FEDERAL RESERVE BANK OF ST. LOU IS
13
NOVEMBER/DECEMBER 1999
1 “Article VI. Section 3. Controls
of capital transfers: Members
may exercise such controls as
are necessary to regulate inter-
national capital movements,
but no member may exercise
these controls in a manner
which will restrict payments for
current transactions or which
will unduly delay transfers of
funds in settlement of commit-
ments, except as provided in
Article VII, Section 3(b) and in
Article XIV, Section 2.”
An Introduction
to Capital
Controls
Christopher J. Neely
Moreover, it may well be asked whether
we can take it for granted that a return
to freedom of exchanges is really a ques-
tion of time. Even if the reply were in the
affirmative, it is safe to assume that after
a period of freedom the regime of control
will be restored as a result of the next
economic crisis.
—Paul Einzig, Exchange Control,
MacMillan and Company, 1934.
Currency controls are a risky, stopgap
measure, but some gaps desperately
need to be stopped.
—Paul Krugman, “Free Advice:
A Letter to Malaysia’s Prime Minister,”
Fortune, September 28, 1998.
Unlike many topics in international eco-
nomics, capital controls—taxes or
restrictions on international transac-
tions in assets like stocks or bonds—have
received cursory treatment in textbooks and
scant attention from researchers. The con-
sensus among economists has been that cap-
ital controls—like tariffs on goods—are
obviously detrimental to economic efficiency
because they prevent productive resources
from being used where they are most need-
ed. As a result, capital controls gradually
had been phased out in developed countries
during the 1970s and 1980s, and by the
1990s there was substantial pressure on less-
developed countries to remove their restric-
tions, too (New York Times, 1999). The topic
almost had been relegated to a curiosity.
Several recent developments, however,
have rekindled interest in the use and
study of capital controls. First, the resump-
tion of large capital flows—trade in assets—
to d