Labour and Conservative governments in the 1970s abolished exchange controls and the reasons don’t just lie in free market ideology.
Unhindered capital mobility – once understood as an unassailable feature of the modern global economy – has recently been called into question. While The Telegraph’s scare headlines may exaggerate things (‘How to protect your money from Corbyn’s threatened capital controls…’), the possibility of limiting capital mobility does appear to be gaining traction in the advanced capitalist world. For example, John McDonnell has suggested the possibility of imposing capital controls to rein in financial speculation, while Marine Le Pen has hinted that in the case of France exiting the EU, she would be prepared to defend the national economy against unpatriotic capital flight.
Implicit in these populist flirtations with capital controls is an unspoken (mis)understanding of why they were scrapped in the first place. Both left and right populist leaders contrast themselves with establishment politicians who, supposedly, have either unflinchingly promoted financial interests, or have crafted policy to suit their pro-globalisation ideology. Much of the political economy literature on capital control liberalisation has actually shared a similar – though more nuanced – diagnosis. Capital controls were supposedly abandoned as a strategy to boost the competitiveness of national financial centres and as a result of the growing hegemony of laissez-faire principles.
My new SPERI Paper seeks to challenge this political economy consensus, by taking a close look at Britain’s scrapping of exchange controls. Exchange controls – a subset of capital controls that had been in place since 1939 – were a system of limits on the use of British funds for overseas investment and rules for the repatriation of profits earned overseas. These controls were abandoned in four stages over the years 1977-9 by the governments of both James Callaghan and Margaret Thatcher. Rather than this deregulatory policy being chiefly motivated by a desire to promote the City of London’s global prospects or by an ideological commitment to the free market, I suggest that the explanation for this liberalisation must be sought in the stagflation crisis that confronted policy-makers during this time.
In the late 1970s, the British state faced two interrelated problems: spiralling inflation and perilously low rates of profit on business investment. In addition, the pound began to continuously rise after the 1976 IMF bailout and the discovery of North Sea oil, which helped to combat inflation, while compounding the profitability crisis by making British exports even less competitive. Within this context, the possibility of exchange control liberalisation was a poisoned chalice. By allowing for an outflow of investment out of the pound, this deregulation could reduce the value of sterling and thus boost export competitiveness. Yet the inflation targets could be sacrificed in the process. The archival evidence suggests that both the Callaghan and Thatcher governments chose to address the export competitiveness problem, at the expense of inflation. The possible benefits for the City of London, and the role of neoliberal ideology, only played auxiliary roles in motivating this liberalisation.
Yet two obstacles stood in the way of this strategy of currency depreciation. Firstly, the trade union movement was vehemently opposed to any capital control liberalisation. Secondly, in a context of floating exchange rates, any attempt to manufacture a depreciation of the pound could spook currency markets and provoke a sterling crisis.
Callaghan’s government was unable to overcome these hurdles. Labour’s historically close ties with the unions, and the fact that they had been relying mainly on wage repression to tackle inflation, meant that they were wary of further incensing a labour movement that was vehemently opposed to exchange control relaxation. Furthermore, Callaghan’s administration was unable to create a strategy that would allow them to pursue this competitive depreciation of sterling without spooking the currency markets and provoking a run on the pound. This resulted in Labour’s limited dismantling of exchange controls in October 1977 and January 1978.
The Thatcher government, on the other hand, had more success. The constraints posed by the unions’ opposition had significantly weakened, following the Winter of Discontent. Yet more importantly, the Conservatives had crafted a strategy that would allow them to pursue what was in effect a purposeful depreciation of sterling in a covert manner. By publically appealing to laissez-faire notions of responsible economic management, which were quite convincing due to the widespread perception of Thatcher as a Tory radical, the abolition of exchange controls could be dressed up as simply ‘good housekeeping’. It was hoped that this would calm global markets, and result in a gradual and measured diversification out of the pound, rather than a full run on sterling, which would ease the pressure on Britain’s exporters. This rhetorical strategy gave the Thatcher administration the confidence to take this ‘leap in the dark’ and fully scrap exchange controls, which were dismantled in July and October 1979.
Britain’s abolition of exchange controls – widely understood as a key turning point in the global movement towards deregulated financial markets – was not chiefly a policy to boost the City of London nor simply an expression of Thatcher’s radical free market ideology. Instead, this deregulation was pursued by both Conservative and Labour governments as a way to temporarily stave off the accelerating economic and social crisis that gripped the global capitalist system in the late 1970s. While Thatcher went further than Callaghan in getting rid of these controls, this was not primarily due to their ideological differences, but rather because the Thatcher government believed that it was able to craft a rhetorical strategy that would let it navigate the volatile currency markets.
This raises some tough questions for progressive critics of today’s bloated financial sector. While the contemporary status quo is certainly undesirable and unsustainable – as the growing literature on the Finance Curse points out – the financial deregulations that led us here may not have resulted solely from state capture by financial interests, pro-finance economic policy agendas, or the prevalence of pernicious neoliberal policy-making norms. Rather, as Wolfgang Streeck and Greta Krippner have argued, financial liberalisation was often pursued as a delaying strategy to postpone the fallout from the deep-seated economic crisis of the late post-war era. In order to launch a successful critique of our oversized, fragile financial sector, we must understand the complex relationship between financial expansion and capitalism’s recurrent crises.
Download Jack’s new paper: SPERI Paper 42 – The role of competition and ideas in Britain’s abolition of capital controls, 1977-9.