Capital Controls: Theory and Practice

I was never taught anything about capital controls in grad school except that they have existed at some times and places and that they are bad because they prevent the markets from allocating capital to where it is most productive. The following article has an interesting summary of what capital controls are and how they work.

Capital Controls: Theory and Practice:

"Among the economists promoting capital controls, Keynes was the most prominent. He was in favor of controls as a protective tool from the unstable international economy and the possibility of capital flight, which, among other things, causes a decrease in potential growth, erosion in the tax base, and redistribution from poorer to richer groups. From 1945-60 capital controls were unquestioned. During the immediate postwar period, freedom of capital movements was hardly an issue; international flows of capital through markets were unthinkable. The memories of the hectic 1920s and 1930s were still present and strict controls on international capital movements were needed for financial stability. According to Shafer (1995), developments at the end of the 1950's and early 1960's questioned the logic of the so-called Bretton Woods’ dichotomy, that is, controls for finance and freedom for trade. Capital account liberalization was taken seriously with the establishment of the OECD in 1961."