Why were capital controls abandoned? The case of Britain’s abolition of exchange controls, 1977–1979
| Author | Jack Copley |
| DOI | 10.1177/1369148118819687 |
| Published date | 01 May 2019 |
| Date | 01 May 2019 |
| Subject Matter | Original Articles |
https://doi.org/10.1177/1369148118819687
The British Journal of Politics and
International Relations
2019, Vol. 21(2) 403 –420
© The Author(s) 2019
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DOI: 10.1177/1369148118819687
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Why were capital controls
abandoned? The case of
Britain’s abolition of exchange
controls, 1977–1979
Jack Copley
Abstract
This article examines the politics of capital control liberalisation through an archival analysis of
Britain’s exchange controls abolition. While the political economy consensus states that capital
controls were abandoned because of a desire to boost the competitiveness of national financial
centres and the ascendance of laissez-faire ideas, this article will challenge this interpretation.
The James Callaghan and Margaret Thatcher governments were concerned by the worsening
performance of British industrial exporters, and exchange control abolition constituted a strategy to
depreciate sterling and thus boost export competitiveness. Yet this beggar-thy-neighbour strategy
risked spooking global markets and provoking a run on sterling. Thus, the Thatcher administration
publicly masked its intentions by emphasising that this deregulation was motivated by laissez-faire
ideology. This article thus reconceptualises the role of competition and ideas in spurring capital
control liberalisation by demonstrating the importance of industrial competitiveness and the role
of ideas as rhetoric.
Keywords
British politics, capital controls, financial deregulation, financialisation, international political
economy, Thatcherism
While countries in the Global South and the European periphery have continually con-
tested the policy dogma of ‘no capital controls’, few cracks have appeared in the most
advanced capitalist economies’ commitment to capital mobility. Yet this stance is poten-
tially changing with the ongoing populist surge. Both left- and right-wing political challeng-
ers have expressed willingness to reimpose capital controls, either to rein in financial
speculation – as suggested by UK Shadow Chancellor John McDonnell – or defend the
national economy against unpatriotic capital flight – as in the case of the Front National’s
Marine Le Pen (Melander et al., 2017; Parker et al., 2015). By character ising the impo sition
Institute of Advanced Study and Department of Politics and International Studies, University of Warwick,
Coventry, UK
Corresponding author:
Jack Copley, The University of Warwick, Coventry CV4 7AL, UK.
Email: j.d.copley@warwick.ac.uk
819687BPI0010.1177/1369148118819687The British Journal of Politics and International RelationsCopley
research-article2019
Original Article
404 The British Journal of Politics and International Relations 21(2)
of capital controls as a matter of political will – something that their establishment oppo-
nents ostensibly lack – these movements implicitly contain an explanation of why capital
controls were abandoned in the first instance, namely mainstream politicians’ preferential
treatment of financial capital or the prevalence of pro-globalisation ideology.
International Political Economy (IPE) accounts of capital control liberalisation have
also relied chiefly on two factors to explain this trend: (1) the competitive dynamics
unleashed by increasing global capital flows, expressed as the threat of capital flight or
the incentive of promoting domestic financial centres (Andrews, 1994; Bhagwati, 1998)
and (2) the rise of neoliberal economic ideas, at the national scale and within international
organisations (Best, 2004; Chwieroth, 2010). Britain’s 1979 abolition of exchange con-
trols is said to best exemplify the interaction of these competitive and ideational pres-
sures. Margaret Thatcher’s government was motivated, it is argued, by a desire to boost
the City of London’s prospects (referred to here as the City) – at the expense of industry
– and a commitment to neoliberal policy norms (Germain, 1997; Helleiner, 1994).
This article will question this conventional wisdom regarding the role of competition
and ideas in capital control liberalisation by examining Britain’s abolition of exchange
controls through an analysis of primary archival sources. While archival evidence cannot
be used to provide an entirely definitive explanation of this liberalisation, it can challenge
the existing consensus and suggest an alternative narrative. Exchange controls were
scrapped in four stages, by Conservative and Labour governments, from 1977 to 1979.
This article will argue that the British state was not chiefly motivated by a desire to pro-
mote the City’s interests nor by laissez-faire ideological commitments. Although there is
evidence that certain civil servants believed this liberalisation would benefit the City’s
global operations, the key driver of this deregulation appeared to lie in the intensifying
stagflation crisis. In the context of sterling appreciation, following the 1976 International
Monetary Fund (IMF) bailout and rising revenues from North Sea oil, the British state
was confronted with a governing dilemma: the strong pound acted to combat inflation,
yet it simultaneously depressed the competitiveness of the struggling industrial export
sector. Both the governments of James Callaghan and Thatcher prioritised the export
competitiveness goal, and thus sought to depreciate sterling by relaxing exchange con-
trols and encouraging an investment outflow. Yet two obstacles stood in the way of this
strategy. First, the trade union movement was opposed to exchange control liberalisation,
and the Labour government was wary of further alienating union leadership as they
attempted to gain union acquiescence to an unpopular incomes policy. Second, in a con-
text of floating exchange rates, any attempt to manufacture a currency depreciation could
spook currency markets and provoke a sterling crisis. While these hurdles ultimately
impeded the Callaghan administration from pursuing full liberalisation, the Thatcher gov-
ernment faced a weakened union movement, and constructed a rhetorical strategy to pla-
cate currency markets by emphasising that exchange control abolition was an
internationally credible policy driven by laissez-faire ideology. This combination of fac-
tors provided the Thatcher administration with the confidence to completely abolish con-
trols in October 1979.
This article will thus suggest that IPE scholars rethink the role of competition and
ideas in capital control liberalisation. While conventional IPE accounts insist that deregu-
lation was a strategy to boost national financial sectors’ competitiveness in a world of
cross-border capital flows, the evidence presented here suggests that British govern-
ments’ key aim was to boost ailing industrial exporters’ competitiveness. Crucially, this
policy was not a blueprint to secure the City’s dominance, but was rather intended to be a
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