Why were capital controls abandoned? The case of Britain’s abolition of exchange controls, 1977–1979

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.