GoKawiilAdvanced economies did not simply abandon capital controls after the 1944 Bretton Woods Agreement. Martino Comelli and Pedro Perfeito Da Silva show that welfare states quietly took over their job. Countries that protect workers can afford open financial borders. Countries that spend mainly on pensioners still police the movement of money
What Keynes called heresy
In 1944, defending the Bretton Woods plans in the House of Lords, John Maynard Keynes celebrated a conversion: 'the plan accords to every member Government the explicit right to control all capital movements. What used to be a heresy is now endorsed as orthodox'. Capital controls are rules that limit how money moves across borders, from taxes on foreign inflows to restrictions on taking money out of the country. The postwar financial order stayed on a national leash, and governments used this policy space to pursue full employment and build welfare states.
Development of the welfare state in Europe happened in a regime of tight capital controls. Welfare and capital controls grew together because they had similar goals. Every capitalist state must keep accumulation going while keeping society governable. Capital controls handled the external side, blocking the sudden flight of money that punishes governments and disciplines workers. Welfare handled the internal side, absorbing the people and risks the market discarded.
Most economies, decades into liberalisation, still restrict cross-border finance somehow
The 1970s broke the Bretton Woods system, closing the parenthesis of the Keynesian heresy, back to market orthodoxy. Washington ended dollar convertibility in 1971, finance went global, and the threat of exit became a permanent presence at every bargaining table, as capital chased lower wages and higher financial profits.
Yet capital controls never disappeared completely: IMF data compiled by Andres Fernández and colleagues show that most economies, decades into liberalisation, still restrict cross-border finance somehow. The interesting question is why some countries keep the drawbridge up while others let it down.
Not how much, but on whom
The standard answer, going back to Dani Rodrik, holds that open economies compensate their citizens. More exposure to world markets, more social spending.
Social assistance spending as a percentage of GDP
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