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New Left Review I/155, January-February 1986

Andrew Glyn

Capital Flight and Exchange Controls

The difficulties faced by a Labour Government in carrying out socialist policies in the UK assume their most dramatic form in the threat of capital flight. [*] This paper was originally prepared for the Cambridge Journal of Economics Conference “Towards New Foundations for Socialist Policies in Britain” held in June 1985. My thanks to participants at the conference, and to Wendy Carlin and Laurence Harris for their comments. If free movement of financial capital is allowed, domestic UK interest rates are bound by a golden chain, via Euromarkets, to the ‘world’ rate of interest. Moreover, if the future of the sterling exchange rate is in doubt, UK interest rates have to exceed world nominal rates by the discount on the forward pound, which will widen as confidence declines. This confidence factor is the mechanism by which the pressure of international capital is channelled against the implementation of policies which offend against the canons of prevailing financial orthodoxy. Harold Wilson recorded how this pressure was exercised in late November 1964: ‘That night we had our most desperate meeting with the Governor of the Bank. Claiming that our failure to act in accordance with his advice had precipitated the crisis, he was now demanding all-round cuts in expenditure, regardless of social or even economic priorities, and fundamental changes in some of the Chancellor’s economic announcements. Not for the first time, I said that we had now reached the situation where a newly-elected Government with a mandate from the people was being told, not so much by the Governor of the Bank of England but by international speculators, that the policies on which we had fought the election could not be implemented; that the Government was to be forced into the adoption of Tory policies to which it was fundamentally opposed. The Governor . . . had to admit that was what his argument meant, because of the sheer compulsion of the economic dictation of those who exercised decisive economic power.’ [1] Harold Wilson, The Labour Government 1964–70, London 1971, p. 37.

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