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THE GLOBAL CAPITAL MARKET: Capital Mobility 4

In this way, the Great Depression discredited gold standard orthodoxy and made financial markets and financial practitioners unpopular. Their supposed speculative excesses and attachment to gold became identified in the public mind as causes of the economic calamity. Financial products and markets were banned or more closely regulated. In the United States and elsewhere, central banks were brought under heavier Treasury influence. Worldwide, a new consensus developed in which preserving the value of the currency ran a distant second to maintaining high employment.
These changed attitudes underlay the new postwar economic order negotiated at Bretton Woods, New Hampshire, in July 1944. Forty-four allied countries set up a system based on fixed, but adjustable, exchange parities, in the belief that floating exchange rates would exhibit instability that would damage international trade. At the center of the system was the International Monetary Fund (IMF). The IMF’s prime function was as a source of hard-currency loans to governments that might otherwise have to put their economies into recession to maintain a fixed exchange rate. Countries suffering protracted balance-of-payments problems had the option of realigning their currencies, subject to IMF approval.

The IMF’s founders viewed its lending capability as primarily a substitute for private capital inflows, not a complement to them. Interwar experience had given private capital flows a reputation as unreliable at best and, at worst, a dangerous source of disturbances. Encompassing controls over private capital movement, perfected in wartime, were expected to continue. The IMF’s Articles of Agreement explicitly empowered countries to impose new capital controls, prohibited members from using IMF resources “to meet a large or sustained outflow of capital,” and even gave the Fund the right to request that capital controls be imposed in such cases

(Horsefield, 1969, pp. 193-4). As Treasury Secretary Henry Morgenthau proclaimed at Bretton Woods, the new IMF and its sister institution, the World Bank, would “drive . . . the usurious money lenders from the temple of international finance” (Gardner, 1980, p. xix). The maintenance and even extension of capital account controls had the additional advantage of placating a U.S. Congress worried that taxpayers’ money would disappear down foreign “rat holes,” as Republican Senator Robert A. Taft of Ohio put it (as quoted in Gardner, 1980, p. 130).