A brief history of capital controls

Now that the European Union is beginning to experiment with capital controls – restrictions on the movement of money within and beyond a country's borders – it may be helpful for investors to take a look at the history behind this policy choice in order to ascertain what the impact on the global economy may be. There have been a number of examples throughout the past 50 years of this tactic being used, but the sad reality is that in most of these cases, the results were less than positive.

When Argentina defaulted on its loans in 2001, its government undertook a series of capital control measures to prevent money from being taken out past its borders. Given the fact that the South American nation had a fixed exchange rate of 1:1 with the U.S. dollar, Argentina's financial authorities had limited room to devalue in order to spur economic growth. 

According to The Telegraph, a U.K.-based newspaper, Argentina executed a now-infamous policy known as "el corralito," or "little fence," which drastically reduced bank withdrawal limits and set harsh regulations for investors and wealthier citizens. The impact – spiraling unemployment and rising public deficits – were quickly felt. Yet some economists credited the moves as necessary to stave off a complete national collapse, and to this day, scholars continue to debate the merits of the "corralito."

A study penned in 2006 by an MIT researcher suggested that the idea of capital controls goes back to the 1920s, when left-leaning economists argued that the policy kept investors from sparking financial panics. This conversation continued until the late 1970s, when stakeholders in the International Monetary Fund – comprised of many of the world's leading countries – decided upon a limited role for capital controls, which critics say set the stage for the rapid financialization of the world economy and laid the foundation for future economic crises.

It remains unclear as to how long capital controls will be enforced in Cyprus, or if this policy will be extended to other troubled European nations or countries elsewhere in the world. However, history suggests that the durations of these decisions are rarely short – Argentina experienced nearly 120 months of bank restrictions following its default – and as a result, investors should tread carefully as they adjust their portfolios heading into the spring. Those interested in learning about wealth preservation tools should visit GreatWealthStrategies.com today and download a "Free Game Plan Report."