A Campaign against capitalism
Human Action (Ludwig Von Mises)
Human Action – Ludwig von Mises (excerpt)
"Or why there is something fishy about the Swiss banks and Government will use every means possible to maintain power. They presume the people are stupid and they can be BS all the time. The economy is captive and it will be strangled to death by government who will simply NOT address any of the problems we face for to solve them requires political reform. During this process they are assisted by a lack of free press for they will not even print the economic truth" [complete story in Human Action - a Bibel for investors and a devil for those still trusting Government]
The governments of almost all countries are engaged in a campaign against the capitalists. They are intent upon expropriating them by means of taxation and monetary measures. The capitalists are eager to protect their property by keeping a part of their funds liquid in order to evade confiscatory measures in time. They keep balances with the banks of those countries in which the danger of confiscation or currency devaluation is, for the moment, less than in other countries. As soon as the prospects change, they transfer their balances into countries that temporarily seem to offer more security. It is these funds that people have in mind when speaking of "hot money."
The significance of hot money for the constellation of monetary affairs is the outcome of the one-reserve system. In order to make it easier for the central banks to embark upon credit expansion, the European governments aimed long ago at a concentration of their countries' gold reserves with the central banks. The other banks (the private banks, i.e., those not endowed with special privileges and not entitled to issue banknotes) restrict their cash holdings to the requirements of their daily transactions. They no longer keep a reserve against their daily maturing liabilities. They do not consider it necessary to balance the maturity dates of their liabilities and their assets in such a way as to be any day ready to comply unaided with their obligations to their creditors. They rely upon the central bank.
When the creditors want to withdraw more than the "normal" amount, the private banks borrow the funds needed from the central bank. A private bank considers itself liquid if it owns a sufficient amount either of collateral against which the central bank will lend or of bills of exchange that the central bank will rediscount. (All this refers to European conditions. American conditions differ only technically, but not economically. However, the hot-money problem is not an American problem, as there is, under the present state of affairs, no country that a capitalist could deem a safer refuge than the United States.)
When the inflow of hot money began, the private banks of the countries in which it was temporarily deposited saw nothing wrong in treating these funds in the usual way. They employed the additional funds entrusted to them in increasing their loans to business. They did not worry about the consequences, although they knew that these funds would be withdrawn as soon as any doubts about their country's fiscal or monetary policy emerged.
The illiquidity of the status of these banks was manifest: on the one hand large sums that the customers had the right to withdraw at short notice, and on the other hand loans to business that could be recovered only at a later date. The only cautious method of dealing with hot money would have been to keep a reserve of gold and foreign exchange big enough to pay back the whole amount in case of a sudden withdrawal. Of course, this method would have required the banks to charge the customers a commission for keeping their funds safe.
The showdown came for the Swiss banks on the day in September 1936 on which France devalued the French franc. The depositors of hot money became frightened; they feared that Switzerland might follow the French example. It was to be expected that they would all try to transfer their funds immediately to London or New York, or even to Paris, which, for the immediate coming weeks, seemed to offer a smaller hazard of currency depreciation. But the Swiss commercial banks were not in a position to pay back these funds without the aid of the national bank. They had lent them to business — a great part to business in countries that, by foreign exchange control, had blocked their balances.
The only way out would have been for them to borrow from the national bank. Then they would have maintained their own solvency. But the depositors paid would have immediately asked the national bank for the redemption, in gold or foreign exchange, of the banknotes received. If the national bank were not to comply with this request, it would thereby have actually abandoned the gold standard and devalued the Swiss franc. If, on the other hand, the bank had redeemed the notes, it would have lost the greater part of its reserve. A panic would have resulted. The Swiss themselves would have tried to procure as much gold and foreign exchange as possible. The whole monetary system of the country would have collapsed.
The only alternative for the Swiss national bank would have been not to assist the private banks at all. But this would have been equivalent to the insolvency of the country's most important credit institutions.
Thus, for the Swiss government, no choice was left. It had only one means to prevent an economic catastrophe: to follow suit forthwith and to devalue the Swiss franc. The matter did not brook delay. [scenario replayed during the Summer of 2011]
By and large, Great Britain, at the outbreak of the war in September 1939, had to face similar conditions. The city of London was once the world's banking center. It has long since lost this function. But foreigners and citizens of the dominions still kept, on the eve of the war, considerable short-term balances in the British banks. Besides, there were the large deposits due to the central banks in the "sterling area." If the British government had not frozen all these balances by means of foreign-exchange restrictions, the insolvency of the British banks would have become manifest. Foreign-exchange control was a disguised moratorium for the banks. It relieved them from the plight of having to confess publicly their inability to fulfill their obligations......
note:
- What politicians refuse to understand is that Capital ALWAYS flees Taxation and regulation. That it is volatile and it will flee even under severe capital export regulations. They fail to understand that Capital and Labor need each other and that once Capital flees, unemployment ALWAYS rises and this kind of action always kills the economy. Admitting this is true would mean that the politician is in fact admitting he's nothing more than a blood sucker of society.
- What many investors fail to understand is that a Real Estate Owner is a Sitting Duck. NO WAY to deflate your property (and most of the time impossible to sell) and hide it or move it abroad during an era where it be increasingly taxed...
Wikipedia about capital transfer controls:
Pre World War I
Prior to the 19th century there was generally little need for capital controls due to low levels of international trade and financial integration. In the first age of globalisation which is generally dated from 1870–1914, capital controls remained largely absent.[2][3]
World War I to World War II: 1914 - 1945
Highly restrictive capital controls were introduced with the outbreak of World War I. In the 1920s they were generally relaxed, only to be strengthened again in the wake of the 1929 Great Crash. This was more an ad hoc response to potentially damaging flows rather than based on a change in normative economic theory. Economic historian Barry Eichengreen has implied that the use of capital controls peaked during World War II, but the more general view is that the most wide ranging implementation occurred after Bretton Woods.[2][4][5][6]An example of capital control in the inter war period was the flight tax introduced in 1931 by Chancellor Brüning . The tax was needed to limit the removal of capital from the country by wealthy residents. At the time Germany was suffering economic hardship due to the Great Depression and the harsh war reparations imposed after World War I. Following the ascension of the Nazis to power in 1933, the tax began to raise sizeable revenue from Jews who emigrated to escape state sponsored anti Semitism.[7][8][9]
The Bretton Woods Era: 1945–1971
A widespread system of capital controls were decided upon at the international 1944 conference at Bretton Woods. At the end of World War II, international capital was "caged" by the imposition of strong and wide ranging capital controls as part of the newly created Bretton Woods system- it was perceived that this would help protect the interests of ordinary people and the wider economy. These measures were popular as at this time the western public's view of international bankers was generally very low, blaming them for the Great Depression.[10][11]Keynes, one of the principal architects of the Bretton Woods system, envisaged capital controls as a permanent feature of the international monetary system,[12] though he had agreed current account convertibility should be adopted once international conditions had stabilised sufficiently This essentially meant that currencies were to be freely convertible for the purposes of international trade in goods and services, but not for capital account transactions. Most industrial economies relaxed their controls around 1958 to allow this to happen.[13] The other leading architect of Bretton Woods, the American Harry Dexter White and his boss Henry Morgenthau were somewhat less radical than Keynes, but still agreed on the need for permanent capital controls. In his closing address to the Bretton Woods conference, Morgenthau spoke of how the measures adopted would drive "...the usurious money lenders from the temple of international finance".[10] Following the Keynesian Revolution, the first two decades after World War II saw little argument against capital controls from economists, though an exception was Milton Friedman. However, from the late 1950s the effectiveness of capital controls began to break down, in part due to innovations such as the Eurodollar market. According to Dani Rodrik it is unclear to what extent this was due to an unwillingness on the part of governments to respond effectively, as compared with an inability to do so.[12] Eric Helliner has argued that heavy lobbying from Wall St bankers was a factor in persuading US authorities not to exempt the Eurodollar market from capital controls. From the late 1960s the prevailing opinion among economists began to switch to the view that capital controls are on the whole more harmful than beneficial.[14][15]
While many of the capital controls in this era were directed at international financiers and banks, some were directed at individual citizens. For example in the 1960s British families were at one point restricted from taking more than £50 with them out of the country for their foreign holidays.[16] In their book This Time Is Different economists Carmen Reinhart and Kenneth Rogoff suggest that the use of capital controls in this period, even more than its rapid economic growth, was responsible for the very low level of banking crises that occurred in the Bretton Woods era.[17]
Transition period and Washington consensus: 1971 - 2009
By the late 1970s, as part of the displacement of Keynesianism in favour of free market orientated policies and theories, countries began abolishing their capital controls, starting between 1973 - 1974 with the U.S., Canada, Germany and Switzerland and followed by Great Britain in 1979.[18] Most other advanced and emerging economies followed, chiefly in the 1980s and early 1990s.[2] During the period spanning from approximately 1980 - 2009, known as the Washington Consensus, the normative opinion was that Capital controls were to be avoided except perhaps in a crises. It was widely held that the absence of controls allowed capital to freely flow to where it is needed most, helping not only investors to enjoy good returns, but also helping ordinary people to benefit from economic growth. During the 1980s many emerging economies decided or were coerced into following the advanced economies by abandoning their capital controls, though over 50 retained them at least partially.[2][19] The then orthodox view that capital controls are a bad thing was challenged to some extent following the 1997 Asian Financial Crisis. Asian nations that had retained their capital controls such as India and China could credit them for allowing them to escape the crisis relatively unscathed.[17][20]Malaysia's prime minister Mahathir bin Mohamad imposed capital controls as an emergency measure in September 1998, both strict exchange controls and limits on outflows from portfolio investments - these were found to be effective in containing the damage from the crisis. [2][21][22] In the early nineties even some pro-globalization economists like Jagdish Bhagwati[23] and some writers in publications like The Economist[21][24] spoke out in favour of a limited role for capital controls. But while many developing world economies lost faith in the free market consensus, it remained strong among western nations.[2]
Heinrich Bruning and the 'flight tax'
In the late 1920s, the economy of the Weimar Republic was beset by numerous fiscal troubles. The global depression spread quickly to Germany, undermining the government’s ability to make its reparation payments from the Great War.Fearing a return to hyperinflation, many Germans decided to pack up and leave; they remembered the days when banknotes were used as wallpaper and had no desire to repeat the experience.In 1931, Chancellor Heinrich Bruning imposed a ‘flight tax’, which levied a 25% tax on the value of all property and capital for Germans leaving the country.Total revenue collected from this tax amounted to roughly 1 million Reichsmarks (RM) in its earliest days ($56 million today). By the late 1930s under Hitler’s rule, flight tax revenue soared to RM 342 million ($21.5 billion today) as more people headed toward the exits.
This flight tax constitutes one of the earliest modern examples of capital controls. They’ve evolved substantially since the days of Hitler, but the end goal is the same– governments controlling the flow of capital across borders.Bankrupt governments seek to trap capital within their borders, maximizing the amount available for subsequent taxation or other forms of confiscation. This tactic is usually employed when lost confidence has impaired the government’s capability to borrow.As one scans the headlines in the US and Europe, it’s obvious that the march towards stricter capital controls is quickening its pace.
Capital controls can take a variety of other forms– including taxation on outward remittances, restrictions on the movement of financial instruments, bureaucratic approval processes for foreign transactions, reporting requirements for foreign assets, and government control over banks.This last is important– when politicians and bankers are in bed with each other, banks can be compelled to loan a portion of their deposits to the treasury at unrealistic terms, sticking bank customers with sub-optimal yields below the rate of inflation. [I remember this letter sent out by the Belgian Minister of Finance in the late 1970’s where he threatened the Institutional Investors (insurance co’s) if they failed to buy Belgian Treasuries].
I’ve said before– it’s imperative that everyone establish a foreign bank account, even with a
small deposit. There are several banks where you can open an account through the mail with just
a nominal deposit. This way, if you ever need to move the bulk of your funds in a hurry, you’ll
at least have the established infrastructure to do it.I know it’s easy to kick the can down
the road, but as the political and economic support for capital controls is spreading around the globe, I would urge you to take action now.