According to recent reportage in The Economist, “Many economists point to Iceland as a case study of what should be done during an economic crisis: devalue your currency, impose capital controls and avoid excessive austerity.” Not so fast.
Capital controls are for the birds. Nobelist, Friedrich Hayek, got it right in his 1944 classic, The Road to Serfdom:
The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.
The latest validation of Hayek’s warning is being served up by Iceland. Iceland is in the process of phasing out capital controls. Those controls reduced foreign investments. Fine. But, what about property rights and the taking of property?
Creditors of Iceland’s failed banks have two options to remove the shackles and escape the ring fence imposed by capital controls. The creditors’ first option is to come to an “agreement” with the state liquidators by December 31st and take a haircut. Alternatively, the creditors can escape by paying a tax of 39 percent on their assets. In either case, the creditors will take a heavy hit.
Iceland provides a concrete example that supports Hayek’s conclusions about capital controls: “Complete delivery of the individual to the tyranny of the state” and “the suppression of individual liberty”.