A Step Toward Freedom

The U.S. took a significant step last week toward freeing the international movement of capital for loans and investments. The Nixon Administration discarded a series of capital controls that had been imposed by the Kennedy Administration in 1963. The controls had aimed to reduce the outflow of dollars to expanding economies in Europe, Japan and elsewhere, and to narrow U.S. balance-of-payments deficits.

As a result of last week's moves, U.S. citizens no longer must pay an "interest equalization tax" when they buy foreign stocks. In addition, U.S. corporations are freed from a complicated set of limits on their foreign investments, and U.S. banks will no longer be asked to abide by voluntary Federal Reserve Board guidelines on the amount of money that they can lend abroad.

Administration economists had long been planning to lift the controls and they sped up their timetable because the dollar was gaining in value on world currency markets, threatening to make U.S. goods too expensive for foreign buyers. Partly because of the dollar's relative cheapness until now, the nation scored a surplus in its foreign trade in 1973. Last week the Commerce Department announced that the U.S. exported $1.68 billion more than it imported, the first annual surplus in three years.

Though Americans can now send dollars out of the country more or less as they please, a sizable net outflow of capital is not likely. A major reason is that lifting the controls will probably reduce the value of the dollar again in international markets, thus making U.S. goods and securities as much of a bargain for foreign investors as they were last year. Indeed, many bankers expect Arab governments to invest much of their swelling oil revenues in the U.S.

No one was ever certain whether the capital controls sufficiently limited the outflow of money to be worth the effort of administering them. Treasury Secretary George Shultz strongly disliked them. Said Shultz: "Whatever net restraint really existed, the cost was high." Last week's removal immediately led other nations to take their own steps toward freedom. The governments of Canada, West Germany and Belgium said that they would lift their capital controls in response to the U.S. move, and The Netherlands is expected to follow suit.

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