Danger of Creeping Controls

IN the wake of the international monetary system's recurring crises, European governments are erecting ever stricter controls on the flow of capital across national boundaries. The most recent furor, caused by Britain's decision to unhook the pound from a fixed value and let it fetch whatever the market will bring, has brought on yet another spate of regulations. Their purpose is understandable: to keep out the flood of homeless, speculative cash --much of it in irredeemable dollars --that can make a betting game out of currency values and disrupt nations' economies in the process. The growing danger is that the proliferating rules will hamper normal trade and investment as well.

Two weeks ago West German Economics and Finance Minister Karl Schiller resigned over the controls issue. His departure took away one of the last influential voices calling for unhampered capital flows. Schiller's successor, former Defense Minister Helmut Schmidt, apparently believes that without some controls West Germany will be forced to revalue the mark upward for the second time in less than a year, thereby making its products more expensive and harder to sell abroad. French Finance Minister Valery Giscard d'Estaing, too, favors currency regulations as opposed to floating rates.

TIME European Economic Correspondent Roger Beardwood filed the following roundup on the rising currency walls:

WEST GERMANY. Starting this month, commercial banks are required to leave in reserve with the Bundesbank up to 40% of foreign-owned deposits, thus immobilizing large sums of otherwise lendable funds. To keep inflation-breeding currencies out, German-based corporations must deposit with their banks, at no interest, 50% of any funds that they borrow abroad. Last week the central bank asked commercial bankers to refuse to sell mutual fund shares, bonds and other fixed-interest securities to nonresidents, who would likely pay for such investments in weak currencies. If bankers do not abide by the request, officials warned, further regulations may be added.

SWITZERLAND. Since last month nonresident foreigners have been banned from buying Swiss real estate or securities. Just to keep an account of more than 50,000 Swiss francs ($13,325) in one of Switzerland's famed banks, they must pay the equivalent of 8% interest annually to the bank.

FRANCE. Banks must hold special reserves equal to 10% of a nonresident's deposits. France also restricts loans that are made to nonresident companies and individuals. It operates two foreign exchange markets--one for trade operations and a second for capital transactions. Last week the dollar was about 5% lower on the capital market than the trade market, where its value is kept at the official rate by government intervention if necessary. Thus, anyone who wanted to buy a French investment with dollars automatically had to pay the penalty of doing so with discounted money.

BELGIUM. As in France, there is a two-tier foreign exchange market that makes speculation in the Belgian franc expensive. Banks cannot increase their lending to nonresidents above the level of last March 9, and there are restrictions on payment of interest on some foreign-owned bank accounts.

BRITAIN. Since it floated the pound last month, Britain has imposed a whole range of controls on capital outflows, strengthening barriers in force since 1947. Banks are severely limited in dealing in foreign exchange for their own investment purposes. Companies are allowed to buy foreign currency only for import and export deals or for officially sanctioned overseas investment. The rising burden of bureaucratic paperwork could threaten London's role as a world financial center. Says an official of London's Midland Bank: "These days I push paper for the government."

With the dollar inconvertible into gold, Europe's finance ministers and central bankers see few feasible alternatives to controls. Most hope that they can end after major financial powers next year negotiate long-term reforms in the international monetary system, including some method of gradually repatriating dollars held abroad.

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