Whatever the values of currencies dictated by today's economic fundamentals, the recent chaos gripping foreign exchange markets seems more an expression of speculative fever than a response to economic developments. The episode illustrates how easily speculative forces can seize control of the currency markets, frustrating central banks and threatening to undermine the dollar--and the incipient global expansion.
Is there a better way? In the U.N.'s 1994 Human Development Report, Nobel laureate James Tobin of Yale University reiterates a proposal he made 15 years ago: Impose a small tax on international currency transactions.
Only a tiny fraction of the $1 trillion or so a day in such dealings is needed to allocate world savings efficiently, Tobin argues. The rest, he says, mainly reflects speculative efforts to make quick money on exchange rate fluctuations and interest-rate differentials. Such speculation distorts the signals that exchange rate markets give for long-range investment and trade and impedes the actions of central banks.
In 1936, John Maynard Keynes noted that a transaction tax would strengthen the weight of long-range fundamentals in stock-market pricing and would reduce the influence of speculators trying to guess what other speculators were about to do. Tobin thinks a worldwide tax on currency transactions could do the same.
How big a tax? Tobin says a 0.05% bite would produce $150 billion a year in revenues, which could be used to support the work of international institutions such as the World Bank and the U.N. Even a tax one-tenth that size would produce $15 billion and significantly dampen the actions of speculators who move in and out of currencies daily on the basis of minuscule margins. And speculators who weren't intimidated, he adds, "would at least contribute to the world community."