Chapter 9: An idea that gained currency but lost clarity
* More than 30 years after I ﬁrst explored the idea of a levy on cross-border currency speculation, the ‘Tobin tax’ is gaining popularity. In Europe, France’s Lionel Jospin and Germany’s Gerhard Schröder have both expressed enthusiasm, so, too, have various critics of globalization. Of course, there are no such transactions within the eurozone. But it may be time to recall the origins of the proposal and the uses to which, I believe, it should properly be put. In 1971, I gave the Janeway lectures at Princeton. My subject was macroeconomic policy, in which my long-time academic interest had been deepened by service on President J.F. Kennedy’s Council of Economic Advisers 10 years earlier. The early 1970s were troubled times for the US dollar and currency markets were becoming crucial for policy-makers everywhere. In my lectures, I found myself giving much more attention to foreign payments balances and exchange rates than had seemed necessary in America in 1961. The Bretton Woods system of exchange rates had collapsed after the US withdrawal. As ﬁnanciers and economists surveyed the wreckage, they mainly debated whether to restore ﬁxed exchange rates or settle for marketﬂoating rates. I though the diﬀerence was exaggerated, because ﬁxed rates were not really ﬁxed. They were ‘adjustable pegs’, vulnerable to change when central banks lost reserves because of trade deﬁcits or speculative runs. The International Monetary Fund still allowed exchange controls of capital outﬂows but these defences were crumbling. Private claims on central banks’ reserves...
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