Every business day over US$1.5 trillion worth of currencies are traded on international money markets. Only a small amount of this activity finances trade in goods and services or long term investments. Most of the transactions reflect speculation by traders seeking to profit from small changes in exchange rates or interest rate differentials.

Excessive speculation is disruptive. When huge profits can be made quickly through monetary speculation, there is less incentive for investors to create jobs producing goods and services.

The famous British economist John Maynard Keynes once wrote “Speculation may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.”

As the recent financial crises have demonstrated, financial speculators have an inordinate influence on national monetary and fiscal policies. The Bank for International Settlements estimates that the pool of “hot money” that can flow instantly around the world through telecommunications networks is worth US$13 trillion. (ECEJ 1997:2) The owners of this enormous pool of “hot money” have an inordinate influence on national economic policies. They can punish a government by selling off its bonds if they deem its interest rates too low or if they think its social spending is too high.

A Tobin Tax would reduce the incentive to make a quick profit by selling off one nation’s currency or bonds and buying another’s. In today’s world traders buy and sell huge quantities of currencies or bonds to take advantage of price differentials of less than one tenth of a percentage point. Such trading is profitable because of the huge volumes of currencies they trade and because of the frequency of their transactions. If enough traders gang up on a country’s currency they can force a devaluation as occurred with the British pound in 1992.

But if traders had to pay a tax on every transaction that was as large as their profit margin, then there would be no incentive to speculate. As long as the tax were not too large it would not disrupt transactions tied to actual purchases of goods or services or long term investments. Since the effect of such a tax is highest on short term transactions, the additional cost for long term investments is minimal.

When James Tobin first proposed his tax in 1978, he thought it could be applied at a rate of 0.5% or one-half of a percentage point. Since then further research has shown that a Tobin tax would have to be introduced at a lower rate, perhaps 0.1% or one tenth of a percentage point to start with and gradually rise to 0.25% or one-quarter of a percentage point. Although these amounts sound small they would be high enough to deter many speculative trades as price differentials as small as 0.03% to 0.1% (or 3 to 10 cents per $100) are big enough to induce trades on bond markets today.

Estimates of the revenue potential of a Tobin tax vary. They depend on assumptions concerning such factors as: the size of the money market; how much the tax would lower the volume of transactions; the extent of tax avoidance and, of course, the tax rate. It is estimated that a 0.1% tax might cut foreign exchange turnover by up to 50% and still generate annual revenues of US$ 200 billion.

While a Tobin tax would initially be collected within each nation applying the tax, a strong ethical argument exists for using the revenues for international purposes. Pragmatists argue that some of the revenue should remain within each country collecting the tax as an incentive to participate in its implementation. But we should not hesitate to make a strong argument that the revenues from a tax on international gambling should be used first and foremost to meet the most pressing needs of the victims of the global casino economy. At least half the revenues collected in Northern industrial countries should be dedicated to assisting less developed nations. We should strongly resist any proposal in favour of the International Monetary Fund or the World Bank administrating the resources.