The Tobin Tax: A Solution to Today’s International Monetary Instability?

Friday, January 1st, 1999 at 12:00 am by William R. White
William R. White, The Tobin Tax: A Solution to Today’s International Monetary Instability?, 1999 Colum. Bus. L. Rev. 365

Since the collapse of the Bretton Woods system in the early 1970s, the market composed of foreign currency exchange transactions has grown explosively. From a daily turnover rate equivalent to only $18 billion in 1970, the market has grown by a factor of fourteen and now accommodates $1.23 trillion worth of transactions per day. In addition, growth in the market has continued to accelerate, doubling between 1983-1986, 1986-1989, and 1992-1995. In comparison, the annual turnover in the global equity markets amounted to only $21 trillion last year, while worldwide trade in goods and services equaled only $4.3 trillion – the equivalent of 17 days and 3.5 days of trading in the foreign exchange (“FOREX”) market, respectively. Likewise, worldwide central bank reserves now amount to less than one day’s trading in the FOREX market. However, it is not only the staggering size of the foreign exchange market that makes it unique among worldwide exchanges. The market is characterized by investment horizons that are far shorter than those in any other global market. The Bank for International Settlements (“BIS”) estimates that over eighty percent of all currency exchanges involve “roundtrips” that last seven days or less, and that forty percent of transactions involve roundtrips of two days or less. These short investment horizons are the result of currency traders who attempt to profit from speculative investments based on the movement of exchange rates. These speculative trades make up the vast majority of currency exchange transactions. This growth in speculative transactions has led many to believe that the unregulated growth of the foreign exchange market is dangerous to the world economy. Quite simply, today there is an urgent call for intervention in the foreign exchange markets – either by national governments or supranational organizations – to decrease exchange rate volatility and speculation in order to stabilize the market and the world economy. However, others argue that any intervention by governments or international organizations will only introduce inefficiencies into the FOREX market, resulting in greater harm to the world economy than if governance of currency exchange had been left solely to market forces. This Note seeks to explore the issues surrounding this debate and to examine one of the most widely-cited proposals for stabilizing the international currency markets: the “Tobin Tax.”

Author Information