The political economy of currency transaction taxes

The speculative currency transaction markets are the largest capital markets in the world with an estimated US$2 trillion being traded every day. By comparison the daily global transactions related to international trade, goods and services represent only a small proportion of capital trades. Speculative flight in times of capital crises has triggered major social and economic disruptions such as those in Mexico (1994), East Asia (1997-98) Russia (1998), Brazil (1999), Turkey (2000) and Argentina (2001). Smaller crises occur regularly including currency speculation losses by the Reserve Bank of Australia in 2002 and corporate disruptions from trading losses incurred by the National Bank of Australia in 2004. Recently (May 2006) hedge funds withdrew vast quantities of capital from Iceland and New Zealand causing major disruptions to financial systems in both countries. Each disruption causes trauma to small and institutional investors and to civil society. The proliferation of transactions and the rise in accommodating and secretive offshore tax havens has created a global shadow economy, which has essentially reconfigured capitalism in modern times. This paper examines the political economy of financial market reform and the financial architecture required to implement a currency transaction tax. The thesis defends an argument in support of global currency transaction taxes based on proposals originally made by Keynes, Tobin, Spahn and Schmidt. There is an urgent need to account for the effects created by the speculative and volatile global shadow economy. Recent developments in hedge fund regulation measures demonstrate that the lobbying power of new financial players create major problems for policymakers and global financial security.