Reading The Gold Standard In Theory And History, I was awed when I read that, according to editor Barry Eichengreen, the idea has been tossed about in certain circles of economic theory that taxing foreign currency transactions might be one way that a country could defend itself against attacks on its currency by speculators. This struck me as an idea definitely worth pursuing.
The idea, according to Eichengreen, is that “speculators would be less likely to launch attacks against pegged currencies if they had to pay a tax to get in and out.” By “pegged” currencies he means those currencies whose values are tied to the values of some other country’s currency, such as say the dollar of the U.S., or even of a “basket” of different currencies. The tax would be high enough to “decrease the likelihood of attacks not motivated by serious policy imbalances.”
The problem, as Eichengreen points out, is that if one country attempted to apply such a tax unilaterally, “that country’s foreign exchange market would simply move offshore.” For instance, people could ship domestic currency to foreign branches of banks and there the currency exchange for foreign currencies, thus evading the tax.
Of course, it seems to me that we could implement some sort of regulation or financial punishment to make it worth the bank’s while to surcharge these “off-shore” transactions in large sums of currency. Seems a country could at least try it and see what happens– without depending on it to be the main mechanism for defending against speculative currency attacks.
Eichengreen suggests that if we’re serious about this idea, it would have to be universally applied and implemented and coordinated by some international body, like the IMF, but I hate to think that THAT is the only way. The IMF or whatever international body in charge of currency trading would then set the appropriate tax (“appropriate” in its eyes, I suppose), and it would also possess sanctions that could be levied on countries failing to comply with the rules of the imposed international currency trading regime. I can’t say I’m very fond of this notion.