James Tobin's purpose in developing his idea of a currency transaction tax was to find a way to manage exchange-rate volatility. In his view, "currency exchanges transmit disturbances originating in international financial markets. National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exchanges, without real hardship and without significant sacrifice of the objectives of national economic policy with respect to employment, output, and inflation.”
Tobin saw two solutions to this issue. The first was to move “toward a common currency, common monetary and fiscal policy, and economic integration.”
The second was to move “toward greater financial segmentation between nations or currency areas, permitting their central banks and governments greater autonomy in policies tailored to their specific economic institutions and objectives.”
Tobin’s preferred solution was the former one but he did not see this as politically viable so he advocated for the latter approach: “I therefore regretfully recommend the second, and my proposal is to throw some sand in the wheels of our excessively efficient international money markets.”
Tobin’s method of “throwing sand in the wheels” was to suggest a tax on all spot conversions of one currency into another, proportional to the size of the transaction.
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