COMMENT ON THE PAPER BY A.BHADURI AND E.MATZNER.
By Josef Steindl
I. The authors ask themselves how an individual country could manage to
pursue an independent full employment policy in an unpropitious
international environment. I should like first to say a few words on why
this environment is so unfavorable nowadays. For practical purposes the
flow of capital between countries is uncontrolled or uncontrollable. The
amount of such funds which are subject to quick movement from country to
country is enormously large in relation to the reserves which are at the
command of governments and central banks. Countries are strongly divided
between surplus and deficit countries. The exchange rates are unstable.
The world of free financial flows was originally created by the United
States who then had reason to think that it was to their advantage. In
the meantime the world has changed and, in part at least, the advantage
has passed to Japan and Germany. The U.S. is in a hybrid position: It is
a creditor to Latin America and a debtor to Japan and Europe. The dollar
has still a unique position as a widely accepted and trusted asset with
all the advantages which this confers on the U.S. monetary policy, yet it
cannot serve as a standard or basis for other currencies; New York is
still the first centre, but U.S. does not provide a lender of the last
resort. The IMF which prescribes strong doses of restriction to suffering
debtors certainly does not fulfill this role. The position of the world
is thus in some respects not unlike that of the early thirties when, as
Kindleberger reminds us, there was no financial leader (England no more,
the U.S. not yet ). The financial health of the world is watched over and
policies are coordinated by a group of ten who meet every quarter of a
year when they have their photograph taken.
This unstable position in the international field is not unconnected with
the national scene where everywhere the financial sector has gained in
weight and influence and has been - especially in the U.S. - the
instrument of tremendous structural changes and of shifts of power and
wealth. The process in which this is being brought about has been justly
called the Casino Society. The result of it is a tremendous pile of debts
in the corporate sector, due to the replacement of shares by junk bonds,
a process which offers a certain parallel to the indebtedness of the
development countries (the parallel has been drawn by G.P.Brockway in
Challenge May-June 1989 ).Altogether our world seems to be dominated not
only by finance, but more specifically by short run speculation.
Autonomous economic policies are called in question by lack of controll
over interest and exchange rates and over capital movements.
II. What are the consequences of the tax which the authors, following
Tobin, propose to levy on all transactions on the foreign exchange
market? The question is hypothetical for we have not experience with such
a tax. We can answer it with some confidence as far as the relation
between the quotations of the exchange rate in different places is
concerned. If the tax were 1/2 p.c. in Germany the price of the dollar in
New York in terms of DM might be up to 1/2 % higher or lower than its
price in Frankfurt. Like the gold points the tax establishes a certain
range of freedom where arbitrage would not work. (I assume in the context
that the transaction costs are negligible). .If the price in the home
market can diverge by a certain amount from that abroad this will to the
same extent also permit a divergence of interest rates, because the
arbitrage will not be able to equalise completely the interest on loans
in, say, dollars in the two places. If the tax were variable and could be
quickly adjusted then it might conceivably be used to shield the country
in question against a change in interest rate in some other country which
might otherwise force the first country into following this change. This
would indeed constitute a rather powerful means of protecting a country's
