Full text: 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

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