A Tobin tax refers to the suggested tax on all trade of currency across borders. This is supposed to put a penalty on short-term speculation in currencies. The proposed tax rate would be low, between 0.05 and 1.0 per cent.

The president of Venezuela, Hugo Chávez, recently announced that Venezuela is currently studying the implementation of such a tax.

Since one country acting alone would find it very difficult to implement this tax, many argue it would be best implemented by an international institution. It has been proposed that having the United Nations manage a Tobin tax would solve this problem and would give the U.N. a large source of funding independent from donations by participating states.

The name comes from the economist James Tobin. It was in 1972, soon after the Nixon administration pulled the United States out of the Bretton Woods system, that Tobin suggested a new system for international currency stability, and proposed that such a system include an international charge on foreign-exchange transactions. Professor Tobin later received a Nobel Prize (1981), and his name will evermore be fixed to this idea.

The idea lay dormant for more than 20 years. It was revived largely through the efforts of Canadian activists in the 1990s, and in March 1999 that country's House of Commons passed a resolution directing the government to "enact a tax on financial transactions in concert with the international community." That language is ambiguous. Does "in concert" mean an international authority has to agree before Canada will act? Or simply that Canada will enact such a tax unilaterally once it is confident it has consulted properly with other countries' treasury officials? or something else?

The Tobin-tax idea was the subject of much discussion in Europe in the summer of 2001. In that context, an unsigned editorial in The Guardian (Manchester, U.K.), Aug. 30, 2001 put the case against such a tax in straightforward terms. It said that currency speculators are “an exceptionally useful lot, working day-in, day-out, risking their own wealth to supply a thing called liquidity. Without liquidity, markets dry up, prices become volatile and goods become difficult to shift.” If a Tobin tax were in place, the editorial continued, that useful work would not be as well accomplished.

“The net result is that everyone involved—producer, trader, buyer—becomes poorer, not richer” said The Guardian.

That's the nub of the issue. Are currency speculators, such as George Soros, a 'useful lot' or are they doing something that ought to be discouraged?

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