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Banking

Back to a Golden Age?

Why tinker with international currency speculation by throwing sand in its wheels, when you can block its path completely with a big boulder? That's the view of Paul Davidson, professor of political economy at the University of Tennessee. A 1% round-trip Tobin tax (after Nobel laureate James Tobin) discourages only the small-time short-term speculators. It needs a radical overhaul of the relationship between currencies and economies to end damaging medium-term attacks, Davidson says.

Governments only consider changing the parameters of the foreign exchange markets when there's a currency crisis. As soon as the crisis is past they believe in free markets again. But long-term economic figures show that the world has been missing out on growth and productivity since the early 1970s and the Golden Age of fixed exchange rates.

Davidson admits his view is unfashionable; but he believes that sooner or later governments will learn there's enlightened self-interest in an internationally agreed mechanism to transfer current account surpluses, discourage competitive devaluations and prevent the export of unemployment. Davidson at this point quotes Benjamin Franklin: "We must ... all hang together or most assuredly we shall all hang separately." But who sets up the mechanism, and who polices it?

John Williamson, an economist at the World Bank, "has admitted this is an ideal system, but too Utopian", says Davidson.

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