Speculation and Poverty

ATTAC

One of the most worrying developments in the evolution of modern and so-called developed societies is the "financialisation" of the economy. This trend, thriving as it does on the unfettered movement of capital and the extraordinary expansion of modern technologies, is directly linked to the globalisation of the economy, i.e. the existence today of genuinely global markets. It can nevertheless not be claimed (despite the assertions of the neo-liberal globalisation lobby) that globalisation remains a purely financial affair to be managed uniquely according to its contributions to market profitability.

The leit-motif for the adepts of the now sacred market is that of maximum and immediate profit, which in turn inevitably encourages the development of speculative activity. Speculation today has taken the upper hand; it has such a hold that, like some concert maestro, it can now direct all aspects of the human comedy. Comedy, for some, perhaps, but tragedy, more likely, for most. For it is this "financialisation" of the economy that now ensures that less and less of the wealth existing or being created in the world is being used to satisfy the genuine need for vital services and supplies of the planet's population; it is also to this phenomenon that we owe the ever more frenetic attempts to reduce the costs of all types of production. From here it is but a small step to the industrial mergers, rationalisation programmes and redundancies dominating the headlines.

Profitability for profitability’s sake has become the golden rule in the system. The aim of capitalism is no longer to generate productive activity, but rather to pursue financial gain, with the new industrial corporations preferring speculation to any other business form. This purely financial view of corporate objectives has turned the general economy into little more than a battleground for mighty industrial predators. Populations suffer unheeded, passive observers as events unfold, condemned to bear the brunt of wave after wave of layoffs and the stifling effects of structural unemployment. In British economist John Maynard Keynes's own words, "Speculation does no harm when it is only a bubble above an ongoing flux of productive activities, but it is no longer the case whenever the productive activity is no more than a bubble within a speculative whirl. It becomes urgent to reverse this evolution of society".

Portfolio investments on the financial markets (stocks, bonds, derivatives, and other financial instruments) are the mainstay of financial speculation. They involve funds from four types of institution: the pension funds, insurance companies, mutual fund companies, and the major international banks. Over the past ten years the volume of funds invested has more than doubled and can today be valued at nearly 28,000 billion US dollars. This exceeds the gross domestic product of all the industrial countries put together. 50% of these funds are controlled by American operators.

85% of these portfolio investments are particularly volatile. They are a real threat to the global economy and, in particular, to developing countries. They explain the booms experienced in the world's stock markets in the last few years. These highs (particularly in 1997 and 1998: up by 50, 80, even 200% in certain emerging countries) are nothing other than speculative gaming leading to sadly tragic results in Mexico, Brazil, Indonesia, Korea, Japan, Russia, etc. The volume of trade on the American stock exchange, which leads the world, increased by 31% in 1997 and 27% in 1998. More particularly, the Dow Jones index rose from 3000 points in 1991 to 11000 points in April 1999. This new wealth however was very unequally distributed – it is estimated that 85% of these stock exchange windfalls benefited only 10% of American households. Human life attracts far less interest today than money.

Riccardo Petrella argues that the waves of deregulation undertaken by governments since the 1980s follow a particular logic: "Genuine power is detained by the financial markets, and politicians are nothing but clerks to this power." "Apartheid, he adds, still exists, but it is now economic." How indeed can one not to be affected by the searing divide tearing the world's population into increasingly unequal parts? Since, on the one hand, 15% of the world's population owns 85% of all existing and annually generated wealth (i.e. almost everything); the remaining 85% of the population, on the other hand, have to do what they can with the 15% that is left for their needs (i.e. almost nothing). The image may be somewhat approximate; it nonetheless describes the reality staring us in the face.

In 1960 20% of the world's population earned 30 times more than the world's poorest 20%; by 1995 they earned 82 times as much. The UNDP's 1998 Human Development Report notes that although the production of consumer goods has doubled since 1975, inequality has risen by stunning proportions: the gap between the wealthiest 5% and the poorest 5% in the world, which was 30 to 1 in 1960, is now 74 to 1.

At the same time certain individuals have acquired personal wealth superior to that of some countries. The private estate of the richest 145 people in the world exceeds the gross domestic product of the whole of Sub-Saharan Africa. At the dawn of the 21st century, the richest three individuals own as much as the gross national product of all the less advanced countries and their 600 million inhabitants.

And the gap continues to grow: in over 70 countries the income per person is inferior to what it was 20 years ago. On a planetary scale 3 billion people – half of humankind – live on less than 2 dollars per day. Whilst the level of goods and services available has reached unprecedented levels the number of those lacking housing, employment, and calories is continually increasing. Of the 4.5 billion inhabitants of the developing countries almost a third lack access to drinkable water, one fifth of their children suffer calorie or protein deficiencies, and about two billion people – one third of humankind – suffer from anaemia. Not to mention the issue of education for all!

In global terms therefore, poverty is in fact the rule, and affluence the exception. The inequalities are growing apace, and the rich are losing touch with the poor.

There is a direct link between this reality and the development of "corporate governance", whose leading objective is to reduce the human payroll to a minimum – in favour of "value added" for the shareholders. Employees in this system are just another (adjustable) factor of production. There are a number of recent examples revealing how executive management has sacrificed employees to pamper its shareholders. Unilever announced a rise in 1998 profits of 41% over its 1997 figures, with at the same time the loss of 3000 jobs over two years (the unions claim that 10,000 jobs were lost). In France Michelin reported a six-monthly profit of 12 billion Belgian francs, representing a rise in profits of 20%, whilst simultaneously announcing the laying off of 7500 workers. In the UK, Railtrack, the private company responsible for the maintenance of the British railway network since privatisation in 1996, announced, with apologies, a profit of 236 million pounds just a few days after a dramatic railway accident causing 35 deaths and 250 injuries. The accident was attributable, in part, to the poor condition of the network, itself a consequence of course of the cost-cutting required to guarantee shareholders their "rate of return". The chief executive of Elf-Aquitaine, Mr. Jaffré, in his battle with Total-Fina, has stated his intention of raising shareholders' earnings from 7.9% to 14%, whilst at the same time announcing the laying off of 1500 employees (out of 4000) in the company's "Exploration-Production" division.

There's something of a paradox in these scenarios: In our courses on political economy not so long ago we were being taught that the merging of businesses leads to monopoly control and the stifling of free competition. Today however, we are told that this is the only way a company can achieve a position sufficient to guarantee an adequate level of profitability; i.e. a comfortable return for its shareholders. 

All this, of course, is supposed to benefit the consumer. Is it the case? In 1998 in the United States 677,795 jobs were axed; the following year American companies announced an almost 20% increase in profits. The wave of layoffs has now reached Japan, once the stronghold of life-long employment. Japanese bankers and shareholders are now more interested in high returns on their investments than in merely capturing a share of the market. Recent examples are Nissan (whose restructuring programme has cost 21,000 jobs, including 16,500 in Japan), Nippon Telegraph and Telephone (who have announced 20,000 job losses over three years), and the merger of two Japanese banks (with the loss of about 10,000 jobs). Even in the 29 affluent countries of the OECD, 37 million people are unemployed, including 18,000 in Europe. There is no shortage of funds, but the competition for them puts hundreds of thousands of jobs in the balance. Underlying this is the logic of "corporate governance" and the "financialisation" of the economy, both of which are presented as factors essential for development.

There is clearly an urgent need to respond with some form of action in the face of such stark realities. The question is how? For some years now calls have been growing for the introduction of a Tobin tax. ATTAC is also calling, amongst other things, for such a tax, which is even considered by some to offer an overall solution. This document proposes a modest assessment of the potential effect of such a tax. What impact could it have, both on financial speculation, and on poverty? Does James Tobin's original idea offer an adequate solution, and what scope could there be for other related measures?

The Tobin Tax: definition and objectives

Following the abolition in 1971 of the system of fixed exchange rates introduced under the Bretton Woods agreements, it became clear that the fluctuation in exchange rates could be explained not only by the interaction of economic "fundamentals" (i.e. inflation rates, budgetary deficit, trade balance, public debt, etc.), but also by operations of purely speculative nature, that is to say transactions with no productive purpose other than the pursuit of financial gain.

It was therefore no coincidence that in 1972 James Tobin, a professor at Yale University, former advisor to J.F. Kennedy, and holder of the Nobel Prize for Economics, suggested the imposition of a 0.25% tax on all currency transactions (foreign exchange operations). Since then the idea of a "Tobin tax", as it has come to be called, has regularly been evoked by those who would like to reduce the impact and risks of speculation.

In 1977 Tobin himself devoted the whole of his presidential address at the Eastern Economic Association to an examination of this tax. He saw it as one measure among others to improve, if only to a limited extent, the efficiency of macro-economic policies, since the income earned from the tax could be used by the central banks to defend their currencies.

Tobin was directly inspired by Keynes in this idea. Just as Keynes had recommended that a price should be paid for access to the stock exchange, Tobin proposed that currency speculation should also carry a charge, analogous to a casino entrance fee. Needless to say, neither Keynes’ recommendation nor Tobin's has yet been put into practice.

Tobin’s idea is very simple, since it would introduce, at international level, a tax with a single parameter. At the same time the tax shows a certain sophistication, inasmuch as its essential property would be to automatically penalise short-term shuttle transactions without discouraging to any significant effect the trade in goods or long-term capital investments.

Since the tax would oblige speculators to conduct more subtle analyses of market conditions, it is also likely that it would encourage them to adopt a more long-term view in their operations. The tax would also put a brake on the incessant movement of capital generated by the difference in interest rates from one country to another. This in turn would give countries a little more autonomy as far as their monetary and macro-economic policy-making is concerned.

Since the basic strategy of short-term speculators is to shuttle successively from currency to currency exploiting their changing rates of exchange, such a tax, however small, would be charged to these speculators several times a day. It is estimated that at present 80% of international monetary transactions involve 'round trips' of five days or less.

Since the daily number of transactions is colossal (1500 billion USD per day in a normal period – see p.16), it is almost certain that a significant amount of income would be generated –  although exactly how much is difficult to assess, since the number of transactions liable to be taxed would naturally decrease in proportion to the severity of the tax. The income generated in this way was not for Tobin the main issue; he saw it as a by-product which would probably be redistributed multilaterally, since the tax would necessarily have to be applied on an international scale. The amount of income generated would ultimately depend on the rate of the tax, and on the volume of short-term transactions persisting after introduction of the tax.

We should note that Tobin's proposal concerned monetary transactions only, and not operations on the stock exchange (see p.7-10). ATTAC prefers for this reason to discuss a "Tobin-type" that could be applied to any financial transactions, i.e. to income from stocks and bonds and other assets, and in particular to the derivatives market.

Unlike Tobin, the founders of ATTAC consider that the income from a Tobin-type tax should be placed in a development fund for the eradication of poverty. In such a perspective, the tax can indeed be seen as an instrument for the raising of funds, to be dedicated to the struggle against social and economic inequality in the world. In this new form, it would correspond to a tax on capital itself, and would be applied uniformly across the planet. This then begs the question, of course, of how to manage and redistribute the income earned, which is a major and separate discussion in itself.

Whatever its potential in material terms, the Tobin tax is an important first step, and one of educational and symbolic value for the citizens of the world. Campaigners fighting to introduce the tax join a battle that is in fact taking place on two fronts: citizens across the world are converging with demands on their political masters – demanding that they in their turn force the world of high finance to return to the democratic arena at least some of the power which it has so illegitimately been accorded, and which gives it sole control over the future direction of our societies.

In order to give a clear and accurate view of the potential of a Tobin tax, we will examine how the financial markets have been operating and developing since James Tobin's initial proposal in the early seventies. This should help us understand to what extent such a tax would be capable of achieving its two main goals: a reduction in financial speculation and the relief of world poverty.

The Financial Markets

The financial markets include: 1) the foreign exchange markets where currencies are exchanged (long-term capital markets where bonds are exchanged), 2) the stock exchanges where stocks and bonds are traded (short-term capital markets), and 3) the derivatives markets, where derivatives are bought and sold (forward contracts and transactions). We'll look at these one at a time.

What is the foreign exchange market?

There are a host of different currencies in the world – among others the Japanese yen, the US and Canadian dollars, the Russian rouble, the British pound, and the French and Belgian francs. These different currencies have no material basis - i.e. they are no longer defined in relation to the fixed standard of a precious metal such as gold or silver. They have no intrinsic value on their own but symbolise in effect a certain value, and are therefore entirely dependent upon the confidence they inspire.

"Foreign currency" is a relative term, indicating any non-local currency. Thus the US dollar is foreign currency for French or Belgian citizens, whilst the French or Belgian franc is a foreign currency for citizens of the USA.

Different currencies are subject to supply and demand. If you go to South Africa for example, you will need to buy rands; by the same token, if you import South African products you will have to pay in rands rather than your local currency. You thus add to the demand for South African rands. At the same time there is also a supply of foreign currencies: in whatever country they are working, the large commercial banks can order a supply of rands and obtain them for you. The foreign exchange market consists of these transactions.

The quotation systems

The exchange rate, or price, of a given currency is the price of one unit of this currency expressed in another currency. There are however two ways of fixing the price of a currency – of quoting it, in the jargon:

·        direct quoting – mainly used on the London market – which means specifying the value of a local currency in terms of a foreign currency. For example: one Belgian franc is worth 1/62^nd of a pound sterling, i.e. approximately 0.016 GBP. Direct quoting of the Belgian franc in pounds would give: 1 BEF = 0.016 GBP; [1]

·        the pound sterling itself could however also be expressed in Belgian francs: 1 GBP = 62 BEF; in such a case we would say that the Belgian franc is quoted indirect against the pound. This is by far the more common practice[2], with only the UK quoting direct.

We will therefore adopt this second "indirect" approach; we will use the term rate of exchange as the price of a foreign currency expressed in terms of the local currency. It would follow from this that a rise in the rate of exchange of a particular currency would indicate a depreciation of that currency, with a fall in the rate indicating its appreciation (in the first case more francs would have to be paid in exchange for one pound, and in the latter case fewer).

The three types of exchange rate system

There are three main types of exchange rate system:

·        First, the fixed-rate system (or pegged exchange rate system), in which the monetary authorities (the central banks) fix a level of parity between currencies (i.e. a reference level or range, below or above which the rate of exchange is not allowed to move), based on a standard such as gold, the dollar or more recently the ECU. In this system the monetary authorities (central banks) intervene to ensure that the rate of exchange remains within acceptable limits – 5% above, 5% below, for instance – with regard to the reference standard. The International Monetary System for example was based on the gold standard until the 1976 Jamaica agreements, whilst the European Monetary System was based on the ECU . Such fixed-rate systems (like the one in force until 1971 under the Bretton Woods Agreement) can be undermined by major speculative attacks.  Devaluation could in such cases go beyond the tolerated levels – exceeding 5% in our example - given that the monetary authorities can be powerless against large-scale transfers of capital. The central bank reserves – the stock of ready funds in the country or countries under threat – would be insufficient to offset the outflow of speculative capital. A devaluation of the currency becomes inevitable – the traders sell the currency or currencies concerned 'en masse'.

·        Secondly there is the system of free or floating exchange rates, in which the monetary authorities avoid direct action and leave the exchange rate to float at the will of the market (of traders, that is, who buy and sell currencies). This has been the system in operation since the disintegration of Bretton Woods. In financial jargon this is referred to as the dirty floating regime. Pure "floating" only exists in theory – experience has shown that a self-regulating market is nothing but a myth, since any speculative activity threatening a currency invariably attracts intervention by that currency's central bank (or the IMF), which will try to save what it can. Hence the term dirty floating.

·        And thirdly we have an amalgam of the two: the crawling or sliding peg – the authorities fix a rate of parity (a range with lower and upper limits to be respected) with another currency or basket of currencies (the reference standard), but this rate is now only valid for a fixed period of time, six months for example, at the end of which the rate (range) is reviewed, and thereby allowed to change gradually over time. This is the system in use in South Africa and Israel for example.

In the "dirty" free exchange rate systems predominant today, exchange rates vary with supply and demand, whilst the central banks make intermittent and regular interventions to protect and stabilise their local currency.

Just as the price of apples will rise if demand outstrips supply, so the rate of exchange of a currency will tend to increase if demand for it exceeds supply. The opposite is of course true when the supply of a currency is greater than the demand for it.

The exchange rate is determined on a specific market, the foreign exchange or currency market. This is a genuinely global market. Exchange operations are conducted on a continuous and almost 24-hour basis: at 8.30 a.m. Paris time the European markets open trading; at 6 p.m. Wall Street starts its operations and continues until 11 p.m.; Sidney then takes over, before handing over to the East Asian markets and finally the Middle East; after which the cycle starts over again. Moreover, with the global networks run by Reuters or Telerate information can travel almost instantaneously, so that the markets can respond in real time.

The two types of foreign exchange market

As with the stock market, the foreign exchange market includes both a spot market and a forward market.

·        The foreign exchange spot market handles operations taking immediate effect – the recording of movements between financial institutions (large-sum operations in different currencies for international investment). It is on the spot market therefore that short-term transactions take place.

·        The foreign exchange forward market handles operations agreed upon today but concerning a transaction that will take place at a future date fixed by contract (it is here that derivatives are bought and sold - see below).

Two forms of speculation, and arbitrage

Two of the main forms of speculation take place on the foreign exchange market, reflecting the two different faces of the foreign exchange market (spot speculation and forward speculation):

·        The first involves immediate short-term currency dealing. A trader will thus buy or sell foreign exchange on behalf of a financial institution, with the sole aim of making a profit in the process. (For example, a trader, confident that the euro will lose 5% against the dollar in the course of the week, will sell his euro for dollars and then buy them back when the exchange rate falls; thus if the euro really loses 5% against the dollar the trader makes a profit of 5%.)

·        The second form of foreign exchange speculation involves anticipating changes in exchange rates, by trading on the forward market. This type of forward speculation is made possible by the trade in derivative products, an activity which is becoming more and more common and is having a significant impact on traders' behaviour on the foreign exchange market. Derivatives are so named because they derive their value from so-called "underlying" transactions (we come back to this below).

·        Hedging is yet another practice; it involves exploiting minor differences in a currency's exchange rate from one financial marketplace to another. For example, a trader on noticing that the euro is quoted at USD 1.08 in Paris and at 1.09 in Frankfurt will buy in Paris to resell in Frankfurt. As a result of this, the rate of the euro will climb in Paris and fall in Frankfurt – the exchange rate climbs if there is buying and falls if there is selling, like shares or other commodities. The trader however has already made a profit by buying in Paris more cheaply than s/he will sell in Frankfurt.

What is the Stock Exchange?

In the interests of clarity let us first recall the nature of the Stock Exchange. The stock exchange is the market where shares and bonds are traded. A bond is a title to borrow; the issuer, a borrower, 'sells' a bond to a buyer, but is obliged to reimburse the sum at a specified rate over a specified period of time. Shares are titles to ownership of a company. A company will issue shares to be bought by investors; when the company ceases its activity its capital is shared amongst share-holders.

A stock exchange is thus the place where businesses are funded, through the issuing of either shares or of bonds on the stock exchange's primary market (the period of the market when stocks and bonds are first issued, ending on the day following payment of the subscription).

Such shares and bonds may be resold on the secondary market of the Stock Exchange - the greater the demand for a company's shares, the higher its value (and vice versa). This secondary market can of course lead to speculative dealings, with traders buying in on a large scale low-priced shares (e.g. at 100 units) and then reselling when they consider that the share price has risen sufficiently (by selling at 150 units, they make a profit of 50 on the operation). The history of international finance is littered with devastating crashes. The stock exchange rises in response to massive share purchasing, creating a so-called speculative bubble (stock prices are irrationally high), and then collapses when these same shares are sold off in large numbers – this is what happened both in the 1929 Wall Street crash and in South-East Asia in 1997, following the speculative fever of the twenties and nineties.

The stock exchange (where stocks and bonds are traded) should not be confused with the foreign exchange market (where currencies are traded). The term financial markets is used to cover all kinds of market, i.e. the foreign exchange market and the stock exchanges, and also the markets in derivatives, which we will look at in detail below.

A history of the international financial system

            The foreign exchange market has not always been what it is today, a global market working in real time without any form of regulation, and handling an enormous volume of transactions. There was even a time, before 1958, when this particular market did not exist, as the world's currencies were not inter-convertible. Three different stages can, and should, be distinguished in the development of the global foreign exchange market.

1.     We start in 1958, when, on the one hand, the currencies of the ten richest countries in the world are rendered convertible, i.e. the commercial banks are no longer obliged to return the foreign currency they hold to their central banks, and private individuals can change francs for example into any other convertible currency., In the same year on the other hand the United States records a balance of payments deficit, which is destined to grow. The American deficit had of course the advantage that it allowed the rest of the world to acquire American dollars, but there was a more serious disadvantage, in that it paved the way for a new, highly speculative, and hugely proportioned market in eurodollars. The term may seem strange, but its meaning is clear: a eurodollar is nothing other than an American dollar invested with a bank outside the United States. But, you may ask, what is the point of placing dollars in a European bank rather than in the States? - Because, quite simply, the rate of interest on the deposits was more favourable in the former than in the latter. The fact is that, as the table shows, the eurodollar market grew at an extraordinary rate.

	Dollars held by the Eurobanks
		Totals (in thousands of million USD)	Average annual growth
1965 1970 1975 1980		12 60 190 520	- 38% 26% 22%

Source: Jean Denizet, Le dollar, Paris, Fayard.

This mass of wandering eurodollars gradually grew to such proportions that it eventually came to be used for speculation on a large-scale, to such an extent, in fact, that it brought about the downfall of the international monetary system: there were more dollars in circulation than there was gold to guarantee them. Now, as we will see below, this link between the dollar and gold was the central pillar of the Bretton Woods system. To protect Bretton Woods, the United States were going to have to devalue the dollar (by reducing the value of the dollar the total value of the dollars in circulation would be brought back in line with the value of the gold reserves held). Nixon refused and decided to put an end to the Bretton Woods Agreement.

2.  We have arrived at the second stage in the period between 1971 - 1973 in which the system of fixed exchange rates created by the Bretton Woods Agreement was to crumble. This system was established in 1944 around two basic elements:

– first, there was gold, the fundamental pillar around which the system was built, since the exchange rate of every currency was defined by a fixed weight of gold (35 dollars for one ounce of gold was the benchmark);

– secondly, there was the fact that the fixed parity between currencies (in terms of their value in gold) was a binding rule: the dollar for example was worth 50 Belgian francs; member countries were therefore obliged to intervene on all exchange markets to ensure that that market's rate remained within 1% up or down of this bilateral parity.

The Bretton Woods régime was to crumble in two stages. On Sunday 15 August 1971, Richard Nixon announced the end of dollar-gold convertibility – and the end thereby of gold as a standard of exchange. Two years were to pass before the corner-stone of the Bretton Woods Agreement, fixed currency exchange rates, were to be abandoned. This finally came about on Sunday 11 March 1973, when the Finance Ministries of the nine European Community countries, who had been some of the last to remain faithful to the system of fixed exchange rates, decided to float their various currencies vis-à-vis the dollar.

3.  The European countries, after attempts to stabilise their currencies with the European Currency Snake in 1973 and the European Monetary System (EMS) in 1979, completely liberalised their foreign exchange markets. This led in 1992-1993 to the collapse of the EMS under the weight of massive speculation on the Italian lira and the British pound.

The adoption of floating exchange rates had a significant impact. The major currencies were to suffer from high instability (economists refer to exchange rate volatility), leading in the end to the establishment of a range of new instruments (derivatives) aimed at protecting the investor from exchange rate risk, i.e. losses following movements in exchange rates). At the same time, the floating exchange rate regime revealed once again what had already been observed after the First World War: unregulated exchange markets whose rates vary with foreign currency supplies and demand, are speculators' markets, completely exposed to the "herd effect" – "a rise brings on a rise, and a fall a fall". The floating of the currencies went a long way therefore towards turning the exchange rate markets into speculators' markets.

The floating of the exchange rates gradually spread to all the other markets, including the stock exchanges. In the United States, and then later in Europe, this led to what was called the Three D movement (the Three D theory came from the French economist Henri Bourguignat):

(i) Decompartmentalisation of the financial markets: the barriers fall between national markets (for example, in the United States the distinction between deposit accounts and current accounts) and international ones (traders can operate from one to another), culminating in the "Big bang" on the London markets in 1986.

(ii) Deregulation: access restrictions to the markets are almost completely relaxed, leading to a rise in the volume of trade (investment rises when it becomes cheaper to enter a market), the development of a number of new financial instruments, and the abolition of the distinction between the commercial banks and the investment banks specialised in stocks and bonds.

(iii) Dis-intermediation: given the furious competition between banks following decompartmentalisation and deregulation, the role played in the past by financial intermediaries (the banks in particular) diminished, with financial operators avoiding intermediaries to save on costs. Dis-intermediation allowed investors to communicate directly on the marketplace, without having to pass through agents.

The derivatives market

As we have seen, the seventies saw a general movement towards a floating of currencies, which spread in the eighties to all of the financial markets. To counter this phenomenon of overall instability, which threatened to undermine international trade (given that it was no longer possible to make accurate predictions for overseas investments, since their value depended directly on the exchange rates in the markets concerned), the banks started to bring out new insurance products against future risks: on payment of a premium the banks supply currencies and other assets to their clients at rates set in advance by contract. This opened a new activity in derivatives, which took off in the seventies and had found a place in specialised stock markets by the eighties. To understand how these function we can look at the two main types of derivatives:

·        options: an option gives an operator the right to buy or sell from the issuer of the option a financial asset (such as shares or currency) at some future time and at a pre-determined price. For example: the Chase Manhattan Bank may issue a 6-month option to buy dollars at 1.05 euro. This means that the bank promises to deliver dollars at 1.05 euro in 6 months' time. At the same time as this a Spanish oil importer prepares to buy 1000 dollars' worth of oil in 6 months. He will quite logically seek to protect the value of his investment (by making sure that the dollar will not rise in value during the 6-month period – if the dollar rises to 1.10 euro, he will have to pay 1100 euro instead of the 1050 he would have to pay if the transaction was completed today with the dollar at 1.05 euro). To be on the safe side, the Spanish oil importer will take out an option to buy on the dollar (at 1.10 euro and at 6 months) as issued by the Chase Manhattan Bank. To do this he pays the Chase a premium (like an insurance premium). By purchasing the option, the Spanish importer gains the right to buy dollars at 1.05 euro in 6 months' time. He is therefore covered against any rise in the dollar in the next 6 months by the option bought from Chase (even if the dollar climbs to 1.20 euro, the importer is guaranteed dollars at 1.05 euro and therefore the possibility of paying his oil at 1050 dollars rather than at 1200). Should the dollar fall (to 1 euro for example), the importer will not exercise the option – he won't pay more for the currency than it is really worth (preferring to pay the market rate of 1000 dollars rather than 1050) and will chose to forfeit his premium instead (to the Chase's advantage). The option in this case is the derivative; the dollar is the underlying cash product from which the final operation derives (hence the term derivative).

·        swaps: a swap is an exchange contract between two parties, who exchange one currency for another at the spot rate (the currencies exchanged are therefore the underlying products from which the operation derives) and who, at a later pre-determined date, reimburse each other at a pre-determined rate of exchange. For example, a commercial bank in possession of yen has a need for pounds sterling over a two-year period. The bank will set out in search of a partner in possession of pounds and confident that the pound will fall in value against the yen. At the end of the two years, the two parties return their yens and pounds at the exchange rate initially agreed by contract (it is therefore to the bank's advantage if the yen has risen against the pound, and vice versa for the other party).

There are two types of forward market:

·         the organised markets, which have clearing houses to regulate them, provide a trading partner, and prevent any transactional irregularities. Standardised derivatives are traded on these markets, and investors must prove their solvency (deposit an initial margin) and regularly cover any losses (margin call).

·        the over-the-counter markets which are subject to no controls and which lack all transparency. The over-the-counter markets are unlike any other stock market (or organised market) in as much as their operations are decided by common accord of the parties concerned. Such operations are not standardised and are therefore generally not transferable (although they are well adapted to the needs of the contracting parties). They are of interest in so far as they offer the advantages of any made-to-measure product. This type of market has no formal obligations; for over-the-counter trading to take place, it suffices that two parties agree on the terms of a contract. This is the made-to-measure market where anything is allowed at zero transparency. New derivatives are created here on a daily basis (the term is financial innovation); in the United States a bank needs only to prove the social utility of a new product and find two parties interested in it. In Europe there are no restrictions at all to hamper financial wizardry. Swap contracts are for the most part traded over-the-counter. It happens that the foreign exchange market is riddled with swap transactions; this has a major impact on its development and on the possibilities of regulating it.

There is not a single operation today that is not associated with a derivative product. It is normal in fact for several derivatives to be associated with a single operation; this results in a series of wagers on wagers and widespread speculation on market correlations, enmeshing the markets together. At the end of the day, despite the fact that derivatives were born of the need to counter instability (the trend towards floating currencies described above), they engender further instability in the form of waves of devastating speculation (to which we return a little later).

The foreign exchange market today

How it works

The foreign exchange market can no longer be physically located at a particular address; in its present form it is an international electronic network in continuous activity. The market is a computerised forum where the entire supply and demand in foreign currency comes together.

The foreign exchange market is nothing other than the electronic interconnection on a planetary scale of arbitrage tables (an arbitrage table is the traders' workspace in a bank), drawing on the services of telecommunications providers and specialised clearing houses. This is a permanent network like the internet, to which only its members have access. It is therefore a unique virtual space comprising a host of specialised computers in global interconnection.

This is a far cry from the time when single transactions were performed by a particular client; in fact, in this market everything happens in quotas of 10 or 100 million dollars (or their equivalent). Any bank, therefore, seeking to trade on the market must first have access to the necessary quota, or be obliged to pay more for the operation.

This means that any bank operating on the international market will specialise its operations: one bank will specialise in Greek drachmas, the other in euro, etc. The two banks trading in almost all currencies, and thereby dominating the foreign exchange markets, are the Chase Manhattan Bank and Citygroup. It is thus that a few international banks can "control" the foreign exchange market, banks for the most part based in New York and London.

The global interaction on the foreign exchange markets is carried out by SWIFT (Society for Worldwide Interbank Financial Telecommunications), whose headquarters are in Brussels and which is responsible for clearing the transfers required in foreign exchange transactions. Access to the foreign exchange market is only granted to financial institutions affiliated to SWIFT (6600 financial institutions in all). All the commercial banks on the foreign exchange market have a SWIFT account.

As banks trade, they keep SWIFT informed of their dealings, and these are booked to their respective accounts (the currencies do not actually leave their home countries). When the BBL for example sells dollars for euro to the Dresdner Bank, the two banks confirm their transaction with SWIFT and their dollar and euro accounts are automatically updated. BBL's credit in dollars will be seen to fall at SWIFT whilst its euro account will rise, with the opposite being true for the Dresdener Bank's accounts. At the same time, SWIFT will notify its official dollar correspondent that the BBL's balance has fallen in favour of the Dresdener Bank – and vice versa as regards his euro correspondent.

The presence of SWIFT is a reliable gauge of the solvency of any financial institution trading on the market. Institutions cannot in effect operate if their accounts managed by SWIFT are not sufficiently provisioned. SWIFT is thus the agent responsible for settling the balance of all foreign exchange operations (whenever you deal in a foreign currency you will see the SWIFT reference number on the ticket).

The technical feasibility of a Tobin-style tax is obviously favoured by such a centralised and interconnected system of exchange; everything is automated, centralised and "memorised". To implement a Tobin-style tax, it would suffice to place a charge on any automatic clearance operation carried out by SWIFT; in addition it would be entirely possible to detect any transaction emanating from a tax haven – and therefore to penalise it. We will come back to this later; suffice it to say that the facts of this matter prove the technical feasibility of introducing such a tax.

As for the market itself, it is made up of providers, whose computer networks enable traders from all over the world to negotiate with each other. The Reuter and Knight-Ridder networks are the main ones. In concrete terms, investors on the foreign exchange market work from their arbitrage tables, which are nothing other than immense halls filled with computers. Most of these machines are terminals linked to data exchange companies. These latter differ from other data providers in that they enable transactions to be concluded directly, and under secure conditions.

Whilst, therefore, SWIFT is responsible for clearing foreign currency operations, the providers handle the market, linking up traders who are seeking to negotiate deals which are made possible and certified by the system itself. In our example of the BBL and the Dresdener Bank, these two banks will communicate via Reuter's, for example, and have the balance of their trade settled at SWIFT (no foreign exchange transaction can be confirmed without intervention by SWIFT). As far as access to the system is concerned, as we have seen, only market professionals guaranteed by SWIFT may benefit from its services. For Reuter's and their like, access is available to all comers, as long as they pay the monthly subscription fee (in excess of BEF 100 000).

For information, besides SWIFT (which is an international clearing house) there are national agencies specialised in clearing national trade. For example, in the USA the CHIPS clearing system (Clearing House Interbank Payments System) is comparable to SWIFT, but operates on a much smaller scale and, especially, more locally, since the CHIPS only settles dollar transactions between banking institutions. CHIPS is run by the New York Fed. (the American central bank). Foreign banks may subscribe as long as they have a presence in New York.

As we have seen, traders on the foreign exchange market buy and sell the foreign currency they please; the more a foreign currency is bought, the more it increases in value. similarly, the more a currency is sold, the faster it loses value. However, any foreign exchange operation is vectored by the American dollar, the reference currency for all other currencies (to a certain extent we are operating in a dollar-standard system).

For this reason, when making an investment, a trader seeking to change pounds sterling for Swiss francs, will first change the pounds for dollars, and then the dollars for Swiss francs (which happens automatically of course).

We can say in conclusion that any exchange operation involves three different processes: first, the dealing site handles the placing of orders (at the arbitrage table or trading floor): two traders enter into contact and negotiate the operation. Secondly, the transaction is cleared in the settlement site and confirmed (including therefore the updating of the appropriate accounts by SWIFT): the operation has effectively taken place. Finally, the booking site handles the administration and management of the clients' accounts, with the orders to buy or sell being recorded (accounting level).

Its volume and characteristics

It is generally agreed that there is a significant volume of trade in foreign exchange. The only statistics on this however are those of the Bank for International Settlements (BIS), based in Bale, Switzerland, which carries out a survey every three years. The last survey covered 1998 [3].

It concerns "foreign exchange and derivatives market activity" and covers 43 countries (26 three years previously). It therefore closely reflects the trends visible today on these especially volatile markets.

We will look at the survey from four main points of view: the volume of the market; the principal actors involved; the currencies that dominate it; its geographical location.

The table below shows how the average daily turnover of the foreign exchange markets had increased in what is barely a decade, measured in thousands of million US dollars.

Instruments	April 1989	April 1992	April 1995	April 1998
Spot transactions* Forward transactions*	350 240	400 420	520 670	600 900
Total	590	820	1190	1500

* Including estimated shortfalls in the declarations

Source: BIS.

               The first thing to note is that the value of spot transactions has declined in the course of time, in favour of futures and swaps. Whilst in 1989 they represented 60% of the trade, they stand today at only 40%.

            If we now look at the figures for annual turnover (adjusted to take exchange rate variations into account), we see that its growth has been extremely rapid: 33% between 1989 and 1992, almost 30% in the following three years, and finally another 45% between April 1995 and April 1998. Extrapolating from the figures in the table, if we multiply them by the number of days of market activity per year (240) we arrive at the quite astronomical figure of 360,000 thousand million dollars, i.e. nearly 45 times the gross national product of the United States!

            And even this latter figure fails to tell the whole story with regard to the activity on the foreign exchange markets. In particular it does not include foreign currency derivatives traded on the over-the-counter (i.e. non-organised) markets. If we add the daily transactions in these over-the-counter dealings, the total figure rises to 1,590 thousand million dollars[4], which represents the basic sum available for taxation by a Tobin-type tax on foreign exchange dealings.

            The actors

The BIS survey asked operators from 43 countries to supply a list of their contracts and dealings, classed by counterpart under a) reporting dealers (the commercial banks, merchant banks or holdings, and the investment banks); b) other financial institutions, i.e. notably the mutual investment funds, pension funds, hedge funds, money market funds (monetary SICAVs), real-estate companies, insurance companies and central banks; and c) non-financial customers (companies and governments).

It is clear that the role and importance of these three actors will differ significantly according to whether we are looking at foreign exchange markets or the derivatives markets. The distribution of foreign exchange traders was found to be as follows: 73.1% of average daily turnover is created by the reporting dealers, against 14.1% and 12.8% respectively by the other financial institutions and non-financial customers. This confirms what we already know – genuinely commercial transactions have a minor role to play on the foreign exchange markets, whilst financial transactions on the other hand play a major role, due, to a large extent, to the activities of the commercial banks.

The proportions are quite different for over-the-counter foreign exchange markets, where the other financial institutions come into their own, notably the so-called hedge funds modelled on Soros' Quantum Fund.

The currencies exchanged

The table below gives an indication of the demand for particular currencies. It should be borne in mind when reading the table that an exchange transaction necessarily involves a pair of currencies; for this reason the sum of the different currencies' percentage contribution to total daily turnover will equal 200%.

Contribution to daily turnover (in percent)

Source: BIS

            The American dollar is by far the most widely used currency in exchange transactions – in 1998 it figured in 87% of operations world-wide. It is followed by the mark. The mark shows a tendency to weaken however in the course of time. The yen and the pound sterling come next, holding their level better than the German currency. Of course the arrival of the euro in 1999 has had some effect on this data (1998 figures), but it has not changed the general pattern seen here.

Geographical distribution

            The following table shows how foreign exchange activity is distributed geographically, by financial centre. For clarity's sake we have limited ourselves to the seven major financial centres.

Geographical distribution of foreign exchange dealings

Daily average turnover in thousands of million dollars

	April	1989	April	1992	April	1995	April	1998
	Turnover	In %	Turnover	In %	Turnover	In %	Turnover	In %
United Kingdom United States Japan Singapore Germany Switzerland Hong Kong	184.0 115.2 110.8 5.0 - 56.0 48.8	26 16 15 8 - 8 7	290.5 16.9 120.2 73.6 5.0 65.5 60.3	27 16 11 7 5 6 6	463.8 24.4 161.3 105.4 76.2 86.5 90.2	30 16 10 7 5 6 6	637.3 350.9 148.6 139.0 94.3 81.7 78.6	32 18 8 7 5 4 4
Totals	569.8	79	832.0	77	1 227.8	78	1 530.4	77

Source: BIS - extrapolated figures

There are several points to be noted about this table:

(i) The figures confirm that London is by far the most important international centre: its role has grown continuously from survey to survey, and the UK marketplace today hosts almost a third of all international foreign exchange activity.  London's position is so strong that most of the business conducted in dollars or German marks is carried out in the United Kingdom and not in the United States or Germany;

(ii) Four countries (the UK, USA, Japan and Singapore) are themselves responsible for two thirds of foreign exchange dealings, a proportion that barely changes over time. They are trailed by the financial centres of Frankfurt and Paris in continental Europe, (Paris is not quoted in the table but claims 4%, like Switzerland or Hong Kong);

(iii) Finally, the table reflects both the emergence of the East Asian markets (and of Singapore and Hong Kong in particular) and their relative stagnation. Japan is a special case, in so far as it has been declining steadily for the last 10 years, almost certainly as a result of the banking and economic crisis it has been undergoing since the early nineties.

Tobin Tax : Objections and feasability

Recurring objections to the implementation of a Tobin tax are based either on mistaken assumptions or on mere ideological positions. Here are the main ones:

* The Tobin tax cannot work miracles. One cannot expect it to both regulate the market and to raise an income to be redistributed.
Answer: This argument has been used by many "experts", first of all Olivier Davanne, the author of the negative report on the Tobin tax (commissioned by Lionel Jospin when still a brand new Prime Minister in 1997). Nevertheless, this is attributing to the promoters of the tax intentions that they don't have: the purpose of the tax is to raise an income and, to use Tobin's own words, to introduce sand into the wheels of international finance. Nobody claims that the tax can regulate the market on its own.

*The bulk of change operations are hedging operations. A Tobin tax will result in their disappearance, and the transaction volume will dwindle dangerously, which will reduce to nothing the income to be redistributed.
Answer: The hedging technique consists in evening the change markets (for instance, if the euro's exchange rate is 0.87$ in New York and 0.89$ in London, the hedger buys euros vs dollars in New York and sells euros vs dollars in London, making thus a 0.02$ profit and tending to even the quotations of the euro in New York and London.) But even a volume of transactions divided by two would leave a daily turnover of 750 billion dollars, which is considerable: a 0.1% tax would raise annually 180 billion dollars, ie more than twice the amount required to provide universal access to basic social services (this amount is estimated at 80 billion dollars by the UNPD in its "Report 2000 for human development").As for the disappearance of the hedging technique, it would by no means result in the collapse of the market, for the volume of transactions would remain sufficient to guarantee the financing of the real economy (the volume of transactions would actually return to its level in the early 90s - see the table on page 16). It is furthermore accurate to question the necessity to even the market within a few minutes rather than within a day...Actually, this is in nobody's interest except some speculators', greedy for a quick profit. Indeed, the speculative attacks, as observed in Asia, are responsible for the collapse of the system and its dreadful economic and social consequences. Those who would be taxed most heavily would be the "institutional investors", ie the pension funds and insurance companies that use the change market for their international investments. These financial giants with a sheeplike behaviour are precisely at the origin of the late crises. A tax would incite them to invest with a view to a longer term (in economics, one would say that they lengthen their settlement horizon), which could bring some stability to the market.

*The tax will reduce speculation, but speculation is necessary in a system of floating exchange rates.
Answer: When you know that speculative capitals are 80 times as important as real investments, you realise how unfounded this argument is. Speculative transactions are tremendous. Indeed, financial speculation has developed to such an extent that one calls this evolution the "financialization" of the economy. And when you see the social damage done by speculative attacks, you can't but encourage a decrease in speculation. 

*Speculation plays a stabilising part
Answer: The repeated financial crises of the 90s are evidence to the contrary, for it has been demonstrated that they are the direct result of the growth in speculation.

*This won't prevent fluctuations in exchange rates; overestimated currencies will always be attacked.
Answer: We don't claim that a Tobin tax would be enough to get rid of financial speculation, and some complementary measures do exist (see p.27-30).

*You will cut down international liquidities and therefore aggravate the risks of a crisis.
Answer: Facts show that 'massive liquidity' is not a synonym of 'stability'. Over the past years, one could observe simultaneously an increase in the volume of transactions and in the number of crises.

*You will jeopardize the good working of international exchanges.
Answer: In the present circumstances the volume of transactions on the exchange market does not have the slightest relation with what is required to guarantee international exchanges. Indeed, the instability generated by these transactions themselves interferes with international trade (about 5% only of the transactions deal with the international trade, and trade demands monetary stability to secure investments).

*All countries should implement it, which is impossible. 
Answer: It would be sufficient for the few countries that make up the exchange market (which is highly centralized, see table p.18) to adopt the tax, and impose a penalty rate on transactions originating from the "non-Tobin" zone; the economist Kenen proposes a penalty rate of 5%, in the case of a normal rate of 0.05%). The euro zone can be a good starting point and the positive results of the tax would induce the other countries to follow the initiative.

*Increasing computerization makes collecting the tax impossible.
Answer: On the contrary. The dealing site is now totally virtual (two operators just have to give a phone call to conclude an operation) but the settlement site is absolutely centralized (by the SWIFT mechanism for the exchange market). Taxing every operation at its settlement would suffice to raise an income for the central banks (see p.14-15 and 24). The allocation of the funds still has to be defined.

*The tax will push capitals to evade to tax havens. 
Answer: It is easy to identify operations that originate from a tax haven (as explained on p.24) and to tax them consequently (penalty rate). Anyway, ATTAC demands the total abolition of these tax havens that encourage financial crime (between 500 and 1500 billion dollars a year are recycled ).

*The Tobin tax will generate tax evasion.
Answer: This is not an argument. Every tax generates evasion, this does not put its legitimacy into question.

*You will tax honest investors. 
Answer: So, only the dishonest ones should pay taxes?

*This is a cannibal tax that will yield nothing since it will reduce the volume of transactions.
Answer: A Tobin tax is so small that it will hardly reduce the volume of transactions. Anyway, if it does so, this must be a source of satisfaction. But according to ATTAC the tax should also raise funds to eliminate poverty. 

*Substitutes will be created, for instance through derivatives.
Answer: The answer to this question is so complex that we will dedicate a separate chapter to it.

Derivatives and the regulating effect of the Tobin tax

The derivatives' drift

Financial engineering made the creation of increasingly complex derivatives possible, and as a consequence these are sometimes used with a purely speculative aim in view. Indeed, while currencies may be bought for a settlement with a productive aim in view (to protect against rate fluctuations, so as to determine the real cost of a long term productive investment), there may also be no such intention. Every bank in the world, every big company's treasury and even governments, do their best to invest the meanest balance in hand : money can't rest, it must yield, and derivatives can be used to achieve this goal. Do I own too many yens? I can take a position on a derivative based upon the yen!

Swaps are particularly frequent in change operations (for their trading is cheaper than that of options).

Exotic or hybrid products are continually invented, which multiplies the positions on the settlement market. These positions can become purely speculative: for instance, two operators will bet on the coherence of the term evolution in the banana and the dollar rates, over a specific period, say one year. If the coherence exceeds a corridor fixed by contract, party A wins. If the coherence stays within the set margins, party B wins. One can easily understand that none of the two parties has the slightest intention to use bananas or dollars productively. They just use them as references on which they can speculate. And the real economy (the banana producer or the investor willing to buy a product with dollars) will helplessly observe while these speculators' activities disturb the rates.

Numbering every existing derivative would be impossible, for there is a great variety of these, and innovations are frequent in this field. These innovations are also a technique to evade the law: Is a new regulation coming up? Let's design a new derivative to evade it!

For instance, in 1981 President Mitterrand decided to regulate terminal deposits made by banks by fixing a dissuasive legal minimum of 6 months and 500,000 FRF to the short term deposits. At once the banks created the short term ‘SICAV’ to evade the new law. Indeed, a Tobin tax may be evaded by another financial innovation if the legislator does not pay enough attention to regulating these innovations at the same time, by modifying the rules of the market. To cope with this problem, it seems necessary to create an international body that would be in charge of determining a posteriori whether a financial innovation can be a threat to the efficiency of a Tobin tax. 

The transit market for every international financial operation 

In times of speculative attacks against a country or a region, the spot exchange market is the place where every massive capital movement is in transit. For instance, if a pension fund manager owns Japanese shares, private bonds or Treasury bonds in its securities, and if a speculative attack is launched against Japan, the said manager will sell its Japanese stocks versus, say, US stocks (that process is called the "flight to quality"). But, if he sells stocks in yens to buy US stocks in dollars, he will necessarily use the spot exchange market for every operation (to sell his yens vs dollars).

Therefore, the spot exchange market is not the main source of financial instability. It is rather the place where capitals are in transit when fleeing from a financial crisis. The settlement market, however, is far more speculative and destabilizing, by creating differences and reacting to them. Moreover, the international share and bond markets are themselves highly fluctuating and linked to the derivatives.

Let's analyze the itinerary of a speculative attack: when international investors decide that they have made enough profit in the region where they have been speculating, they can prepare an attack. This attack is very often triggered by a stimulus linked to the fundamentals (inflation rate, budget deficit, etc) but first and foremost by an emergency intervention of the IMF that frightens the investors and makes them flee massively. But the origin of the attack is on the derivatives markets.

A few scouts (speculative or hedge funds, mainly) start speculating on the fall of the settlement market. They bet on a fall of the term rates in the region. Then comes the psychological phase when the bulk of the investors follow. The pension funds, mutual funds and insurance companies

have a particularity: they are estimated by comparison to their competitors. A consequence of this is their sheeplike behaviour, ie a mimesis that makes the market suddenly collapse.

When the speculative attack is effectively launched (when the term operations are sold off), the operators sell all their stocks in the region so as to buy some others, somewhere else where the profits are considered less risky (flight to quality again). This is when the assets conversion implies a transit on the exchange market: the currencies of the region are massively sold versus "quality" currencies, and this is how all the currencies of the area collapse at the same time as the stock markets.

Moreover, the term speculation implies that there is no boundary between markets any more. The underlying stock of a derivative can be a share, a currency or a commodity, its nature doesn't matter to the speculator. He just looks for interesting coherences that enable him to make chained speculative operations. By betting on a coherence between, say, a currency and a share, the term speculator creates a link between the stock market and the exchange market.

As a result, a Tobin tax should extend to every kind of financial operations, and not only the exchange operations on the spot. Then the operators would have to get used to this tax, for it applies to every financial transaction, including transactions on the stock market and the derivatives market.

Varieties of this tax do exist, like the idea of a two speed tax proposed by Spahn (when a speculative attack is launched against a country or a region, the local monetary authorities raise the tax rate in order to stop capitals flight). But Spahn refuses to tax the exchanges that do not exceed a given fluctuation (3%), and to tax the "strong" currencies (dollar, euro, yen, sterling). He is not interested in tax income. His proposition can't therefore be used as it is if the aim is, like Attac's, to raise funds for development. However, the idea of a heavier tax in times of speculative attacks can be adopted to complete a Tobin tax.

The international connection between all financial operations

The feasibility of a tax on every transaction is as obvious as that of a tax limited to the currencies. Indeed, if the derivatives connect all markets together, so does market computerization, particularly their automatic clearing systems (the clearing houses). The system of automatic perception to the central banks at the settlement, as described above about the SWIFT for the exchange market, is still valid. A few specialized companies, called clearing houses, guarantee the global connection for the stocks that are negociated worldwide. A Belgian investor who buys an American share or a euro bond gets his order executed by Clearstream (formerly Cedel-Luxembourg) or Euroclear (Brussels).

What happens then, in plain language?

A company buys, say, USD 10,000 worth of a eurobond emitted by the World Bank. It passes an order to its operator, say BBL. This one compares the prices offered on the market and concludes the operation. Let's say that the holder here is Paribas. The two banks will communicate their operation to Clearstream or Euroclear. Let us sya, for the sake of the example, that BBL works with Clearstream and Paribas with Euroclear. This communication will indicate the number of stocks, the rate, the type of the operation (buying, selling, lending), the total amount (running interests included), the name of the other party and the date of the settlement. Clearstream will therefore receive this information from the BBL and Euroclear will receive the same from Paribas. Clearstream and Euroclear will then get in touch (all this process is fully automatic), and if the data provided by the two parties are exactly the same, the operation will be automatically settled on the given date. On this date, the asset account of the BBL at Clearstream will increase by USD 10,000 in value and its liquidity account will diminish by USD 10,000. Simultaneously, at Euroclear, the asset account of Paribas will diminish by USD 10,000 worth in World Bank bonds and its liquidities account will increase by the countervalue. Then, as soon as it receives from Clearstream the confirmation that the operation has been liquidated, the BBL will credit the company's asset account with USD 10,000 worth in World Bank bonds, and will debit its account with the countervalue decided in the order. Obviously, an international investment needs an exchange operation (if a Belgian investor buys an American share, he will have to sell euros vs dollars: as we saw earlier the exchange market is where all international operations are in transit). The international investment will therefore pass through an exchange operation (and consequently through the society that interconnects the exchange markets, ie SWIFT). It is up to the BBL, in the present case, to check that the liquidity account gets the countervalue when needed. So, it's up to the BBL to buy the dollars required, via the SWIFT mechanism, and then to inform its correspondent bank (say, Citicorp) so that it transfers the dollars to Clearstream's correspondent's account, say Chase, so that Clearstream know that the dollars come from the BBL and are dedicated to paying for the USD 10,000 worth of World Bank bonds. This means much administrative see-saw , but this system is very efficient and eliminates the problem of insolvability in one counterpart. A desk or a trader that is not a member of one of these clearing houses will make no operation, for no client would trust him. On the other hand, a member desk will never encounter a problem to make an agreement with a totally unknown institution from the ends of the earth: its membership will guarantee that the execution of the operation (paying and delivery) will adhere to the conventional rules of the market.

In the present situation these bodies (SWIFT, Clearstream, Euroclear et altri) deal with market professionals exclusively: only financial institutions operating on the international stock market can be members. An individual can't: to be able to operate on a market, an operator needs an authorization. To get this, an operator must necessarily be a member of Euroclear or Clearstream, if not, he will have to pass his orders through a intermediary member (which means an extra cost). An operator may be more easily accepted on one market than on another, depending on its global activities. Today, almost all the banks are members of all international bodies, in order to get access to every financial market.

The clearing house must give every operation it handles a unique code (ISIN) and transmit it to all the member operators, so that they can indicate it in their confirmation messages.

To solve the problems of black money, tax evasion, tax havens and encourage the establishment of a tax on every financial transaction, it would be enough to define by convention a unique code, like the ISIN code, to determine whether a transaction must pay a penalty or not. Every operator would automatically be given a unique code that would indicate the identity of the principal and the characteristics of the operation.

From a technical point of view, the elimination of tax havens (or their identification and the establishment of penalties against them) is therefore quite feasible. The only thing that is still wanting is a political decision to set up a tax on every financial transaction. 

One could even define whether an operation is purely speculative or not (ie needed for productive investment). One could upon this basis take dissuasive measures against operations that are considered useless and destabilizing. This approach implies, of course, that we know exactly what "speculation" is.

The limits of the Tax

Contracts for differences

Now, on the exchange markets, the banks encourage the establishment of contracts for differences, which means paying only the balance and not the total amount. This technique is getting common, as it allows the parties to move only the balance, and it implies that the amounts circulating on the exchange market are much lower than the amounts negotiated in reality. For instance, if a bank must buy one million dollars for client A and sell 800,000 USD for client B, it will conclude a contract for difference (ie USD 200,000) with its correspondent on the exchange market.

As far as the