Currency Speculation And The Tobin Tax

Karl Williams

[Reprinted from a Land-Theory online discussion, May 2001,
with comments by Dan Sullivan, David Hillary and Harry Pollard]

"If fifty men did all the work, And gave the price to five, And let those five make all the rules-You'd say the fifty men were fools,Unfit to be alive." [Charlotte Gilman, (1860 - 1935 )]

KARL WILLIAMS: I'll share my own understanding (and justification) for the Tobin tax, but let's first recap on what DanSullivan said about it: It strikes me that the Tobin Tax is is to money monopolization as the Deed Transfer Tax is to the monopolization of land.

DAN SULLIVAN: That earlier view is reinforced by your description of the tax.

KARL WILLIAMS: So, for those interested, here's a summary of my take on the Tobin tax. It's about 700 words, but the reader will be rewarded with a *highly-controversial* addition piece on why such a tax should be applied to share (you blokes say "stock") market transactions!

Speculation in foreign currencies has reached astronomical dimensions, with professionals like George Soros becoming billionaires in the process. But what wealth do they create in all of this? The fact of the matter is that they get something for nothing -- and their unearned profits are orders of magnitude more than an ordinary working person could possibly save in a lifetime, all for a few hours of playing the market! If the foreign currency scene was just like a casino in which players bet amongst themselves, then ordinary folk could not complain. But that's not the case at all, which is why it's so lucrative. Some of the unwitting downline losers are taxpayers, ordinary consumers, and small investors in the share market and superannuation funds. Furthermore, in an age of increasing globalisation, when currency speculators are so big and influential that they can manipulate the very markets in which they're playing, they can sway national economies at their whim.

That the foreign exchange market is now so massive as to be, in itself, a source of increasing instability in the economic world is reason enough to clamp down on it. But the big reason, it may be argued, is plain ethical: to reap where you don't sow means that, for every million that goes into a speculator's bank account, some other people somewhere are going to have to produce a million dollars worth of wealth for which they will not get paid.The fact that this outrageous form of legalised robbery can have persisted for so long without any preventative action being taken by governments (except, perhaps, in Malaysia) is disturbing to say the least. And, when a fairly effective remedy has long been proposed, it becomes doubly disturbing.

The way speculators have been able to profit until now is by feeding on economic instability and its resulting currency fluctuations. The odds are with them that they can make a small, profitable gain in each of many transactions, but do so in massive enough dimensions as to make hefty profits.

The proposed remedy is the so-called Tobin tax, whereby a very modest (about 0.2 - 0.5%) tax would apply to the approx. $1.8 trillion that crosses borders every day. The revenues from the tax could fund sustainable development programs, peacekeeping activities and the like. The Tobin tax would be enough to make nearly all speculative dealings unprofitable, as well as to alleviate currency instability and related financial crises caused by the immense present levels of foreign exchange trading.

This measure would have little effect on ordinary, legitimate transactions. It has to be said, however, that a few Geonomists argue against the Tobin Tax, emphasising how the ability to gain ordinate power and to manipulate exchange rates would largely be solved when the land issue is addressed. In any case, others criticise it as it would penalise and obstruct non-speculative financial transactions.Windfall profits of huge proportions are also made in the share and commodities markets. In a truly free and fair market, the share market plays a useful role in bringing enterprises and investors together for their mutual benefit. But purely speculative profits are unearned in the sense that the profit-maker has created no wealth, and again some other mugs, in the end, have to indirectly pay for this.The solution lies in distinguishing between these speculators and long-term investors. The latter are looking for a safe place to invest and a fair rate of return in the medium and long term.

Something similar to the Tobin tax might do the job, in that a modest tax would neither deter genuine investors nor greatly diminish their returns in the long run. But it would be enough to deter parasitic speculators primarily seeking short-term profits.To some extent, the opportunity to make quick bucks exists because of speculative opportunities in the land "bubble" market and the consequent boom-bust economic cycles fuelled by land monopoly capitalism. The whole issue of boom-bust cycles deserves its own section.

"I think in principle it's a good idea to tax unimproved land, and particularly capital gains (windfalls) on it. Theory says we should try to tax items with zero or low elasticity, and those include sites." [James Tobin, (1918 - ) American winner of the Nobel Prize for economics]

COMMENTS

KARL WILLIAMS WROTE: Speculation in foreign currencies has reached astronomical dimensions, with professionals like GeorgeSoros becoming billionaires in the process. But whatwealth do they create in all of this? The fact of thematter is that they get something for nothing - andtheir unearned profits are orders of magnitude morethan an ordinary working person could possibly save ina lifetime, all for a few hours of playing the market! If the foreign currency scene was just like a casino in which players bet amongst themselves, then ordinaryfolk could not complain. But that's not the case atall, which is why it's so lucrative. Some of theunwitting downline losers are taxpayers, ordinaryconsumers, and small investors in the share market andsuperannuation funds. Furthermore, in an age of increasing globalisation, when currency speculators are so big and influentialthat they can manipulate the very markets in which they're playing, they can sway national economies at their whim. That the foreign exchange market is now so massive as to be, in itself, a source of increasing instability in the economic world is reason enough to clamp down on it. But the big reason, it may be argued, is plain ethical: to reap where you don't sow means that, for every million that goes into a speculator's bank account, some other people somewhere are going to have to produce a million dollars worth of wealth for which they will not get paid. The fact that this outrageous form of legalised robbery can have persisted for so long without any preventative action being taken by governments (except, perhaps, in Malaysia) is disturbing to say the least. And, when a fairly effective remedy has long been proposed, it becomes doubly disturbing.

DAN SULLIVAN: So far everything is the same as with land speculation. Below, however, Karl describes not the currency monopolists, but the currency traders, just as the superficially astute viewers of land speculation focus on the traders rather than the monopolists.

KARL WILLIAMS:
Indeed, I have focused on currency traders, for good reason -- and it's not a superficial focus. Cross-border currency transactions have increased 70 to 80 times in the last 30 years, with purely speculative dealing comprising amound 95% of this total. A staggering US $1.5 to 2 trillion is traded every day.

This has swamped the ability of central banks to manage the wild swings in exchange rates as profit-seekers shove their frenzied snouts from one trough to another.

These speculative attacks lead to incalculable downline human costs -- and it's vulnerable Third World economies which have suffered the most. When a currency is devalued, the purchasing power of citizens plummet, food and other basic items become too expensive, the environment is less protected, and jobs are lost.

The problems of instability are exacerbated by the self-fulfilling nature of the current situation. When speculators gamble on the likelihood of an imminent devaluation and sell a currency, this action itself lowers the asking price of that currency in the market and increases the likelihood of devaluation, precipitating the crisis that was feared. Exchange rate depreciation gives rise to further outflows, as panic sets in among international invetors. Even if a small number of speculators take the lead, this may produce herd behaviour on the part of other investors. And in times of crisis, the more bets there are the bigger the swings. When a currency is under speculative attack, the forceis often irresistable.

To make matters worse, the big players in this game are now so big that they can themselves manipulate the market to their advantage. Of course, it's in their interest to have privileged access to future government decisions -- and even to influence those decisions.

KARL WILLIAMS WROTE: The way speculators have been able to profit until nowis by feeding on economic instability and its resulting currency fluctuations. The odds are with them that they can make a small, profitable gain in each of many transactions, but do so in massive enough dimensions as to make hefty profits.

DAN SULLIVAN: This fails to recognize that the currency traders actually keep currencies in sync.

KARL WILLIAMS:
Rather, today speculative currency traders deal i high-volume, low-margin territory that only keeps rates in sync in the finest degrees. The big potential discrepancies are brought into equilibrium by ordinary market dealings. In any case, the minute synchronisation brought about by speculators is inconsequential compared to the transaction costs (exchange rate differentials etc.) which commerce has to pay on ordinary transactions.

And of what use is this synchronisation anyway? In the long run, miniscule gains and losses on "uneven" foreign transactions would even out.

Furthermore, this synchronisation which Mr. Sullivan applauds is swamped by the massive instability and uncertainty which
DAN SULLIVAN:
The manipulation of currency comes not from mere trading, but from accumulating currency and driving up its value, forcing others to borrow bank notes and pay interest.

KARL WILLIAMS:
Here you confuse matters by diverting the discussion into quite a distinctly different topic, whatever the merits of this disgression.

DAN SULLIVAN:
As you will see, the Tobin Tax specifically excludes those who are hoarding money over long periods.

KARL WILLIAMS:
"Specifically excludes" is not a judicious choice of words, for the Tobin Tax does not intentionally give relief to others who derive ill-gotten gains. The Tobin Tax is not a cure-all for all monetary problems, as you try to present its advocates as claiming.

KARL WILLIAMS WROTE: The proposed remedy is the so-called Tobin tax, whereby a very modest (about 0.2 - 0.5%) tax would apply to the approx. $1.8 trillion that crosses borders every day. The revenues from the tax could fund sustainable development programs, peacekeeping activities and the like.

DAN SULLIVAN: Aside from problems with how the money would be spent, there is a false notion that trading currency is the problem, when trading is the whole purpose of currency in the first place. Just as we want people who are not using land to trade it, so do we want people not using money to trade it. The Tobin Tax does not discourage hoarding of money, but discourages international purchases. Like the deed transfer tax punishes people for selling land, when the problem is the failure to sell, so does the Tobin Tax punish them for selling money, when the real problem is the failure to sell.

KARL WILLIAMS:
This is a problem?!!! The use to which the revenue can be put has been widely discussed in social justice circles, Third World advocacy groups, environmental organisations, churches, charities, etc.

The Tobin Tax pay-off will be massive, and this alone is why so many international aid agencies and environmental groups are calling for its implementation. Of course, the greater the deterrent effect, the less revenue will be raised. Even still, based on an estimate of about 83% of transactions being deterred by a TT of 0.2%, the revenue raised will still be a massive US $150 billion per year -- far in excess of present world aid which totals a mere US $55 billion.

Inevitable disagreements will arise as to how this amount should be spent, but this is a problem with which the world can happily deal! Here are just a few of the proposals, all of which would put the revenue raised to very good use:

* the addressing of environmental problems such as global climate change, loss of biodiversity, erosion of the ozone layer, and the funding of sustainable energy projects.

* overpopulation

* HIV/AIDS

* disaster relief (for victims of earthquakes, cyclones, floods, famines, etc.)

DAN SULLIVAN:
There is a false notion that trading currency is the problem.

KARL WILLIAMS:
A Straw Man argument, Mr. Sullivan! Who ever made the claim that mere (and vital) trading of currency is the problem? No, the Tobin Tax aims to distinguish between speculative transactions and genuine commercial dealing, and the 2-tier refinement of Paul Spahn goes some way to largely achieving this.

A minimal tax rate would apply on all transactions, and a higher rate would be activated at times of market turbulence, to calm grater market volatility. Under this scheme, an exchange rate would be allowed to mvoe freely within a band, but overshooting the band would result in a tax on the discrepancy betweenthe market exchange rate and the closest margin of the band. Exchange rates would thus be kept within a target range through taxation rather than central bank intervention (and consequent depletion of international reserves).

The two-tiered system would thus function as an automatic circuit-breaker whenever speculative attacks against currencies occurred (if they occurred at all under this regime). The two taxes would thus be fully integrated, with the former constituting the operational and computational vehicle for the latter. Unlike the original proposal, which would indiscriminately tax all transactions at the "wrong end" and therefore penalize normal liquidity trading, the exchange surcharge would apply much more heavily on transactions at the "speculative end" and would not affect normal trading

DAN SULLIVAN:
When trading is the whole purpose of currency in the first place, just as we want people who are not using land to trade it, so do we want people not using money to trade it. The Tobin Tax does not discourage hoarding of money.

KARL WILLIAMS:
Once again, because the Tobin Tax doesn't solve all monetary problems (and has never been said to do so), you condemn it outright, without recognizing its benefits.

In any case, your analogy is misleading. If I hoard money (and am penalised by foregoing interest and/or investment opportunities), I'm giving rise to far different consequences than by hoarding land. Without Land Value Taxation, I'm not penalised by hoarding land. And, importantly, by hoarding land I'm standing in the way of someone who could put that irreplaceable land to good use.

DAN SULLIVAN:
... but discourages international purchases.

KARL WILLIAMS:
Not a judicious choice of words -- it is instead directed at speculative transactions rather than purchases of goods and services..

DAN SULLIVAN:
Like the deed transfer tax punishes people for selling land, when the problem is the failure to sell, so does the Tobin Tax punish them for selling money, when the real problem is the failure to sell.

KARL WILLIAMS:
Once again, you fail to recognize how the Tobin Tax is directed at speculators.

KARL WILLIAMS WROTE: The Tobin tax would be enough to make nearly allspeculative dealings unprofitable, as well as toalleviate currency instability and related financialcrises caused by the immense present levels of foreignexchange trading. This measure would have little effecton ordinary, legitimate transactions.

DAN SULLIVAN: The same was said of the deed transfer tax. However, the real effect is as follows ...

KARL WILLIAMS:
The same old false analogy!

DAN SULLIVAN:
Without the Tobin Tax, currency is traded as soon as a diparity of value is perceived.

KARL WILLIAMS:
Or caused!

DAN SULLIVAN:
... and the disparity disappears. If there were a Tobin Tax of, say, .5%, then people would hold a particular currency until the differential reached .5%. That is, they would hold the currency longer, just as land speculators hold the land longer when there is a Deed Transfer Tax.

KARL WILLIAMS:
This is absurd, and presumes that the exchange rate will always move in a known and favourable direction. Around half the time the rate will swing the other way -- and if the differential reached 0.5% the other way, then the speculator has LOST 1.0% on the deal! WHAT SORT OF INCENTIVE IS THIS TO HOARD MONEY?!!

DAN SULLIVAN:
This longer holding of currency would no doubt occur via bank deposits. ...

KARL WILLIAMS:
Holding and hoarding of money is not the real problem, as I explained above.

DAN SULLIVAN:
... so that those who own the banks can create additional debt money via fractional reserve, and the people suffering from a shortage of money can indebt themselves as a temporary relief measure. It's all downhill from there.

KARL WILLIAMS:
My comprehension has certainly gone downhill. I hope you can understand this verbiage, because I can't.

KARL WILLIAMS WROTE: It has to be said, however, that a few Geonomists argue against the Tobin Tax, emphasising how the ability to gain ordinate power and to manipulate exchange rates would largely be solved when the land issue is addressed.

DAN SULLIVAN: I, for one, do not argue that. The land problem and the money problem are separate. However just as the deed transfer tax misapprehends the land problem, so does the Tobin Tax misapprehend the money problem.

KARL WILLIAMS WROTE: In any case, others criticise it as it would penalise and obstruct non-speculative financial transactions.

DAN SULLIVAN: It would equally penalize all transactions.

KARL WILLIAMS:
... If you're still in a state of denial about the whole purpose and mechanism of the tax -- to hit volatility-causing speculators.

DAN SULLIVAN:
Moreover, a speculative transaction is not speculation itself. It is merely a transaction made for the purpose of speculation.

KARL WILLIAMS:
Really, Dan, you can surely mount better arguments than this! In any case, according to the Concise Oxford, this muddling definition is vacuous:

Speculate: v. make investment, engage in commercial transaction, that involves risk of loss.

DAN SULLIVAN:
Speculation itself is the holding of money or land, not the buying or selling.

KARL WILLIAMS: Then the dictionary definition (and common understandings) must be wrong. In any case, why would you hold money or land if not to sell it at a profit? Forget the twisted semantics, and deal in plain English, please!

DAN SULLIVAN: Indeed, we can only determine that someone is a speculator when he holds the land or money out of use in anticipation of a gain.

KARL WILLIAMS: Then you must have lightning reflexes, because many foreign currency transactions are computer-initiated deals made in nanoseconds!

DAN SULLIVAN: At the time of the transaction itself, we cannot ascertain whether it is speculative or not.

KARL WILLIAMS: Nor do we need to ascertain. The long-term investor will hardly be affected by the Tobin Tax.

DAVID HILLARY: Currency and stock speculators do not hold financial assets out of the financial system, they hold financial assts in the financial system. These assets in the financial system earn interest or earnings and are being put to productive use. Land speculators, even those who hold vacant land do not necessarily misallocate it: it might be better to hold land vacant awaiting the acquisition of surrounding land for a large project.

KARL WILLIAMS WROTE: Windfall profits of huge proportions are also made inthe share and commodities markets. In a truly free and fair market, the share market plays a useful role in bringing enterprises and investors together for their mutual benefit. But purely speculative profits are unearned in the sense that the profit-maker has createdno wealth, and again some other mugs, in the end, have to indirectly pay for this.

DAN SULLIVAN: This begs the question of why these other mugs have to pay, what they have to pay for, and whether they would still have to pay if there were a Tobin Tax.

KARL WILLIAMS: The mugs pay because they don't have resources (big bucks, basically) to play. If they did, they would play! Little guys like you and I can play small time on the stock market, but don't have a hope of playing on the foreign currency market.

DAN SULLIVAN: Basically, they have to pay because currency does not expand naturally in response to some of it being withdrawn from the market. Rather, governments decide to let banks print more currency and lend it. The "other mugs" who need money borrow it, and this is why they have to pay. They are paying for access to artificially scarce money, and that money was made scarce by money hoarders, not money traders. They would still have to pay it if the money were not traded, but just hoarded.

DAVID HILLARY: Commercial banks do not print currency under the monetary system of most developed economies, central banks print currency. Commercial banks create money out of other financial assets, i.e., loans, bonds, etc. To the extent that governments make money scarce they do rob citizens of gain that they could have under free banking, but this has nothing to do with 'hoarding money.'

KARL WILLIAMS WROTE: The solution lies in distinguishing between these speculators and long-term investors.

DAN SULLIVAN: When it comes to piling up financial instruments, the speculators *are* the long-term holders.

KARL WILLIAMS: Using a woolly term like "financial instruments" is muddying the waters here. The speculators who are in the cross-hairs on Tobin Tax proponents deal in the shortest of periods -- and that's a simple matter of fact.

DAN SULLIVAN: ("Investor's" is a euphenism. To invest in something is to put value into it, not merely to acquire and hold it.)

KARL WILLIAMS: We could get bogged down in semantics and further distract attention from the Tobin Tax's aim of distinguishing between speculators and investors.

DAVID HILLARY: Speculators hold their assets in the financial system and those assets are the basis of credit extended to owners of productive capital (and also equity provided).

DAN SULLIVAN: Tautologies are tautological.

DAVID HILLARY: Commodity, stock and currency speculators seldom fill their basements with barrels of oil, bars of gold or even plastic notes. They have accounts with banks and exchanges and trade. their equity is part of the economy's supply of financial capital which in turn finances physical capital. Speculators *could* hold inventories of commodities, and this could be inefficient, but typically they do not, they hold accounts with financial institutions.

KARL WILLIAMS WROTE: The latter are looking for a safe place to invest and a fair rate of return in the medium and long term.

DAN SULLIVAN: So are the land monopolists, and so the Deed Transfer Tax falls most lightly upon them.

KARL WILLIAMS WROTE: Something similar to the Tobin tax might do the job, in that a modest tax would neither deter genuine investors nor greatly diminish their returns in the long run. But it would be enough to deter parasitic speculators primarily seeking short-term profits.

DAN SULLIVAN: Totally clueless about the nature of parasitism.

KARL WILLIAMS: Tut, tut, Mr. Sullivan! The case has been made in a number of ways that such speculators create no wealth, and any worthwhile service they provide are negligible and incidental. In old fashioned tersm -- they reap were they do not sow. I'll therefore stick to the term "parasitic".

DAVID HILLARY WROTE: All taxes on the transfer of assets impedes their flow to their most valued uses.

DAN SULLIVAN: Absolutely.

DAVID HILLARY: This is what encourages "hoarding" in the sense tht people hoard their funds in simple deposit or transaction accounts when bank account debits taxes and similar taxes on the movement of money restrict the flow to more risky assets (shares, managed funds, etc.).

DAN SULLIVAN WROTE: The injustice is in creating a shortage of land, so that people will pay a high rent, or a shortage of money, so people will pay a high interest.

DAVID HILLARY: The greater injustice it depriving people of the fruit of their labour earnings and their liberty to own property and structure production how they see fit. The main problem with land is that the capital gains from changes in public policy and economic conditions distract land holders from pursuingthe highest economic rent, and governments interfere with the land transactions and use, inhibiting land from its highest use. The higher the rent the better. Rent indicates the desirability of land for habitation and use and should be maximised by appropriate exercise of sovereignty. The rate of interest depositors get paid (in real terms) is artificially reduced by income taxation and the rate of interest borrowers pay is artificially increased by such taxes (i.e. taxation drives a wedge between the prices paid and received). Minimum reserve ratios on banks around the world, if these reserve ratios are higher than the market would employ unfettered, will also reduce the supply of credit and increase borrowing costs. These are the only two factors affecting the world after tax real interest rate in the long run.

KARL WILLIAMS WROTE: To some extent, the opportunity to make quick bucks exists because of speculative opportunities in the land"bubble" market and the consequent boom-bust economic cycles fuelled by land monopoly capitalism. The whole issue of boom-bust cycles deserves its own section.

DAN SULLIVAN: It does, but the parallels that caused Tobin to botch the money question would cause him to botch the land question.

KARL WILLIAMS: Again, you fail to deal with the real issues Tobin addressed (however limited), and instead criticise it because it's not a panacea for all things monetary.

A QUOTE FROM JAMES TOBIN: I think in principle it's a good idea to tax unimproved land, and particularly capital gains (windfalls) on it.

DAN SULLIVAN: Indeed, there is the botch. Taxing the capital gains on land transfers would only discourage transfers, which, stated contra-positively, would encourage people to hold land longer. That is exactly the effect we would want to avoid.

KARL WILLIAMS: Yes, Dan is right here.

DAVID HILLARY: Taxing the unimproved capital value of land is enough to force it to its highest valued use and not to restrict its transition thereto. Anything more adds complexity and inefficiency.

DAN SULLIVAN: Tobin wanted to tax the capital gains of land from transfer *instead* of taxing the land value itself. Such a measure would have an effect opposite the intended effect, as it would impede the flow of land from non-user to user. It is similar to his Tobin Tax, which impedes the flow of money, when the essential value of money lies in its ability to flow.

KARL WILLIAMS: For all the reasons I've given, land and money are like chalk and cheese, and Mr. Sullivan's analogies are very misleading.

DAVID HILLARY: A capital gains tax on land could operate independently of ownership transfer or use of land, it could simply be assessed each year or quarter and levied on whoever happened to be the registered holder of the land. However the psychology and politics of cash accounting associates the capital gain tax base with the sale of land for a profit, hence the tax could restrict the transfer of land.

KARL WILLIAMS WROTE: Theory says we should try to tax items with zero or low elasticity, and those include sites." - James Tobin, (1918 - American winner of the Nobel Prize for economics

DAN SULLIVAN: However, Tobin has not proposed taxing sites, but has proposed taxing the profits from transfer of sites. The transfer of sites is highly elastic, as they can be traded frequently or rarely. DAVID HILLARY: Precisely. Land stock is inelastic, land transfer is elastic. DAN SULLIVAN: Yes. The two are as different as a lightning bolt and a lightning bug. (Mark Twain's analogy) DAN SULLIVAN: If we are to use a parallel to land value tax, it would be more along the line of Sylvio Gesell's idea of devaluing currency by inflating the supply, so that there is an annual loss, a tax, actually, on holding money out of the market. However, I don't think that is necessary so long as we print money and spend it directly into circulation, instead of letting banks lend to us as individuals what is already ours as a people. DAVID HILLARY: Inflation encourages people to hold their money in the financial system, but gold based free banking would be mildly inflationary methinks, because thevalue of gold is equal to its marginal cost of extraction and its marginal industrial value, both of which are reduced by technological progress as the economy grows, more than offsetting its increased demand. DAN SULLIVAN: Technological advances decrease the cost of goods generally, but the growing scarcity of gold ore, and the fact that the richest and most accessible veins are mined first, would tend to make the price of gold rise relative to other goods. I would think, therefore, that gold money would be deflationary, if the base of comparison is the general price of commodities. That is, the price of commodities measured in gold would fall, or the price of gold measured against a general commodity index would rise. DAVID HILLARY: The real price of metals and minerals falls over time as extraction technology proceeds in excess of demand growth (see Cato Institute publication) . The economics of gold are the same, I think. The price of glass, cement, rubber etc. likewise fall relative to the price level of economic output. The price of personal services rises relative to other goods as the price of labour increases. DAVID HILLARY: Currency and stock speculators do not hold financial assets out of the financial system, they hold financial assets in the financial system. DAN SULLIVAN: Financial assets *are* the financial system. This is like saying that land monopolists do not remove land from the planet. DAN SULLIVAN: Its like saying land 'monopolists' do not hold land out of productive use, e.g. hold it vacant when it would be better improved and used by another party.When banking is free and on the gold standard, the holding of physical gold is to hold money out of the financial system. However speculators wanting to bet that the price of gold would rise relative to some other good, e.g. theshares of corporation XYZ, would not sell his shares in XYZ and take physical delivery of gold, he would sell the shares and leave the money in the bank, where the larger fraction is lend out to enterprises. Or he would borrow shares in XYZ secured against a money deposit at a bank. DAVID HILLARY: These assets in the financial system earn interest or earnings and are being put to productive use. DAN SULLIVAN: I question the use of "earn," which presupposes rightness. In any case, so do land monopolists rent out land so that land can be put to productive use. The injustice is in creating a shortage of land, so that people will pay a high rent, or a shortage of money, so people will pay a high interest. The shortage of land is primarily created by holding land off the market, but also devices that suppress access, such as zoning, government landholding, etc.Money monopolists do it by getting governments to produce too little money, so people will be pressed to borrow, or by getting government to let banks issue all the money, which is the sweetest possible deal for them. In either case, money made through trading is ancillary to the main problem. DAVID HILLARY: The solution is not to issue more government fiat money. The free market can produce the appropriate monetary arrangements for transactors and savers without government intervention. Government can leave monetary creation to banks and other businesses. Money is naturally competitive, with the marketnaturally converging on gold as the value anchor and basis for the financial and monetary system, before government intervention in and control over finance forced the value anchor onto political institutions. The myriad electronic gold currencies now emerging shows how money can be not onlyprivate and transparent, but also competitive (gold currencies/banks include: e-gold (www.e-gold.com), GoldMoney (www.goldmoney.com), 3Pgold (www.3PGold.com), Digigold (www.digigold.net), Standard Gold (www.standardreserve.com), MetalSavings (www.metalsavings.com), ecoin www.ecoin.net), OSGold (www.osgold.com) and NORFED (www.norfed.org). DAN SULLIVAN: I question the use of "earn," which presupposes rightness. DAVID HILLARY: The earnings I am referring to are:1. the earnings of the bank on loans which are the basis for2. the earnings of depositors on money in banks, also3. the earnings of corporations which are the basis for4. stock appreciation (growth of owners' equity) and dividends paid to stockholdersThe income of speculators is a different issue. 5/11 8:25:DH: Commercial banks do not print currency under themonetary system of most developed economies, central banks print currency. DAN SULLIVAN: Central banks print currency and lend it at interest, so the game is not disrupted for the commercial banks. If the government simply printed the money and spent it, at a rate that caused zero inflation, commercial banks would wither on the vine. DAVID HILLARY: Central banks force commercial banks to hold reserves with them, i.e. account balances, which can be redeemed as currency (plastic notes) and the central bank pays interest on these reserves, to influence the interest rate on deposits and loans denominated in the currency. The central bank is a bank, it hold balances for its customers (commercial banks and the often the government). The central bank prints notes as needed to redeem reserve balances, i.e. there is no question of its ability to service its obligations, provided its printing presses are fast enough and it maintains enough currency on hand. Government ability to control inflation via centralbanking via issuance of currency is highly suspect, which is why central banks currently influence conditions via the interest rate it offers. DAVID HILLARY: Commercial banks create money outof other financial assets, i.e. loans, bonds etc. Tothe extent that governments make money scarce they dorob citizens of gain that they could have under freebanking, but this has nothing to do with 'hoarding money.' DAN SULLIVAN: Under the gold standard, hoarding money was essential to the game of banking privilege. Under the current system, where government monetary authority is controlled by the banking interests, they don't have to bother. DAVID HILLARY: Under the gold standard and free banking, banks have no privilege, they are businesses which happen to produce money from gold reserves and financial assets (loans, owners equity etc.). DAN SULLIVAN: This is what encourages 'hoarding' in the sense that people hoard their funds in simple deposit or transaction accounts when bank account debits taxes and similar taxes on the movement of money restrict the flow to more risky assets (shares, managed funds etc.). DAN SULLIVAN: It does make the problem worse, but it is not the only or primary cause. DAVID HILLARY: Land speculators, even those who hold vacant land do not necessarily misallocate it: it might be better to hold land vacant awaiting the acquisition of surrounding land for a large project. DAN SULLIVAN: No argument there. However, if the rent is charged, then there is no particular need to "hold land vacant," as people will not care to invest heavily in an interim use that quickly becomes obsolete. Of course, if someone wants to hold the land to control the future opportunity when it arises, and is willing to pay the land rent in order to do so, then there should certainly be no objection on Georgist grounds. DAVID HILLARY: Land 'monopolists' (presumably referring to land holders) have everyinterest in the gathering of rental revenues on their land, and pursuit ofthis revenue is, other things being equal, served by allocating land to itsmost valuable use. The shortage of land is primarily created by holding land off the market, but also devices that suppress access, such as zoning, government landholding, etc. DAVID HILLARY: Aggregate rent is maximised by allowing land to go to its most productive use, i.e. the removal of restrictions, zonings, etc. Even if, in static terms, aggregate rent could be increased by restricting supply, in dynamic terms, aggregate rent will always be maximised by economic efficiency andeconomic growth brought about by the removal of restrictions on the movement of resources.

DAVID HILLARY: Land speculators, even those who hold vacant land do not necessarily misallocate it: it might be better to hold land vacant awaiting the acquisition of surrounding land for a large project."

HARRY POLLARD: Any entrepreneur who did this is on the way to poverty. In the free price mechanism controlled market ...Let me interrupt myself. Supply/demand curves are a pretty hopeless way to describe the market - perhaps confirmed by the way economists avert their eyes, and change the subject when they come across the vertical supply side curve.With these curves (about which nothing is known except where they cross -- if that) students can rapidly learn what they knew already -- that if Burger King drops it's price from $1.50 to 99 cents, they'll sell more burgers. Both the "Price Mechanism Controlled Market" and the "Market Clearing Price" are easy to understand - and they refer to the real world of trial and error. From now on when I say free market I refer to the price mechanism controlled market. To repeat, any entrepreneur "awaiting the acquisition" is on the road to poverty. In the free price mechanism controlled market this might make sense. But in the collectible land market, the last one to sell is likely to make the most profit. (The opposite of the free market.) So, if you buy a piece of land in the hope you will acquire the surrounding pieces from people, all of whom are trying to be the last one to sell -- lot's of luck. You acquire them all secretly - or you acquire none.If you hold unused land, almost invariably you too are trying to be the last one to sell. Hey! But you are losing Rent income (or rack-rent income.) In any case, so do land monopolists rent out land so that land can be put to productive use.

DAVID HILLARY: Land 'monopolists' (presumably referring to land holders) have every interest in the gathering of rental revenues on their land, and pursuit of this revenue is, other things being equal, served by allocating land to its most valuable use.

HARRY POLLARD: Which is why we have so many parking lots next to skyscrapers.If your collectible market value is rising by 15% a year, why should you sell and invest at 6%? You shouldn't -- even with the land value "volatility" I mentioned in my earlier post. However, modern governments impose costs on your vacant land -- including a relatively small property tax. This might encourage you to get a source of income from your vacant lot to offset these costs -- those not already offset on your April 15th IRS forms. The important thing is not to invest too much in this temporary use. Any structure erected must be easily and cheaply removed. (Any costs must be subtracted from an eventual killing.) A parking lot is ideal. A bit of blacktop, along with a modest shack and minimum wage help -- and you are in business. A service station on a valuable corner lot is a good bet -- which is why you see so many service stations on valuable corner lots. Knock down a little building, haul the salvageable tanks out of the ground and you pass over the title deed. This describes what von Mises and Rothbard call the job of the landholder -- to allocate sites to their best use. (They should have said "in the absence of the free market" -- but they didn't know about such things.) This ignorance led them, I suspect, to their conclusions that it is difficult or impossible to measure Rent. They were thinking in terms of rack-rents calculated downward from a whimsically collectible land price. They were right to point to the difficulty, but wrong in their assumption that they were discussing Economic Rent. The "job" of the landholder is not to allocate land, but to get the highest price he can in a collectible market, which amount will always be higher later, or later still, or even later. Thus, that five acres of vacant land amidst the skyscrapers of downtown Los Angeles to which I've often referred. It has been vacant for more than 25 years. The landholder had "allocated" it to its best use, which was -- last time I looked -- the storage in a corner of some rusty girders. But times change, and a change to a higher use was needed. It is now a parking lot. For how long? -- perhaps another quarter century? You'll notice I never blame land speculators, though I don't like their political maneuverings, and am horrified at the consequences of their activities. I tend to take Churchill's view. He said: "I do not think that the man who makes money by unearned increment in land is morally a worse person than anyone else who gathers his profit where he finds it in this hard world under the law and according to common usage. It is not the individual I attack, it is the system. It is not the man who is bad, it is the law which is bad. It is not the man who is blameworthy for doing what the law allows and what other men do. ... We do not want to punish the landlord. We want to alter the law." We'll do this by making collection of Rent the law and collecting property tax unlawful. Someone suggested that the Tobin tax would not be needed if Rent were collected. There is no connection. The Tobin tax is an interference with the free market. Rent collection places land in the free market (even if it produces next to nothing in Rent). It does not affect the intrusions of government into our lives. The Tobin tax could become another such intrusion and nuisance and an impediment to the international free market. It's our concern because of the other arrow in our quiver. We are Free Traders. Speculation is an important part of the free market. It acts constantly to dampen market fluctuation. Speculation is like an oil that greases the wheels of commerce. Don't tax it, which is like putting grit in the grease.

DAVID HILLARY: Both are levied on transfer rather than on hoarding,and both have an effect opposite of the intendedeffect. In both cases, the tax will merely be passedon to those in need of money or land, and willactually facilitate more hoarding by punishing the act of letting go.

That is also reinforced. Also, because land is fixed in supply, taxation of land is the only way to insure common access. With money, the issuing authority can simply expand the supply by issuing equal amounts on a per capita basisto all members of the community, or by spending the new money on public services and reducing taxes proportionately.