Lord Turner's championing today of a levy on financial dealings to curb the power of the City marks a breakthrough in the long struggle to have the neglected brainchild of American economist James Tobin become a practical policy proposition.

As they sift through the wreckage caused by the biggest crisis the global banking system has ever endured, policymakers are no longer prepared to dismiss a "Tobin tax" as impractical, pointless or plain wrong.

The struggle to get a hearing has, however, been a hard one. Towards the end of his long life, Tobin noted that during the neoliberal ascendancy following the oil shock of the mid-1970s, his idea had tended to fall on deaf ears. "It did not make much of a ripple. In fact, one could say that it sunk like a rock. The community of professional economists simply ignored it."

This was written in 1995, just as the first cracks were starting to show in the shiny new system of global finance ushered in by deregulation, the collapse of communism and the spread of market economies. But neither the Mexican peso crisis of that year nor the Asian financial meltdown two years in the future would change the generally held view that Tobin was harking back to an age of Keynesian economics that had disappeared for ever.

Tobin, who was born in 1918 and died in 2002, outlined his proposal in 1972, just after the break-up of the Bretton Woods fixed-exchange-rate system. The idea was simple: there should be a tax on foreign currency transactions that would allow national governments to stop their economies being at the mercy of speculators.

"My main objectives for the tax are two", he said in the foreword to a 1995 book. "The first is to make exchange rates reflect to a larger degree long-term fundamentals relative to short-range expectations and risk. My second objective is to preserve and promote autonomy of national macroeconomic and monetary policies."

Those operating in financial markets, predictably enough, hated the idea. But so did central bankers. Tobin recalls that when quizzed about the idea of a transactions levy, the then chief economist at the Bundesbank, Otmar Issing, replied: "Oh that again. It's the Loch Ness monster popping up once more." The next time Tobin bumped into Issing, he said cheerfully: "Here I am, the Loch Ness monster still!"

Nor was the idea of a tax universally supported by the remaining disciples of Keynes, many of whom doubted that a levy of between 0.1% and 0.25% on foreign exchange deals would really "throw sand in the wheels of global finance".

Tobin himself identified many of the main criticisms of his idea. At root, it was opposed by those economists who frowned on any interference in the working of free markets – the majority in the 1970s and 1980s. More specifically, opponents said it would drive financial business offshore, or that it would not prevent currencies from being overvalued, or being at the mercy of speculators.

As time wore on, the idea made a comeback when it was seen as a way of raising money for multilateral projects. The French president, François Mitterrand, was one of the first world leaders to see the money-raising potential of a Tobin tax back in the early 1990s. More recently, development campaigners have suggested a tax levied at .005% would raise between $30bn and $60bn (between £18bn and £35bn) a year – enough for the G7 countries to meet their commitment at the Gleneagles summit in 2005 to double global aid.

Interestingly, Tobin himself never envisaged this as being its principal purpose. Like Lord Turner in today's article in Prospect magazine, he thought a tax on finance would lead to greater economic stability.

"Most disappointing and surprising, critics seemed to miss what I regarded as the essential property of the transactions – the beauty part – that this simple one-parameter tax would automatically penalise short-horizon round trips, while negligibly affecting commodity trade and long-term capital investments," Tobin said.

The scale of the crisis has brought Tobin out of the shadows. Indeed, Turner appears to be considering throwing the net wider than simply a tax on foreign exchange dealings. "If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit," he writes.

The first line of attack for the authorities will be higher capital requirements to prevent financial institutions from speculating so wildly during booms.

But Turner adds: "If increased capital requirements are insufficient I am happy to consider taxes on financial transactions – Tobin taxes. Such taxes have long been the dream of the development economists and those who care about climate change – a nice sensible revenue source for funding global public goods."

While not seeking to minimise the difficulties involved in getting universal support for a Tobin tax, Turner is one of the first policymakers to suggest that the effort might be worth it.

"The problem is that getting global agreement will be very difficult. But at least proposals for special financial sector taxes, with increased capital requirements, address the issue of excessive profits and therefore have a chance of doing something about it. Insisting that someone 'does something' about bonuses, by contrast, is a populist diversion."

Tobin believed that some of the practical objections to his tax were overblown. He argued that the threat of business being relocated offshore could be prevented by imposing a penalty rate on transfers to tax havens, or to levy the Tobin tax where the transaction occurred.

Turner says that the sheer scale of the crisis means nothing should be ruled out. "What has occurred has imposed huge economic harm throughout the world and so we really do have to work out how to stop it happening again in five or ten years' time," he said in today's interview. "And that requires a very major reconstruct of the global financial system."

Charity amid the crisis



But not everyone is waiting for regulators to start taxing City profits. Today, Ethical Currency will become the first foreign exchange broker in the world to voluntarily ringfence 0.005% of all its transactions into a single pot that will go to the Global Fund, set up to fight Aids, tuberculosis and malaria.

Founded by foreign exchange trader Alastair Constance, Ethical Currency has been warmly received by campaigners. The timing of its launch, they say, comes as the financial crisis is having an adverse effect on poor nations. Oxfam estimates the number of people facing chronic hunger will rise to 1 billion. And the Global Fund, which buys life-saving drugs and distributes them to poor countries, is facing severe shortfalls in funding.

"As funding for international development becomes more scarce, we need to be creative about finding new and sustainable sources of income," said Ethical Trading's Constance. "We have chosen to base our model on the Currency Transaction Levy (CTL) with the specific aim of getting governments and international business to commit to widespread implementation and the delivery of the Millennium Development Goals. If we can prove that a single business can flourish then the case for implementing a CTL increases. If consumers vote with their business then they will prove the commercial case and force a structural change in the global financial architecture." Constance believes a currency transaction levy (CTL) would be easy to replicate, as forex transactions are electronic. He envisages the city and Wall Street "fighting tooth and nail" against it – but over time, he argues, the tax would be barely noticed.

Campaigners say that by introducing the levy on major currencies as they are traded, the ability to dodge the tax would be closed.

Ethical Currency is targeting charities and social enterprises who buy foreign currencies on a regular basis. It is confident it can give them a better deal than mainstream banks with the added bonus that banking with them will see money going to a good cause.