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Chartalism is a descriptive economic theory that details the procedures and consequences of using government-issued tokens as the unit of money, i.e. fiat money. The name derives from the Latin charta, in the sense of a token or ticket.[1] The modern theoretical body of work on chartalism is known as Modern Monetary Theory (MMT).
MMT aims to describe and analyze modern economies in which the national currency is fiat money, established and created exclusively by the government. In MMT, money enters circulation through government spending;Taxation is employed to establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that can only be met using the government's currency.[2][3] An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities per se.
The theory was presented by German statistician and economist G. F. Knapp in 1895,[4] with important contributions also by Alfred Mitchell-Innes. It was referenced in the 1930 Treatise on Money of John Maynard Keynes,[5] which cited Knapp and "Chartalism" in its opening pages.[6] Chartalism experienced a revival under Keynes and Abba P. Lerner,[7] and has a number of modern proponents.
Background
Knapp coined the term "chartalism" in his State Theory of Money, which was published in German in 1895 and translated into English in 1924. Knapp argued that "money is a creature of law" rather than a commodity.[4] At the time of writing the Gold Standard was in existence, and Knapp contrasted his state theory of money with the view of "metallism", where the value of a unit of currency depended on the quantity of precious metal it contained or could be exchanged for. He argued the state could create pure paper money and make it exchangeable by recognising it as legal tender, with the criterion for the money of a state being "that which is accepted at the public pay offices".[4]
As a set of principles governing the operation of monetary systems, chartalism has existed for several millennia before it was formalised. As an example, Constantina Katsari has argued that principles from both metallism and chartalism were reflected in the monetary system introduced by Augustus, which was used in the eastern provinces of Roman Empire, from the early 1st century to the late 3rd century AD. [8] [9]
The prevailing view of money was that it had evolved from systems of barter to become a medium of exchange because it represented a durable commodity which had some use value. However, modern chartalist economists such as Wray and Forstater argue that more general statements appearing to support a chartalist view of tax-driven paper money appear in the earlier writings of many classical economists.[5][10] Adam Smith, for example, observed in The Wealth of Nations:
A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend altogether on the will of the prince
— Smith, Adam , An Inquiry into the Nature and Causes of the Wealth of Nations
Forstater also finds support for the concept of tax-driven money, under certain institutional conditions, in the work of Jean-Baptiste Say, J.S. Mill, Karl Marx and William Stanley Jevons.[10]
Alfred Mitchell-Innes, writing in 1914, argued that money existed not as a medium of exchange but as a standard of deferred payment, with government money being debt the government could reclaim by taxation.[11] Innes argued:
Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. He has to acquire his portion of the debt from some holder of a coin or certificate or other form of government money, mid present it to the Treasury in liquidation of his legal debt. He has to redeem or cancel that portion of the debt...The redemption of government debt by taxation is the basic law of coinage and of any issue of government ‘money’ in whatever form.
— Mitchell-Innes, Alfred, The Credit Theory of Money, The Banking Law Journal
By 1947, when Abba Lerner wrote his article Money as a Creature of the State, economists had largely abandoned the idea that the value of money was closely linked to gold.[12] Lerner argued that responsibility for avoiding inflation and depressions lay with the state because of its ability to create or tax away money.[12]
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