Chartalism

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Chartalism is the theory that money originated with states' attempts to direct economic activity rather than as a spontaneous solution to the problems with barter, and that fiat currency has value in exchange because of sovereign power to levy taxes on economic activity payable in the currency they issue.

Background[edit]

George Friedrich Knapp, a German economist coined the term "chartalism" in his State Theory of Money, which was published in German in 1905 and translated into English in 1924. The name derives from the Latin charta, in the sense of a token or ticket.[1] Knapp argued that "money is a creature of law" rather than a commodity.[2] 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".[2]

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.[3][4]

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. Modern chartalist economists such as Randall Wray and Mathew 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][6] 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

— Adam Smith, 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.[6]

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.[7] 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.

— Alfred Mitchell-Innes, The Credit Theory of Money, The Banking Law Journal

Knapp and "Chartalism" were referenced by John Maynard Keynes in the opening pages of his 1930 Treatise on Money [8] and appear to have influenced Keynesian ideas on the role of the state in the economy.[5] 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.[9] Lerner argued that responsibility for avoiding inflation and depressions lay with the state because of its ability to create or tax away money.[9]

Modern proponents[edit]

Economists Warren Mosler, L. Randall Wray, Stephanie Kelton, and Bill Mitchell are largely responsible for reviving the idea of Chartalism as an explanation of money creation; Wray refers to this revived formulation as Neo-Chartalism.[10]

Bill Mitchell, creator of the Centre of Full Employment and Equity or CofFEE, initially at the University of Newcastle, New South Wales, and now at the Charles Darwin University, Australia, refers to an increasing related theoretical work as Modern Monetary Theory. Scott Fullwiler has added detailed technical analysis of the banking and monetary systems[11]

Rodger Malcolm Mitchell's book Free Money[12] (1996) describes in layman's terms the essence of Chartalism.

Some contemporary proponents, such as Wray, situate Chartalism within post-Keynesian economics, while Chartalism has been proposed as an alternative or complementary theory to monetary circuit theory, both being forms of endogenous money, i.e., money created within the economy, as by government deficit spending or bank lending, rather than from outside, as by gold. In the complementary view, Chartalism explains the "vertical" (government-to-private and vice versa) interactions, while circuit theory is a model of the "horizontal" (private-to-private) interactions.[13][14]

Hyman Minsky seemed to favor a Chartalist approach to understanding money creation in his Stabilizing an Unstable Economy,[15] while Basil Moore, in his book Horizontalists and Verticalists,[16] delineates the differences between bank money and state money.

James K. Galbraith supports Chartalism and wrote the foreword for Mosler's book Seven Deadly Innocent Frauds of Economic Policy in 2010.[17]

See also[edit]

References[edit]

  1. ^ Knapp, George Friedrich (1924), The State Theory of Money, Macmillan and Company, p. 32 
  2. ^ a b Knapp, George Friedrich (1924), The State Theory of Money, Macmillan and Company 
  3. ^ Stephanie A. Bell and Edward J. Nell, ed. (2003). The State, the Market, and the Euro: Chartalism Versus Metallism in the theory of money. Edward Elgar. ISBN 1843761564. 
  4. ^ Constantina Katsari (2011). "Chpt. 7". The Roman Monetary System. Cambridge University Press. ISBN 0521769469. 
  5. ^ a b (Wray 2000)
  6. ^ a b Forstater, Mathew (2004), Tax-Driven Money: Additional Evidence from the History of Thought, Economic History, and Economic Policy 
  7. ^ Mitchell-Innes, Alfred (1914). "The Credit Theory of Money". The Banking Law Journal 31. 
  8. ^ Keynes, John Maynard: A Treatise on Money, 1930, pp. 4, 6
  9. ^ a b "Lerner", Abba P. (May 1947). "Money as a Creature of the State". The American Economic Review 37 (2,). 
  10. ^ The Economist, 31 December 2011, "Marginal revolutionaries" neo-chartalism, sometimes called “Modern Monetary Theory”
  11. ^ http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=444041
  12. ^ Mitchell, Rodger Malcolm: Free Money - Plan for Prosperity, PGM International, Inc., paperback 2005, ISBN 978-0-9658323-1-1
  13. ^ "Deficit Spending 101 - Part 3" Bill Mitchell, 2 March 2009
  14. ^ "In the spirit of debate...my reply" Bill Mitchell, 28 September 2009
  15. ^ Minsky, Hyman: Stabilizing an Unstable Economy, McGraw-Hill, 2008, ISBN 978-0-07-159299-4
  16. ^ Moore, Basil J.: Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, 1988, ISBN 978-0-521-35079-2
  17. ^ Mosler, Warren: Seven Deadly Innocent Frauds of Economic Policy, Valance Co., 2010, ISBN 978-0-692-00959-8; also available in .DOC