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In macroeconomics, chartalism is a theory of money that argues that money originated with states' attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt, [1] and that fiat currency has value in exchange because of sovereign power to levy taxes on economic activity payable in the currency they issue.

Macroeconomics branch of economics that studies aggregated indicators

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies.

Money Object or record accepted as payment

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment. Any item or verifiable record that fulfils these functions can be considered as money.

Barter Exchange of goods

In trade, barter is a system of exchange where participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists distinguish barter from gift economies in many ways; barter, for example, features immediate reciprocal exchange, not delayed in time. Barter usually takes place on a bilateral basis, but may be multilateral. In most developed countries, barter usually only exists parallel to monetary systems to a very limited extent. Market actors use barter as a replacement for money as the method of exchange in times of monetary crisis, such as when currency becomes unstable or simply unavailable for conducting commerce.



Georg 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. [2] Knapp argued that "money is a creature of law" rather than a commodity. [3] Knapp contrasted his state theory of money with "metallism", as embodied at the time in the Gold Standard, 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". [3]

Georg Friedrich Knapp German economist

Georg Friedrich Knapp was a German economist who in 1905 published The State Theory of Money, which founded the chartalist school of monetary theory, which argues that money's value derives from its issuance by an institutional form of government rather than spontaneously through relations of exchange.

Economist professional in the social science discipline of economics

An economist is a practitioner in the social science discipline of economics.

Commodity money Money with value derived from composition from a commodity (such as silver or gold coins)

Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves as well as their value in buying goods. This is in contrast to representative money, which has little or no intrinsic value but represents something of value, and fiat money, which has value only because it has been established as money by government regulation.

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 the Roman Empire, from the early 1st century to the late 3rd century AD. [4] [5]

Augustus First emperor of the Roman Empire

Augustus was a Roman statesman and military leader who was the first emperor of the Roman Empire, reigning from 27 BC until his death in AD 14. His status as the founder of the Roman Principate has consolidated an enduring legacy as one of the most effective and controversial leaders in human history. The reign of Augustus initiated an era of relative peace known as the Pax Romana. The Roman world was largely free from large-scale conflict for more than two centuries, despite continuous wars of imperial expansion on the Empire's frontiers and the year-long civil war known as the "Year of the Four Emperors" over the imperial succession.

Roman Empire Period of Imperial Rome following the Roman Republic (27 BC–476 AD)

The Roman Empire was the post-Republican period of ancient Rome, consisting of large territorial holdings around the Mediterranean sea in Europe, North Africa and West Asia ruled by emperors. From the accession of Caesar Augustus to the military anarchy of the third century, it was a principate with Italy as metropole of the provinces and its city of Rome as sole capital. The Roman Empire was then ruled by multiple emperors and divided into a Western Roman Empire, based in Milan and later Ravenna, and an Eastern Roman Empire, based in Nicomedia and later Constantinople. Rome remained the nominal capital of both parts until 476 AD, when it sent the imperial insignia to Constantinople following the capture of Ravenna by the barbarians of Odoacer and the subsequent deposition of Romulus Augustus. The fall of the Western Roman Empire to Germanic kings, along with the hellenization of the Eastern Roman Empire into the Byzantine Empire, is conventionally used to mark the end of Ancient Rome and the beginning of the Middle Ages.

When Knapp was writing, 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, as modern chartalist economists such as Randall Wray and Mathew Forstater have pointed out, chartalist insights into tax-driven paper money can be found in the earlier writings of many classical economists, [6] [7] for instance Adam Smith, who observed in The Wealth of Nations :

Medium of exchange is one of the three fundamental functions of money in mainstream economics. It is a widely accepted token which can be exchanged for goods and services. Because it can be exchanged for any good or service it acts as an intermediary instrument and avoids the limitations of barter; where what one wants has to be exactly matched with what the other has to offer.

Use value or value in use is a concept in classical political economy and Marxian economics. It refers to the tangible features of a commodity which can satisfy some human requirement, want or need, or which serves a useful purpose. In Karl Marx's critique of political economy, any product has a labor-value and a use-value, and if it is traded as a commodity in markets, it additionally has an exchange value, most often expressed as a money-price.

Adam Smith 18th-century Scottish moral philosopher and political economist

Adam Smith was a Scottish economist, philosopher and author as well as a moral philosopher, a pioneer of political economy and a key figure during the Scottish Enlightenment, also known as ''The Father of Economics'' or ''The Father of Capitalism''. Smith wrote two classic works, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter, often abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. In his work, Adam Smith introduced his theory of absolute advantage.

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. [7]

Jean-Baptiste Say French economist and businessman

Jean-Baptiste Say was a French economist and businessman who had liberal views and argued in favor of competition, free trade and lifting restraints on business. He is best known for Say's law—also known as the law of markets—which he popularized. Scholars disagree on the surprisingly subtle question of whether it was Say who first stated what is now called Say's law. Moreover, he was one of the first economists to study entrepreneurship and conceptualized entrepreneurs as organizers and leaders of the economy.

Karl Marx German philosopher, economist, historian, sociologist, political theorist and journalist

Karl Marx was a German philosopher, economist, historian, sociologist, political theorist, journalist and socialist revolutionary.

William Stanley Jevons English economist and logician

William Stanley Jevons FRS was an English economist and logician.

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. [8] Innes argued:

Alfred Mitchell-Innes was a British diplomat, economist and author. He had the Grand Cross of the Order of Medjidieh conferred upon him by Abbas II, Khedive of Egypt.

In economics standard of deferred payment is a function of money. It is the function of being a widely accepted way to value a debt, thereby allowing goods and services to be acquired now and paid for in the future.

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, and 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 [9] and appear to have influenced Keynesian ideas on the role of the state in the economy. [6] 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. [10] Lerner argued that responsibility for avoiding inflation and depressions lay with the state because of its ability to create or tax away money. [10]

Modern proponents

Economists Warren Mosler, L. Randall Wray, Stephanie Kelton, and Bill Mitchell are largely responsible for reviving chartalism as an explanation of money creation; Wray refers to this revived formulation as Neo-Chartalism. [11]

Mitchell, founder of the Centre of Full Employment and Equity or CofFEE at the University of Newcastle in Australia, coined the term Modern Monetary Theory to describe modern Neo-Chartalism, and that term is now widely used. Scott Fullwiler has added detailed technical analysis of the banking and monetary systems. [12]

Rodger Malcolm Mitchell's book Free Money [13] 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. [14] [15]

Hyman Minsky seemed to incorporate a Chartalist approach to money creation in his Stabilizing an Unstable Economy, [16] while Basil Moore, in his book Horizontalists and Verticalists, [17] 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. [18]


The continued use of the Somali shilling as currency despite the lack of a functioning central government capable of raising taxes or a central bank to issue it has been cited as a counterargument to Chartalism. [19] Bitcoin, a cryptocurrency not originated by a state, has also been cited as a counterexample. [20]

See also

Related Research Articles

Post-Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney Weintraub, Paul Davidson, Piero Sraffa and Jan Kregel. Historian Robert Skidelsky argues that the post-Keynesian school has remained closest to the spirit of Keynes' original work. It is a heterodox approach to economics.

Fiscal policy use of government revenue collection and spending to influence the economy

In economics and political science, fiscal policy is the use of government revenue collection and expenditure (spending) to influence a country's economy. The use of government revenues and expenditures to influence macroeconomic variables developed as a result of the Great Depression, when the previous laissez-faire approach to economic management became discredited. Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics indicated that government changes in the levels of taxation and government spending influences aggregate demand and the level of economic activity. Fiscal and monetary policy are the key strategies used by a country's government and central bank to advance its economic objectives. The combination of these policies enables these authorities to target the inflation and to increase employment. Additionally, it is designed to try to keep GDP growth at 2%–3% and the unemployment rate near the natural unemployment rate of 4%–5%. This implies that fiscal policy is used to stabilize the economy over the course of the business cycle.

Deficit spending Spending in excess of revenue

Deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual. Government deficit spending is a central point of controversy in economics, as discussed below.

In economics, an optimum currency area (OCA), also known as an optimal currency region (OCR), is a geographical region in which it would maximize economic efficiency to have the entire region share a single currency.

Modern Monetary Theory also known as neo-chartalism, a macroeconomic theory

Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly for the government and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. MMT is an evolution of chartalism and is sometimes referred to as neo-chartalism. Its macroeconomic policy prescriptions have been described as being a version of Abba Lerner's theory of functional finance.

Metallism is the economic principle that the value of money derives from the purchasing power of the commodity upon which it is based. The currency in a metallist monetary system may be made from the commodity itself or use tokens such as national banknotes redeemable in that commodity. The term was coined by Georg Friedrich Knapp to describe monetary systems using coin minted in silver, gold or other metals.

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Credit theory of money

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  1. Graeber, David (12 July 2011). Debt: The First 5000 Years . ISBN   1-933633-86-7.
  2. Knapp, George Friedrich (1924), The State Theory of Money, Macmillan and Company, p. 32
  3. 1 2 Knapp, George Friedrich (1924), The State Theory of Money, Macmillan and Company
  4. 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.
  5. Constantina Katsari (2011). "Chpt. 7". The Roman Monetary System. Cambridge University Press. ISBN   0521769469.
  6. 1 2 Wray, L. Randall (2000), The Neo-Chartalist Approach to Money, UMKC Center for Full Employment and Price Stability
  7. 1 2 Forstater, Mathew (2004), Tax-Driven Money: Additional Evidence from the History of Thought, Economic History, and Economic Policy (PDF)
  8. Mitchell-Innes, Alfred (1914). "The Credit Theory of Money". The Banking Law Journal. 31.
  9. Keynes, John Maynard: A Treatise on Money, 1930, pp. 4, 6
  10. 1 2 "Lerner", Abba P. (May 1947). "Money as a Creature of the State". The American Economic Review. 37 (2, ).CS1 maint: extra punctuation (link)
  11. The Economist, 31 December 2011, "Marginal revolutionaries" neo-chartalism, sometimes called “Modern Monetary Theory”
  13. Mitchell, Rodger Malcolm: Free Money - Plan for Prosperity, PGM International, Inc., paperback 2005, ISBN   978-0-9658323-1-1
  14. "Deficit Spending 101 - Part 3" Bill Mitchell, 2 March 2009
  15. "In the spirit of reply" Bill Mitchell, 28 September 2009
  16. Minsky, Hyman: Stabilizing an Unstable Economy, McGraw-Hill, 2008, ISBN   978-0-07-159299-4
  17. Moore, Basil J.: Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, 1988, ISBN   978-0-521-35079-2
  18. Mosler, Warren: Seven Deadly Innocent Frauds of Economic Policy, Valance Co., 2010, ISBN   978-0-692-00959-8; also available in .DOC