3.  Chartalism

/40/ MMT makes some effort to embed itself in historical context. The history of money might reveal something about the nature of money. MMT's chief source here are two articles by Mitchell-Innes in which he combined the state theory and the credit theory of money.[1] Mitchell-Innes' and MMT's discourse on this matter is not straightforward. With some patience, three storylines can be identified:
the question of whether money evolved as a creature of the state or as a creature of barter and trade
the question of intrinsic value of money and the rejection of metallism
the question of whether money is credit and debt.

3.1  State theory versus market theory of money

With regard to the question of whether money evolved as a creature of legislation or as a creature of markets, MMT and NCT share the chartalist paradigm, i.e. the state theory or constitutional theory of money.[2] The terms state theory of money and chartalism were coined by Knapp.[3] 'Charta' is derived from Greek and Latin for paper, or document, or legal code, particularly in the Roman sense of 'public law', as distinct from 'civil law' or 'private contract'. According to Knapp, 'money is a creature of the legal order.'[4] The teaching dates back via late-medieval Thomism to Aristotle: 'Money exists not by nature but by law.'[5] The formulation of money as a 'creature of the state' is Lerner's.[6]

/41/ The state theory of money contrasts with the theory that money is an endogenous creature of markets, or of barter, if barter is imagined to be an early stage in the development of markets.[7] In legal terms, one may refer to this as the private-compact theory of money. Most often it is referred to as the commodity theory of money.[8] Basic characteristics of the contra­posi­tion in question were given in chapter 1 on 'currency versus banking'.

The empirical evidence which economic historians were able to produ­ce – notably, and of relevance to the occidental world, from Mesopotamia, ancient Egypt, Greece, Rome, Byzantium, the Arabo-Islamic world, the Christian middle ages and early modernity – for the most part supports the state theory of money.[9] The evolutive pattern starts with archaic palace and temple complexes, i.e. the extended household and entourage of dynastic rulers, including armed forces, priesthood, administration, craftspeople and workmen, all requiring the labour-divisionary organisation of chains of provision, thereby also fostering the development of contracting, legal structures, scripture and documentation.[10] Money is described as having emer­ged within those early state structures from tribal traditions of making gifts and contributions, e.g. dowry or bride price, paying wergeld in compensation for physical injury or sacrificial oblations, later also including regular duties and tributes, the latter mostly imposed on conquered tribes besides forced labour or outright slavery. Equally, there is archaeological evidence from ancient Mesopotamia of the practice of lending goods, the amount of which had to be returned with interest.[11]

In an extended household of thousands of people, gifts and duties as well as current provisions of goods have to be measured and registered. All transactions were made in kind, and it is thought that the major staple goods of the time developed into general units of account, such as a weight unit of grain, salt or silver, serving as a common denominator which made different goods comparable in relative quantity or value. Those units of account were fixed by the rulers' administration.

/42/ This does not exclude the eventual development of long-distance trade and finally markets where the quasi-monetary units of account could be applied for transacting goods. From a certain point of development of ancient economies, this occurred for sure. The important thing is that the emergence of trade and markets was tied to the state households of the kings or high priests or warlords, tied to the operations and chains of provision they maintained. This also applies to the sovereign coins they began to issue from about the 7th century BC, as well as to the forms of contracting and juridical practices they developed in the frame of their extended housekeeping practices.

If there is a message to be drawn from this, then the most fundamental is that markets do not emerge and develop in a constitutional vacuum free of state powers. Markets build and rest upon a state's institutional and legal structure, which includes the money system as an integral part. As Graeber puts it: 'States created markets. Markets require states. Neither could continue without the other. ... We are told that they are opposites ... But it's a false dichotomy.'[12]

Closer to our times, this can be studied in the evolution of nation-states and markets within the modern worldsystem since about 550 years ago. In building up this system adventurers, soldiers, colonisers, missionaries, merchants and bankers did not create independent states of their own but always were, and needed to be, envoys of the states they originated from, or contractual partners of the states across which they expanded their business and trade networks.

Around 1900, with historical research much advanced and in a context of international power struggles, this view was reflected in the state theories of money. According to Knapp, the rulers' law, in combination with the credible power to enforce it, is the most important legal and political premise for establishing a currency. A state's authentication of a token as legal tender in payment of all debts (lawful money) stands a much better chance of serving as the currency of the realm than other things. According to Knapp, the strength of a national currency ultimately depends on the political and economic stability and strength of the respective nation-state.[13]

/43/ In Knapp's view it actually does not matter whether a nation-state's money is issued by the state. This can be the case, but is not a necessity. The state's basic role is to define the national currency unit. The decisive factor for the establishment of a specific token as a general means of payment then is what a state's treasury accepts in payment of taxes, or the courts in payment of penalty charges, and what state agencies actually use themselves in fulfilment of their obligations[14]:

'All means by which a payment can be made to the state form part of the monetary system. On this basis, it is not the issue, but the acceptation ... which is decisive.'[15] – 'A state's money will not be identified by compulsory acceptance, but by acceptance at public cash desks'.[16]  

This teaching on currency or money was carried forward by Lerner:

'The modern state can make anything it chooses generally acceptable as money and thus establish its value quite apart from any connection ... with gold or with backing of any kind. It is true that a simple declaration that such and such is money will not do. ... But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done. ... Money is a creature of the state. Its general acceptability, which is its all-important attribute, stands or falls by its acceptability by the state.'[17]

Scholars had long been aware of the role of taxes for establishing a modern currency, among them John Law, who after the death of Louis XIV was engaged in 1719 to introduce paper money in France in order to pay down the suffocating debt legacy of the 'sun king'. Part of the plan was to get the new paper money generally accepted by accepting it on the part of the treasury in payment of taxes, and then use part of the increased revenue for redeeming sovereign debt in a context of economic growth which was expected to result from the increased money base.

/44/ In MMT, taxes are seen as the main cause of what qualifies as official currency. This is somewhat over-determined. Ancient forms of oblation, tribute, toll or similar cannot simply be identified with taxation in a modern sense, any more than decrying of coin in the high middle ages (recall for reprocessing).[18] There were times when sovereign currency existed but taxes did not. Equally, taxes are absent in a number of oil-rich and otherwise rich contemporary states with a currency of their own. More appropriately, Lerner also refers to a state's general acceptance of a means of payment as the decisive factor for establishing a currency, i.e. the currency in which a government spends and which it is happy to take in through taxes, fees, fines and: borrowing.

Nowadays, interestingly, in most modern nation-states neither the revenue office nor the courts cashier's offices accept payment in cash, i.e. government coin or central-bank notes. They only accept payment in demand deposits, i.e. bank money. If they run their accounts at the central bank, they receive central-bank reserves, but creation of these today is reactively prompted by proactive creation of bank credit. To NCT this is a clear indication (and would actually have to be seen as 'proof' by MMT) that bank money has replaced government cash as the sovereign currency of the realm.

The state theory or constitutional theory of money contradicts the classical and neoclassical market theory, or commodity theory, or private-compact theory as advocated by Adam Smith to the founder of the Austrian School, Carl Menger. As a historical thesis, this narrative may be fictitious.[19] The market narrative nonetheless has a point. It identifies as a useful function of currency the facilitation of transactions, particularly in the context of an advanced market-based division of labour, rather than early household or community-based division of labour. Currency does so by enabling a match of supply and demand without necessitating a double coincidence of supply and demand at a given time in a given place. Equally, money facilitates the funding of investments, which otherwise would be very complicated, or even unfeasible. Payment and funding are in fact two important aspects of why money is useful, and why it persists as an integral part of modern societies. /45/ This is true independently of whether money once was state or market-borne. The commodity theory of money may historically be wrong and does not hold as a founding myth of classical economics, but it grasps basic functions of money once markets and money have developed as a 'creature of the state'.

Evidence that money and markets emerged from the legal and institutional framework of state organisation – and basically remain dependent on them – does not preclude, once market economies have evolved, that certain groups of actors create special currencies of their own. Up to a point, the theory of market-endogenous creation of money actually corresponds to the realities of contemporary fractional reserve banking. The present situation is in fact not that far from a free banking regime of a global oligopoly of huge banking corporations which would operate on a basis of denationalised money, or on the basis of one or two privileged national reserve currencies. The present situation may develop even further in that direction if and for as long as politics and the public are further willing to accept this.

The question is for how long a regime of denationalised bank money could survive. For even then the banking corporations and financial markets need the law and order of nation-states supporting them. Ultimately the banking industry would fully have to capture the institutional and legal structures of existing states―which certainly makes intriguing stuff for dystopian fiction. But could it be real?


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[1] The main reference here is a reader edited by Wray (2004), including the two key articles by Mitchell-Innes 1913+1914. 

[2] As the main representatives of chartalism, Lietaer et al. (2012 136) quote G. Fr. Knapp, A. Mitchell-Innes, I. Fisher, J.M. Keynes and Lerner; as neochartalists they quote P. Davidson, N. Kal­dor, H. Minsky, St. Rousseas, W. Mosler, Ch. Goodhart, W. Godley and R. Wray. 'While these scholars don't all necessarily agree on many topics, they all concur that the systemic role of taxes is to give value to a currency, which, in case of a state fiat currency, would otherwise have no intrinsic value whatsoever'. 

[3] Knapp 1905 pp.27, 33–39, 394.

[4] Knapp 1905 32-33 and 145; Engl. 1924, reprint 1973, 92–95.

[5] Aristotle, Ethics 1133 a 30.

[6] Lerner 1943, 1947, Mitchell-Innes 1913 378–390.

[7] Cf. Hudson 2004 (barter vs debt theories of money).

[8] Cf. Ryan-Collins/Greenham/Werner/Jackson 2012 30–37 (commodity vs credit theory of money).

[9] Cf. Del Mar 1867, 1880, Ridgeway 1892, Laum 1924, Gerloff 1940, Quiggin 1949, Einzig 1949, Le Goff 1956, 1986, 2010, Eisenstein 1967, Davies 1994, Graeber 2012. On European and American history of money since early modernity cf. Friedman/Schwartz 1963, Galbraith 1975, Vilar 1976, Kindleberger 1990, 1993, Hixson 1993, North 1994, Zarlenga 2002.

[10] Henry 2004

[11] Hudson 2004, Graeber 2012

[12] Graeber 2012 71.

[13] Knapp 1905 101, 265.

[14] Knapp 1905 86, 99, 101.

[15] Knapp 1905 86. Engl. Knapp 1973 [1924] 95.

[16] Knapp 1905 Intro p.VI.

[17] Lerner 1947 313.            

[18] Reprocessing meant smelting the coins down and reminting them into more coins of the old face value, with each coin thus containing less silver. This can be interpreted as a kind of 'taxation' in times when taxes in a modern sense did not exist yet in the occidental world – except the tithe to ecclesial landlords, which normally, however, was delivered in kind rather than paid in coin.

[19] Graeber 2012 22–71.