Chartalism

Published Mar 22, 2024

Definition of Chartalism

Chartalism is a monetary theory that emphasizes the role of the state in the provision and regulation of money. According to chartalist theory, money’s value is not derived from its material worth (such as gold or silver) but from the state’s power to enforce its use as a medium of exchange by decree and to accept it in payment of taxes. This perspective views modern money as a creature of the state, with its acceptance primarily rooted in the government’s authority rather than intrinsic value or commodity backing.

Historical Background

The roots of chartalism can be traced back to the work of German economist Georg Friedrich Knapp, who introduced the concept in the early 20th century, labeling money as a “creature of law” rather than a commodity. Knapp argued that money derives its value from its acceptance by the state for payment of taxes and other obligations, a concept that has fundamentally influenced modern monetary theory (MMT) and the understanding of fiat currencies.

Modern Implications

In contemporary economies, where fiat money (money not backed by a physical commodity) is the norm, chartalist principles are evident. Governments decree what is recognized as legal tender within their jurisdictions, and this money is universally accepted for transactions and the settlement of taxes. The chartalist perspective is instrumental in understanding the mechanisms of fiscal policy, government spending, and taxation within a sovereign currency system.

For example, consider a government that issues its own currency, the “GovCoin.” According to chartalism, the value of GovCoin is not based on gold or another commodity but on the government’s ability to demand its return in the form of taxes. The government can spend GovCoin into the economy (e.g., through public projects or salaries) and then require its citizens to pay taxes with it. This cycle creates demand for GovCoin, as everyone under the government’s jurisdiction needs it to settle their tax obligations, thereby establishing and maintaining its value.

Why Chartalism Matters

Chartalism offers critical insights into the nature of fiat money and the power dynamics between the state and its currency. Understanding this theory helps explain why and how money maintains its value and circulates within an economy, even in the absence of a commodity backing. It also sheds light on the tools available to sovereign states for economic policy-making, including spending, taxation, and the manipulation of interest rates to achieve policy goals like full employment, inflation control, and economic stability.

Frequently Asked Questions (FAQ)

How does chartalism differ from commodity money theories?

Chartalism differs from commodity money theories in its foundation of money’s value. While commodity money theories suggest money has value because it is backed by a physical good (e.g., gold or silver), chartalism holds that money’s value comes from the state’s authority to impose taxes and demand payment in the money it issues. This difference underscores a fundamental shift in understanding monetary value from intrinsic to state-sanctioned importance.

Can chartalism explain inflation in modern economies?

Yes, chartalism can explain inflation, particularly through the lens of excessive government spending without corresponding tax collection. If a government creates more money and spends it into the economy without removing it adequately through taxation, it can lead to an excess of money chasing a limited supply of goods and services, resulting in inflation. Chartalists argue that understanding the balance between government spending and taxation is crucial for managing economic stability and inflation.

What role does taxation play in a chartalist monetary system?

In a chartalist monetary system, taxation plays a crucial role in giving value to money and controlling its supply in the economy. By requiring taxes to be paid in the state’s money, the government creates a demand for its currency, ensuring its acceptance and circulation. Taxation also helps regulate the amount of money in circulation, which can be instrumental in controlling inflation and stabilizing the economy.

Chartalism provides a distinctive perspective on the nature and function of money, highlighting the state’s decisive role in monetary systems. As modern economies continue to evolve, the relevance and application of chartalist principles offer valuable insights into fiscal policy, monetary theory, and economic governance in the context of fiat currencies.