Chartalism – What is it, definition and concept | 2022

Chartalism or chartalism is an economic approach that holds that money is a means of payment accepted by the State. Contrary to what is argued in other economic theories, chartalism maintains that money arises from the State and not as a means to facilitate trade.

Therefore, the State will be the source from which money emanates, deciding when to create money through spending and eliminating it by imposing taxes. In this way, the value of money will be determined by the actions undertaken by public authorities.

The main referents of the chartalist theory are the economists George Friedrich Knapp and Alfred-Mitchell-Innes. His ideas break with the approaches of a referent of the Austrian school like Carl Menger. He defended that money was the result of an evolution in commercial exchanges.

How did chartalism come about?

The germ of chartalism is located between the end of the 19th century and the beginning of the 20th century. In a context in which the role of precious metals was declining due to the need for monetary expansion through the use of paper money. On the other hand, banknotes issued by private banks were being replaced by paper money created by central banks, which had the backing of the State.

Thus, society quickly adopted paper money. While credit, without the need to be backed by cash, did not lead to a scenario of uncontrolled inflation.

As George Friedrich Knapp himself stated, the use of banknotes was accepted because it was accepted as a means of payment by public authorities.

Main ideas of Chartalism

Previously, chartalism had spoken of the value of money as a commodity. This meant that money was given a value based on the value of a good.

However, chartalism determined that money had value because that was established by the State. This means that the parity of the money with precious metals does not matter, but that it will be generally accepted because it is legal tender. This fiduciary money, therefore, is based on a fundamental element that is trust.

To control money and its value, the State has mechanisms and instruments for its creation and destruction. Thus, the State has tools such as taxes to destroy the monetary mass. Whereas, if you want to increase the amount of money, you can resort to spending.

Regarding the instruments of money destruction, when the State establishes a tax, each taxpayer is helping to reduce the debt that the public sector has generated by issuing money and bonds.

Money, emanating from the public sector, beyond being a mere means of facilitating trade, also serves as a unit of account. Precisely, this unit of account function will be managed by the public sector. This vision of money implies that each ticket becomes a kind of State promissory note.

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Chartalism also defends that, in the modern economy, the function of money cannot be understood without the role of the State. This implies that money is framed within the sovereignty of the State, which is why the chartalists defend that money is a public good and a social institution.

Consequences and new visions

Economists like Bill Mitchell, Stephanie Kelton, Warren Mosler, and L. Randall Wray have recently revived chartalist ideas. Thus, Wray has come to frame chartalism within the framework of the ideas of Keynesian economists, renaming it neochartalism and later calling it Modern Monetary Theory.

Modern Monetary Theory, also inspired by the ideas of Knapp and Mitchell-Innes, has addressed the fiduciary system, the sovereignty of the State and its ability to issue money. In this sense, the Modern Monetary Theory affirms that the bankruptcy of the State is impossible. Because the public sector has the power to have unlimited resources to satisfy the public debt.

Going a step beyond chartalism, the defenders of Modern Monetary Theory affirm that it is not necessary for the State to resort to loans or taxes in order to spend. Thus, the states, having a monopoly on the issuance of money, can put into circulation the amount of currency they need.

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