Chartalism
heterodox theory of money
Chartalism is a heterodox theory in macroeconomics that views money as a pure creation of the state, introduced to control and organize economic activity rather than arising from barter or debt.
It holds that fiat currency has value because governments impose taxes that must be paid in the currency they issue, creating demand for it.
Background
Georg Friedrich Knapp, a German economist, invented 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. Knapp argued that "money is a creature of law" rather than a commodity. 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".
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, modern chartalist economists Randall Wray and Mathew Forstater say that chartalist insights into tax-driven paper money can be found in the earlier writings of many classical economists, for instance Adam Smith, who 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.
Forstater also finds support for the concept of tax-driven money, under certain institutional conditions, in the work of Jean-Baptiste Say, John Stuart Mill, Karl Marx and William Stanley Jevons.
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This entry incorporates text from “Chartalism” on English Wikipedia. Contributors are listed in the page history. Text is available under the Creative Commons Attribution-ShareAlike 4.0 License. Selected authority identifiers and statements are retrieved from Wikidata under CC0; their references and qualifiers remain part of the verification path.