The Neo-Chartalist Approach to Money

Abstract

As argued by Charles Goodhart, there are two competing approaches to the study of money: the orthodox, or M-form (for Metalist); and the C-form, or Chartalist. The central idea of M-form theory is that money was invented to facilitate exchange. The value of money was initially determined by the value of the coined metal, later by the commodity that backed it, i.e., gold; eventually, the public was fooled into accepting money with no backing. In the modern economy, says orthodox theory, the money supply is determined by government policy. The central idea of the Chartalist approach is that the value of money is based on the power of the issuing authority and not on the embodied or backing precious metal. The evolution of money is linked to the state's ability to spend and to tax; thus, money and monetary policy are linked to political sovereignty and fiscal authority. Recent extensions to the Chartalist approach have been made by Post Keynesians, such as Knapp, Innes, and Lerner. As a result, the neo-Chartalist approach begins with the recognition that, today, the nation state establishes the unit of account to be used within its boundaries. Money derives from obligations imposed by an authority. This authority then spends by issuing physical representations of its debts, and these representations are therefore demanded of those indebted to the authority. Market activity followed from the imposition of obligations, and banks developed as intermediaries between the authority and the indebted subjects. Thus, money has always been a creature of the state, and currency has always been a state token. Central banks cannot control the money supply; rather, most government fiat money enters the economy as a result of fiscal policy. This paper examines the Chartalist and neo-Chartalist approaches to the origin and evolution of money, contrasts them with the orthodox approach, and analyzes policy implications regarding the money supply, the central bank, inflation, unemployment, and the international monetary system.