Chartalism: What it is, How it Works, Cryptocurrency

What Is Chartalism?

Chartalism is a monetary theory that defines money as a creation of the government that derives its value from its status as legal tender. It argues that money is valuable in use because governments require that you pay taxes on that money.

Understanding Chartalism

Chartalism can be contrasted with mainstream theories of money, which argue that money originally derives its value from its usefulness as a medium of exchange. The early-20th-century German economist Georg Friedrich Knapp first developed the theory of chartalism, defining money as a unit of account with a value that is determined by what the government will accept as payment for tax obligations. In other words, chartalism states that money does not have intrinsic value, but it is given value by the government.

In economics, the mainstream theory of money is that it originates as a medium of exchange in markets based on physical properties that make certain commodities suitable for use as money. Chartalism arose in the early 20th century as a challenge to this theory, which is dubbed metallism by chartalists.

Knapp coined the term in his book The State Theory of Money, published in German in 1905 and in English in 1924, arguing that "money is a creature of law," rather than a commodity. The term "chartalism" comes from the Latin word "charta," meaning ticket or token—items that may be accepted as payment, but which do not have intrinsic value.

At the time of Knapp's book, the gold standard was in existence and most national currencies were based on it. People could redeem paper money substitutes and bank deposits in return for legally or contractually specified quantities of gold coins or in some cases bullion, for example, at a Federal Reserve Bank. At that time, the prevailing economic theory of money described money as a generally accepted medium of exchange and explained the use of precious metals such as gold, but it did not explain fully the process by which a metallic commodity could become money (and not just another useful commodity).

Knapp argued that this occurred because rulers and governments declared it to be so and imposed the use of gold or other precious metals as money upon markets. He argued that the state is the ultimate authority, with money originating from its attempts to direct economic activity.

Knapp further criticized the practice of "metallism," and instead argued that governments could define anything they wanted to be money by fiat and compel its use as a medium of exchange through the use of legal tender laws. Instead of accepting the fiscal limitations that a scarce, internationally traded commodity such as gold imposed on them, governments could issue charta as money (i.e., pure paper money or fiat money). 

Chartalism became highly influential in the 20th century, both because governments worldwide adopted its ideas at least implicitly in practice and it came to form the basis of the concept of money in the economic and financial theories that became dominant, such as Keynesian economics and Monetarism.

Today, the gold standard is long gone and essentially all money is (or is based on) Chartalist fiat money—it has no use value and its use as a medium of exchange generally coincides with the sphere of influence of a government, or governments, that issue it and compel its use as legal tender for all debts public and private.

Chartalism vs. Neo-Chartalism

Knapp's notion that money is debt created by the state later attracted the attention of economists behind the Modern Monetary Theory (MMT). Expanding on Knapp's work, neo-chartalists posited that governments do not need taxes or borrowing for spending, since they can be the monopoly issuers of currency and can simply print as much money as they need.

The theory goes that governments with a fiat currency system can (and should) print money freely because they cannot go broke or be insolvent unless politicians decide otherwise. Of course, economists and policymakers will still need to consider the real effect that this could have on the inflation rate.

MMT stands in contrast with the current system in most countries, where most money is created and circulated by banks loaning the money into existence as credit money (fiduciary media) through the process of fractional reserve lending based on reserves of government (or government central bank) issued paper currency.

Cryptocurrency and Chartalism

In recent years, cryptocurrency has emerged as a potential challenge to Chartalism and MMT. Virtual currencies like Bitcoin are issued in a free and open marketplace, having no connection to any government. Aside from their (currently) predominant value as high-risk speculative investments, in certain circumstances, they may have value among some people that trade them as media of exchange. For now, this is mostly limited to black and gray markets use due to their lack of status as legal tender, which tends to support the Chartalist theory of the origin of money as a creature of the government through legal tender laws.

However, this may change in the future; if Bitcoin or other market-based cryptocurrencies were to become generally accepted in markets, they could pose a challenge to existing money and could serve as direct evidence of the market-based theory of the origin of money. In this regard, the cryptocurrency movement stands in opposition to national and bank monetary systems as well as the foundation of Chartalism. Its increasing popularity suggests that a chunk of the world's population is in favor of an alternative monetary system free from government rule, going back to the roots of money.