What Should Money Be Made From?

And who should have the power to create it?

History of Chartalism Pt. 1

The following is adapted from part of an upcoming book by John Michael Colón & Steve Mann tentatively titled Money, Power, & Socialism. It is Part I of a two-part series called the History of Chartalism, about the history of Modern Monetary Theory and its antecedents. We will be running other extracts after this series, as well.

If you follow mainstream policy debates at all, you’ve probably noticed that lately a lot of energy has been devoted to arguing over the true nature of money. Even if you’re not an expert in economics you’re liable to have picked up some of the lingo. There’s the old jargon of course, words like monetarism and deficit and taxpayer dollars, which tend to come out of the mouths of people who want to promote austerity – a euphemism for cuts to the welfare state, wage suppression, and higher unemployment – as the only way of saving the economy whenever things go wrong. But in recent years you may have started to hear some new words as well, which perhaps remain unfamiliar: words like tax receivability, or monetary sovereignty, or public money.

And along with the words come new slogans. Before, you’d hear that we have to live within our means and that governments need to tighten their belts and exercise fiscal responsibility. But today, such voices are frequently challenged by others which say the government isn’t a household, that a monetary sovereign can never run out of its own currency, and that what matters isn’t the budget constraint but the inflation constraint. The attacks of these groups upon one another can be quite vicious and passionate. And those in radical circles, from the various Marxist factions to the libertarian socialists, have little consensus on what to make of these discussions and who to side with. (All too often, those who wish most to reconstruct the economy leave the economics to the bourgeois economists.)

Yet it isn’t hard to notice that within little more than a decade something has fundamentally changed about the way even commentators from the political establishment talk about what precisely a government can afford to do. For the first time in most of our lifetimes, it’s becoming fashionable among at least some of the policy elites of industrialized states to discuss radically expanded government action. How did this happen, and what does it mean for socialists?

A lot has changed in terms of material conditions – the long aftermath of the Great Recession (which for the working classes never really ended), the looming threat of climate disaster, and the immediate catastrophe of the coronavirus pandemic. But intellectually, we want to focus on one major and much misunderstood change: the initially slow and imperceptible but then suddenly unavoidable and near-total replacement of one common-sense idea of what money is with another.

In the old theory1 For a typical neoclassical exposition of how loanable funds supposedly work, see D. H. Robertson, “Industrial Fluctuation and the Natural Rate of Interest.” The Economic Journal 44, no. 176 (1934): 650–56. The idea is sometimes attributed to Swedish economist Knut Wicksell and the so-called Stockholm School of economists. Later versions of the loanable funds doctrine incorporated fiat money and bank credit as a component that, according to its theorists, would still be limited and mediated by available savings.Strictly speaking the loanable funds doctrine is supposed to be a theory of how the interest rate is determined – as the intersection of the lenders’ supply and the borrowers’ demand for the scarce dollars – but it comes with all the rest of the ontological assumptions we’ve outlined attached. – which today is called the loanable funds doctrine – money is a scarce resource stipulated to exist as a pile of funds sitting somewhere out in the economy which everyone must somehow acquire if they’re to have any at all.2Where did dollars come from? This isn’t a question the theory likes to ask. Even when Loanable Funds Theory acknowledges that the government prints dollars, it uses the Quantity Theory of Money to forbid the US government from printing it, because doing so will increase the money supply and cause inflation. For more on why inflation actually happens, consult Steve Mann, “Notes Towards a Theory of Inflation” elsewhere in this issue. Workers have their wages, businesses their revenues, and banks have the money their customers choose to deposit in them (which they then allegedly lend out). The government is no exception: it must pay for its various activities, but it has no dollars. Thus it must collect these dollars in one of two ways: either through taxes, which is how it gets it from us; or from loans, by borrowing the dollars from banks or the public. This means that the government must collect more in taxes than it spends and borrows, or it will go bankrupt. In this theory, states must first acquire money, and only then can they spend it.

The new theory takes a very different approach. It starts by asking: where does money come from? Who makes money? How does it enter the economy? Its somewhat startling answer, drawn from studies of the real-world institutions governing the process, is that money is spent into existence by whoever issues it. The government doesn’t need to tax or borrow dollars before it spends; the way dollars enter the economy in the first place is its spending on whatever it wants to build or procure. Banks don’t need people to first deposit dollars to issue loans; the cash they loan out is brought into existence and enters the economy when they approve the loan. And they in turn can only do this, the theory says, because they’re given a license to create new money by the state, the ultimate authority over its own currency.3The theory that bank loans create deposits (and not the more familiar reverse causation used to explain bank lending in mainstream textbooks) is called endogenous money theory (or sometimes “endogenous banking theory”). This chartalist theory is discussed in more detail further into this essay. For now, what’s important to keep in mind is MMT’s idea that states delegate some of their money-creation authority to private banks, who then use it commercially to make loans (create deposits) at a profit (they hope). The government therefore isn’t like a household because it’s a currency issuer – it creates money, which is effectively infinite for it. Individuals and businesses are currency users, who must hoard money because to them it’s scarce – but they want it because they can use it to repay loans and ultimately their annual tax obligation. Money is spent into existence, circulates, is received back by its issuer in loan repayments or tax payments, and then destroyed. The real limit to government spending isn’t the budget (an artificial constraint it places on itself) but whether or not inflation happens, which has much more to do with whether it can get the labor-power, resources, and inputs it needs to accomplish its goals.

This new framework is called Modern Monetary Theory (MMT) – and it’s taken the world somewhat by storm.

In general, MMT argues that a country that issues its own currency and maintains a floating exchange rate (conditions they refer to as “monetary sovereignty”) can never run out of its own money or go bankrupt by printing too much money. This is because money is not something that exists independently of the state; it’s not the case that the government must either collect money in taxes or be loaned money by private banks. Furthermore, money does not arise naturally from some universal human tendency to truck and barter. Rather, MMT argues, money is a “creature of the state,” a credit which is issued by being spent into existence. States issue money because it is a tool of economic planning that helps them mobilize biophysical resources (all of the people, materials, physical processes, knowledge, and equipment existing within a country) in a manner that meets their goals. The true limits on a government’s spending are the biophysical resources under its control, not the amount of money it issues.

The MMT argument is typically made with reference to the United States dollar, and secondarily with evidence of the historical development of monetary systems, famously in ancient Mesopotamia and the European colonies in North America and Africa. MMTers use this analysis to dispel the common economic belief that money should be treated as scarce, that we can’t afford social programs, and that governments should worry about deficits accrued in their own currency. They typically propose that democratic movements and their representatives force governments to use public money for the public good, building up a robust welfare state and economy of care. Their signature policy plank, the job guarantee, would abolish involuntary unemployment by designing a system to create a job at living wages for anyone who wants one, matching people to socially useful work that matches their skills in a massive expansion of the public sector.4This has been a brisk and bare-bones summary of the MMT perspective. For a popular introduction geared towards the lay reader, see Stephanie Kelton, The Deficit Myth (2020); for a thorough academic textbook from an MMT perspective, see Bill Mitchell, L. Randall Wray, & Martin Watts, Macroeconomics (2019).

Its main expositors – economists like Stephanie Kelton, L. Randall Wray, Pavlina Tcherneva, and Bill Mitchell – have in recent years acquired something like a celebrity profile. Kelton in particular was an advisor to Bernie Sanders; for a time, Alexandria Ocasio-Cortez made the job guarantee a central component of her proposed Green New Deal; and a recent podcast in the elite business press breathlessly announced in its title that “MMT won the fiscal policy debate.”5See for example “How MMT Won the Fiscal Policy Debate,”Odd Lots (a Bloomberg podcast) 17 March 2021. The stakes are quite high. If MMT is correct, then there are real limits, and real trade-offs, but they’re far more flexible than the reigning neoliberal orthodoxy among the capitalists, technocrats, and politicians who rule us would lead one to believe. And if this is so, we have to understand what those true limits are if the hugely difficult tasks which lay ahead of us – abolishing the wages system, imperialism, and the fossil fuel economy while building a global community of ecologically sustainable socialist democracies – are to be at least tractable.

What Should Money Be Made Of?

Metallism vs. Chartalism: A (Proto-)Debate Across Centuries

So is MMT real or is it bullshit? We’ll put our cards on the table: our own ideas are influenced by MMT’s analysis of macroeconomics and we think that what the theory gets right is quite important. On the other hand, we also think the MMT framework has major limitations that need to be overcome (though most of our critiques will be in other essays).

But what’s more important than this question is how one would go about developing an answer. The MMT controversy is too often conducted as a series of armchair debates from first principles, with an eye for the present and little understanding among participants of the broader intellectual history at play. That history is important for two reasons. First, it clarifies the concepts at issue and their stakes – these ideas are quite difficult to understand in the abstract but are easier to grasp when you see how they developed. Second, and more crucially, it reveals that debates over money are always and everywhere really debates about power, the political order, and economic planning. Yet for all its crucial importance, the history of debates about money remains little known and less understood.

It’s not people’s fault, really. No less an authority than Joseph Schumpeter, whose History of Economic Analysis (1954) remains something of a gold standard in the history of economic ideas, once complained about the hideous confusion which proved inevitable each time he tried to reconstruct what precisely major historical economists believed about money:

[B]asic theories are malleable and writers are often inconsistent, still more often vague. When we find that a writer compares money to a ticket – a ticket that admits the bearer to the great social store of all goods – we feel inclined to register him a cartalist [sic]. But the phrase need not mean much, and both J.S. Mill, who used it in the nineteenth century, and Berkeley, who used it in the eighteenth, are more properly called metallists. There is no denying that views on money are as difficult to describe as are shifting clouds.6Joseph Schumpeter, History of Economic Analysis (1954), p. 275-276. For Schumpeter’s history of the metallism vs. chartalism debate, see Part II, Chapter 6 (“Value and Money”), especially pp. 274-285. It should be noted that, from our point of view, Schumpeter is not an infallible authority – as an Austrian School economist, he was something of an apologist for capitalism and believed in various theoretical constructs we find to be fallacious. That said, of all the Austrians he is the closest to the German Historical School tradition that produced figures as diverse as Max Weber and Otto Neurath and was, in our view, much more grounded in the reality of historical institutions; many of his most famous theories, such as those concerning firm behavior, remain useful; and his history of economics is remarkably even-handed and thorough, remaining one of the few histories to incorporate many dissident or heterodox schools and give them a fair shake.

The difficulty arises from the following: for thousands of years, there weren’t – at least not in the strict sense – robust theories of money per se. Economic theorizing in general was pretty thin before the rise of classical political economy in the early modern period; money specifically was something whose origin and nature would tend to be described briefly and fleetingly before the author got to something else they were more eager to talk about. For a long time there weren’t so much theories as intuitions, rules of thumb, half-formed proto-theories, and ad hoc explanations that would appear in texts devoted to other topics – sometimes philosophical treatises, but most often practical manuals written for rulers explaining how best to manage money and resources within their territories. And even when theorizing about the nature of money started to come into vogue in the sixteenth and seventeenth century, writers would often express themselves quite inconsistently on the subject before more solidly defined camps came into view.

That said, from the very earliest times down to the present, theories of money have tended to cluster around one of two intuitions. Before the theories were properly formulated, a single thinker might flit back and forth between explanations in each category; but by the nineteenth century, they had congealed into distinct and mutually exclusive theoretical frameworks. They have been called different things in different eras, but the terminology Schumpeter uses has been the most long-lasting so we’ll go with him as our guide. He refers to each in the quote above.

One of the theories of money says its origins were as a replacement to barter. Adam Smith famously described, from the learned vantage of his armchair, economic participants in the earliest societies as “trucking and bartering” – that is, exchanging goods for goods in fixed quantities according to their relative value (10 chickens = 1 cord of lumber = 2 haircuts, etc) – up until the discovery and widespread implementation of money, a universal commodity that could stand in as a way of measuring the values of other commodities. The view that money emerged in this specific manner out of barter, with one commodity eventually being picked out as the universal equivalent to all the others, is often referred to as the commodity theory of money. But since money was overwhelmingly made of gold and silver (in Eurasia anyway), Schumpeter prefers to call it the metallist school, and we will follow his usage.7Barter theories, commodity theories, and metallist theories are all very closely related, but distinctions are sometimes made between them. In our view, the most reasonable way of taxonomizing them is as follows: the commodity theory describes how one very special commodity is chosen to denominate the rest, and a metallist theory describes how only the precious metals have the particular characteristics and intrinsic value a commodity must embody to be chosen, often predicting disaster if people choose incorrectly (which choice not all commodity theorists might agree about either). And we might think of both of them as barter theories, since each is equally dependent upon an underlying myth of money as arising from exchange and barter as the origin of economic activity. But terminology will vary from theorist to theorist, so keep an eye out for all of them. There is a direct line of descent from metallism’s idea of money as a scarce commodity already existing out there in the world to neoclassical economists’ doctrine of loanable funds – which makes sense, because metallist theories dominated economics in the late nineteenth century when the neoclassical dogmas were formulated. Alas, as a history of money’s origins this theory has the unfortunate quality of being demonstrably false, as anthropologists who’ve looked at the matter empirically have shown.8See “Chapter 2: The Myth of Barter” in David Graeber’s Debt: The First 5,000 Years (2011). Our own extensive discussion of the historical origins of money in the ancient Near East and Mediterranean can be found in our forthcoming essay “Meet The Mesopotamians.” That said, it turns out – much to our initial surprise – that metallism has what we’d call a rational kernel, which proved key to helping us develop our Theory of Forex (to be discussed in another upcoming essay).  9To make things even more confusing – Smith, a major origin point for the barter theory of money’s origins, also says this in Chapter II (“On Money Considered as a Particular Branch of the General Stock of the Society, or of the Expense of Maintaining the National Capital”) of 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 upon the will of the prince.” That should sound familiar to any chartalist! Yet another example of the fundamental inconsistency of so many early economists on the money question.

Schumpeter calls the second theory of money the chartalist school (or ‘cartalist’ in his spelling), and its broad tenets should be familiar to you from our description of MMT above – because MMT is, in fact, merely the latest form of chartalism (its formal academic name is neo-chartalism).  Chartalism has often been referred to by other titles, each of which is telling in its own way. People talk about it as a credit theory of money, which describes versions of chartalism that assert money is essentially a form of debt – an IOU put out by the currency issuer promising to be redeemable to the bearer for a certain amount of goods or services. (This notion of “chartal money” derives from the Latin word charta, which means “token” or “ticket.” Money is a token minted, issued, and circulated to accomplish particular goals.) Chartalism is also referred to as a state theory of money, since in our modern context the currency-issuer is usually the state, and we all use one or the other kind of state money to adjudicate debt obligations between ourselves because we need it to pay our annual debt obligation to the government. That is, it’s the fact that the government accepts payment in its chartal money for tax purposes which makes it desirable for us to use that money ourselves for everyday purposes.10This is all true as far as it goes – but only so far. Must the state theory of chartalism and the credit theory of chartalism go together of necessity? Neo-chartalism (MMT) asserts that they must, insisting on the existence of a hierarchy of money with credit issuances subordinated to the state money that’s always at the top. But there are reasons from both an intellectual history and economic history point of view to doubt this is so. Intellectually, many chartalist theories were expressed as credit theories and did not necessarily place the state’s issuances above those of (say) banks in their importance – see the theories of endogenous money created by the Circuitist school, discussed below, as an example. And further, there are a number of historical examples of non-state currency-issuers, many of them described in some detail by certain chartalists themselves – though this is something we’ll discuss in more detail in our forthcoming essay about Forex.

In the history that follows, our focus will be on the chartalist theory. Though we have been highly influenced by chartalism and once confidently called ourselves chartalists, we no longer support it uncritically – not only because the history of chartalism has proven far more diverse than seems the case from many latter-day MMT accounts (and some parts hold up better than others), but because any version of the theory has numerous problems that leave it at best incomplete on its own. That said, we remain steadfast in the belief that due to how it emerged from the analysis of historical institutions and the experience of practitioners, chartalism remains a far better theory than the alternatives on offer and must be the foundation of our inquiry. Any deviation from it must be in a less, and not more, orthodox direction. Chartalism remains for us the beginning of wisdom, but will take us down a road not foreseen by its advocates.

Chartalism’s Gradual Emergence

Both metallism and chartalism have been around for thousands of years – if Schumpeter is to be believed, since Plato and Aristotle at the very least.11The case of Plato is more or less clear, as Schumpeter notes: “Plato remarks in passing that money is a ‘symbol’ devised for the purpose of facilitating exchange (Politeia [Republic] II, 371; Jowett translated σύµβоλоν by ‘money-token.’)” Note that Plato’s language here, of money as a token, is identical to the idea of “chartal” money. Schumpeter goes on to claim that Aristotle was a Metallist, on the strength of a passage in his Politics (I.4) where Aristotle says, in relation to the origins of money, that “men agreed to employ in their dealings with each other something which was intrinsically useful and easily applicable to the purposes of life, for example iron, silver and the like” (translation by WD Ross, Oxford University Press 1921). See Schumpeter, History of Economic Analysis pp. 50-62. Here, though, it’s possible our dear Austrian may have nodded off. In 1961 Barry Lewis John Gordon, the historian of economic thought and Schumpeter’s former student, convincingly argued in an essay titled “Aristotle, Schumpeter, and the Metallist Tradition” for The Quarterly Journal of Economics that his old master was mistaken: Aristotle too was likely a chartalist, or at any rate not a simple metallist. Gordon points out a particularly compelling passage where Aristotle explicitly states that money’s value seemed to have little to do with the material it was composed of or the physical processes that went into its construction and distribution, “because it exists not by nature, but by law (nomos), and it is in our power to change it and make it useless” — hence “this is why it has the name ‘money’ (nomisma)” (Nicomachean Ethics V.5 1133, translation by David Ross, Oxford University Press 2009). Whether it’s chartalist and not metallist ideas that have the oldest pedigree in Western economic thought, this little digression should suffice to illustrate how very old they both are – and the piecemeal, incoherent, and confusing way they were discussed in early economic thought. But as we noted, it took quite a long time for the debate to cohere. 

Over the centuries, how academics and social scientists operating within the chartalist tradition theorize money has changed substantially, but it often comes back to four distinct themes: 

  • ~ that money is an abstract measure of value;
  • ~ that money consists of a claim or credit;
  • ~ that the state or an authority of some other kind (a different institution) is necessary for the emergence of money; &,
  • ~ that money is not neutral in the economic process.

Before there was any mention of “chartalism”, these four ideas about how money operates pervaded theoretical debates between different schools of economic thought starting in the late 18th century, continuing off and on in intensity, and sadly remaining largely unresolved into the present day. 

For us, the best way to make sense of this history (which is so often difficult to trace in the economic sources) is to think of it as beginning in a curious debate over what seems like a practical question: what material should money be made of? Should it be coins of gold or silver, so that it has a high value that is “intrinsic” to its metal content? Or should it be a bill of paper that can be put out in large quantities at zero cost to its issuer, stimulating economic activity by making up for the shortfalls of circulating cash so frequent under metal coinage systems? Will printing paper money cause runaway inflation due to its “fictitious” nature, the fact it isn’t “backed” by something “inherently” valuable? Or can this be offset by a “peg,” the promise of “convertibility” of a bill into a lump of gold or silver on demand? Or, in turn, is this an artificial limit on the money printer? 

These are the sorts of questions out of which the theories of metallism and chartalism emerged. A few historical examples should suffice to illustrate this point. In the history that follows, we have relied heavily upon the work of noted economic anthropologist Geoffrey Ingham in The Nature of Money (2004), which contains one of the most thorough treatments of the metallism vs. chartalism debate currently in print. Unless otherwise stated, the information below can be found in this book.12See especially the section devoted to the intellectual history of chartalism, “Abstract Value, Credit, and the State,” Nature of Money pp. 38-58.

The Banking School vs. the Currency School

First, it helps to define some terms – because the terminology used by chartalists and metallists is highly inconsistent, redundant, and confusing! Broadly speaking, chartalism is associated with fiat money (or as it’s less often called, fiduciary money), usually in the form of paper money (also called bills); whereas metallism is associated with money’s convertibility, the gold standard, and specie, which is to say money that has high intrinsic value. It’s easiest to explain these historically and in relation to one another. Metallists set the terms of the debate: money is said to have high “intrinsic value” if it has high precious metal content – that is, if it’s a coin made mostly or entirely of gold or silver. Most European currencies from the Axial Age to the early modern period were coins, and metallist thinking insisted they must be as close as possible to pure metal. Later, coins were gradually replaced by systems of paper money which allowed banks and states to issue bills that ordinary people and firms could use to purchase things and pay taxes. These paper bills had only limited “intrinsic (metal) value” via their convertibility – anyone could deposit a dollar bill at a bank and demand a lump of gold or silver of a standard weight, called “specie.” In this way, bills were “backed” by gold via the convertibility promise – but this also limited how many bills the banks and state treasuries could issue to at most some multiple of their gold reserves.13It’s also worth noting that the absence of “convertibility” or “the convertibility promise” doesn’t necessarily mean that there is no exchange rate at all between paper bills and gold or silver. It can mean that; but it can also mean that there is no promise of convertibility at a particular price which the currency issuer promises to maintain. This fixed convertibility price or exchange rate is called a peg or a fixed exchange-rate; in its absence, you can have a floating exchange rate where it’s set by international markets and fluctuates frequently. We will be discussing exchange rate regimes in a separate essay. All this was important because only weights of gold got you purchasing power internationally, rather than locally.14This notion of foreign purchasing power – what money can buy you from abroad, vs. what it can buy you domestically – turns out to be extremely important. The function of gold and silver during the ages of coinage and the metal standards are just one special instance of a role played by lumps of silk or salt in other times and places or the US dollar today – the role, that is, of being the international means of payment. We call anything you can use to buy imports foreign exchange, or forex for short – and this concept forms the core of the Theory of Forex that’s our primary critique of chartalism, to be outlined in a future essay. This system was called the gold standard. In the past two centuries and especially the last fifty years, paper money with absolutely no convertibility requirement became more and more common – these purely token or chartal currencies are called “fiat money,” since they exist entirely by state fiat and aren’t “backed” by any commodity. Chartalism can be seen as a philosophy advocating for the creation of fiat currencies because of its conviction that the inherent nature of money is purely tokenistic in the first place.

Metallism and chartalism first began to consolidate themselves as philosophies in urgent debates over a technical question: what material should money be made out of, metal or paper? In Britain, this debate came to the fore during the Napoleonic Wars. At the start, Britain had a paper currency with convertibility to gold. When there was a false rumor that the French invasion forces had landed on British shores in 1797, there was a run on the banks – ordinary people and capitalists flocked in droves to dump their paper bills for gold. This drained British gold reserves that they needed to pay for war imports. The government, whose historical bias was heavily metallist, nevertheless decided in this emergency to take the unusual drastic step of suspending convertibility entirely to preserve the state’s gold reserves. Paper money no longer had any connection to any specific amount of gold specie; it was backed only by state authority. This worked, and Britain won the war.15See Gonçalo L. Fonseca, “The Bullionist Controversy” on the History of Economic Thought Website

But it sparked a terrible controversy lasting decades: on the one hand those who regretted the temporary shift to fiat money and who wished non-convertibility to gold had lasted at most a few weeks rather than the whole war; and on the other hand those who liked fiat money so much they would prefer if paper money became the new standard completely. The pro-gold faction eventually came to be called the Currency School or Buillionists; the pro-paper faction became known as the Banking School. The schools can loosely be characterized as predecessors of metallism and chartalism, respectively. On the Currency School side, the famous political economist David Ricardo argued that the quantity of a new form of paper money – called banknotes – should track the amount of bullion, so as to stabilize prices. They often prophesied that fiat money inevitably leads to runaway inflation, whereas only a currency made of metal or readily convertible to it could retain its value on international markets. On the Banking School side, John Fullarton defended the free issuance of banknotes on the basis of a perceived lack of “money-capital” to facilitate investment for the more average business owner.

Although it wasn’t explicit at the time, you can think of this debate as a turf war between the state and commercial banks over the power to create money. The metallist Currency School adherents approached the issue decidedly from the point of view of the state and its interest in the regulation of money-creation, at least in the eyes of the elites in power. Ricardo feared that the Bank of England would be tempted to seek profits by manipulating the issuance of banknotes, resulting in undue fluctuations in the price of gold. This technocratic impulse to maintain parity between gold and credit money is in stark contrast with the comparatively democratic-sounding case made by the proto-chartalist Banking School. The Banking School argued that strict adherence to a gold convertibility would ultimately harm business owners of lesser means because it would chiefly help large creditors and hurt the “petit bourgeoisie” of small landowners, shopkeepers, and artisans. Or as Ingham puts it:

The Banking and Currency School debates, like the earlier one in the seventeenth century between Barbon and Locke, show how theories of money were an integral part of the struggle between different interests for the production and control of money. In broad terms, the two sides represented the two agencies which, in a capitalist system, share the creation of money – the state and the banks. Behind these lay the two ‘money classes’ in capitalism: on the one hand, the entrepreneurial debtors, and, on the other, the rentiers and creditors.16The Nature of Money, p. 42.

Greenbackers vs. Practical Metallists

A similar theoretical showdown broke out in the United States some years later under strikingly similar circumstances. When the US suspended convertibility of its paper currency to gold during the Civil War of 1861-1865, there was a debate lasting decades about whether it should ever be restored. Here, too, the metallists eventually won when the gold standard resumed in 1879 – but the debate also helped consolidate a pro-paper position that was a clear antecedent to chartalism.

The era of the “Greenback” in US monetary history began during the civil war as a matter of military exigency. Greenbacks were a form of paper or fiat money that was generally not convertible to gold or silver at any fixed rate. Issued initially as “demand notes” by the government-sponsored American Bank Note Company (the Bureau of Engraving didn’t exist yet), these notes were essentially non-interest bearing bills issued directly by the Treasury. The biophysical pressures of the war eventually caused congress to reconsider convertibility to specie – which back in the day was a hunk of gold you could receive in exchange for a bill.17Mitchell, Wesley Clair, “A History of the Greenbacks With Special Reference To the Economic Consequences of Their Issue 1862–65”, University of Chicago, Chicago, 1903. This precipitated a debate between the US civil war-era versions of the chartalists and metallists: The Greenbackers echoing the British Banking school and the “Practical Metallists” echoing the Currency School, with a similar subtext of a political struggle over who gets to create money.

The Greenbackers advocated for a fiat currency, a paper bill with no promise of convertibility to metal commodities at fixed rates, and they did so on more of a legal-theoretical basis than their Banking School forebears had. If it is the people who make the government in a democracy, and the government makes the currency, then in essence the people control the creation of currency, or at least ought to. Fixing gold-convertibility interfered in this sacred right of the people by allowing banks and the state undue influence over what is specifically a sovereign function of government, and the people collectively. 

The Greenbacker movement had less support from elite political economists than the Banking School had, which sometimes leaves historians with the impression that it was less theoretically sophisticated. But whatever it may have lacked in what economists think of as “rigor,” it made up for with a more fundamental critique of the idea that money requires the “intrinsic value” of metallic commodity money. By contrast, the Honest Money League, a metallist mainstay organization of the day, made their case for intrinsic value and its primacy for currency thusly:

There is all the difference between true money, real money, and paper money, that there is between your land and a deed for it. Money is a reality, a weight, a metal of a certain fineness. But a paper dollar is simply a deed.

The Greenbacker response to this was interesting, emphasizing their understanding of money as a social construct embedded in the units of account themselves: “It matters not whether the yardstick and the pound weight be of wood, iron, or gold; length and weight are the only properties necessary to be expressed by them.”18Bruce G. Carruthers and Sarah Babb. “The Color of Money and the Nature of Value: Greenbacks and Gold in Postbellum America.” American Journal of Sociology, 101, no. 6 (1996): 1568

In an intellectual milieu heavily dominated by metallist assumptions, the Greenbackers’ redefinition of money – from being a particular quantity of gold to being an arbitrary measuring stick for the relative worth of goods and services in an accounting system –  was a powerful political statement. For them, it was the state’s duty to set and regulate these units in terms of their accuracy. These early chartalists didn’t simply argue that units have little to do with material composition of their physical artifacts, but that material composition was fundamentally irrelevant. And as in the British case, there was a class angle here as well. Greenbacks were often supported over precious metals by working-class and lower-middle class people – those more liable to be in debt overall because paper money is politically controlled at least in theory by the people, whereas precious metals tend to be hoarded by capitalist creditor elites. 

But the theoretical implications of understanding money as an arbitrary unit of account were perhaps more impactful on the debate than the democratic control of money creation. The Greenbackers took issue with the metallist notion that only gold or silver money is “natural” – what isn’t natural about a yardstick? – and asserted that its worth, like the length of a ruler, is the same regardless of material composition. As luck would have it, at least for the Greenbackers, the US Government was dangerously low on gold reserves during the initial phase of the civil war, its military low-point – allowing, once again, for a successful historical example of fiat money in action. Although their movement would ultimately be defeated decades later with the return of the gold standard, Greenbackers forcefully made their case for a “State Theory” of money with what they saw as at least notional democratic control over its issuance.

Consolidated Chartalist Theories

Knapp and the State Theory of Money

The word “chartalism” wasn’t coined until 1905, by Georg Friedrich Knapp, a German political economist of the Historical School. This school dominated German academia at the turn of the twentieth century and was closely allied with the monarchy. The Historicals themselves came from an older tradition called Cameralism, an economic theory prevalent in 18th-century Germany, which advocated for a strong public administration to manage a centralized economy primarily for the benefit of the militarist state. To get a sense for how statist and militarist Cameralism was perceived to be even in its own time, one need only note Marx’s pronouncements – years apart – that it constitutes “a medley of smatterings, through whose purgatory the hopeful candidate for the German bureaucracy has to pass” and a “…school of thought that legitimizes the infamy of today with the infamy of yesterday, a school that stigmatizes every cry of the serf against the knout [whip] as mere rebelliousness once the knout has aged a little and acquired a hereditary significance and a history.”19From Karl Marx, “Afterword to the Second German Edition” in Das Kapital Volume I (1873) and “Introduction” in Critique of the Philosophy of Right (1843), respectively. For more on the German Historical School, its origins in Cameralism, and its decline following the grand dispute with the Austrian School, see Karl Hauser, “Historical School and Methodenstreit,”Journal of Institutional and Theoretical Economics (JITE) / Zeitschrift für die gesamte Staatswissenschaft, Vol. 144, No. 3 (June 1988), pp. 532-542.

In The State Theory of Money (1905), Knapp argues against the idea that barter leads to money, instead making the case that “money is a creature of law,” that states create and administer money centrally, and have done so for several thousand years. Knapp emphasizes what Aristotle observed about money’s arbitrariness, insofar as institutions make an arbitrary choice about what to call the official money, and enforce its use by demanding we pay our taxes exclusively in it. Knapp likens this dynamic of tax-receivability (which enforces demand for money) to commonplace, non-state enforcement of token forms of money, such as a ticket to a show, or the receipt to a coat-check.20“When we give up our coats in the cloak-room of a theatre, we receive a tin disc of a given size bearing a sign, perhaps a number. There is nothing more on it, but this ticket or mark has legal significance; it is a proof that I am entitled to demand the return of my coat. When we send letters, we affix a stamp or a ticket which proves that we have by payment of postage obtained the right to get the letter carried. The “ticket” is then a good expression . . . for a movable, shaped object bearing signs, to which legal ordinance gives a use independent of its material. Our means of payment, then, whether coins or warrants, possess the above-named qualities: they are pay-tokens, or tickets used as means of payment . . . Perhaps the Latin word “Charta” can bear the sense of ticket or token, and we can form a new but intelligible adjective – “Chartal.” Our means of payment have this token, or Chartal, form. Among civilized peoples in our day, payments can only be made with pay-tickets or Chartal pieces.” From Georg Friedrich Knapp, The State Theory of Money  [1924] 1973, pp. 31–32) What’s most important is that the issuer of the token be held to account for accepting back its own token. The coat-check will always give you back your coat should you produce the receipt. The movie theater clerk will always admit you in for the show so long as you show them your ticket. The state will always accept back its own tokens and relieve you of your yearly tax obligation. Another insight here is that the issuer doesn’t itself need these tokens to operate – money is a unit of account, and it plays no role other than showing you what you’re entitled to as far as what the issuer is promising. It is a debt, or an “IOU.” Joseph Schumpeter’s interpretation of Knapp’s State Theory of Money was that it was specifically a question of how the demand for money is fixed in legal tender laws. MMT economists often note that this interpretation is superficial.21See L. Randall Wray, “From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy”. Levy Economics Institute Working Paper no. 792 (2014). Knapp was keen to take the analysis further than that, arguing that rather than a state chartal money based narrowly on legal tender laws, money’s acceptability was ascribed in the “legislative activity of the state” generally.22Knapp writes, “If we have already declared in the beginning that money is a creation of law, this is not to be interpreted in the narrower sense that it is a creation of jurisprudence, but in the larger sense that it is a creation of the legislative activity of the State, a creation of legislative policy.” (Ibid., 40) This may seem like a distinction without a difference, but it’s an important ontological point. It isn’t just that the state puts some law on the books to accept this or that commodity as a tax payment. Rather, money itself is for Knapp inseparable from the total activity of the state, and the state always has the capacity to bring it into existence in whatever form it pleases.

What’s interesting to note about the Cameralists in relation to Knapp is that they, and arguably by extension the Historicals and Knapp, were all unabashedly statist and militarist in their politics. These thinkers generally agreed it was best for the economy as a whole that the state play a strong role in macroeconomic policymaking and that this would be the lynchpin to developing modern capitalism in Prussia.23A particularly amusing example of the typical Cameralist advisor to German governments is Philipp Wilhelm Von Hornick (1638-1712), an Austrian rather than a Prussian but cut from rather the same cloth as Knapp and his predecessors. A lawyer turned civil servant who eventually had great influence on the Viennese court, Von Hornick was a rabid nationalist obsessed with increasing the power of his beloved Austria and so spent much of his time being quite mad at his fellow actually-existing Austrians for failing to meet his high standards. His most famous book wears its commitments on its sleeve, being titled Oesterreich über alles, wann es nur will – that is, Austria Above All, If She Only Will (1684). In it he outlines his nine famous rules for economic prosperity, which advise countries to reduce imports to a minimum, invest in building up manufacturing capacity and employment, and emphasize export-led growth to create continuous revenue streams of gold and silver from abroad that could be used for further imports. This advice would become the credo of the Mercantilist school of political economy (of which Cameralism was the German wing), and contrary to the slanders of neoclassical economists it remains very good advice for developing countries. But it’s not without its superstitions, particularly the myth of total economic self-sufficiency or autarky. Von Hornick was rather morbidly obsessed with making sure the state is completely independent and all-powerful, wants it alone to gobble up all the gold and silver, thinks ordinary people deserve no foreign purchasing power, and so spends pages and pages yelling at the Austrians to give up all foreign luxury goods and either make a version themselves or go without it. On this subject his tone can reach a truly hysterical pitch. He compels the Austrians to “do without foreign products as far as possible (except where great need leaves no alternative, or if not need, wide-spread, unavoidable abuse, of which Indian spices are an example).” When an imaginary interlocutor asks how a “Dame” (aristocratic woman) will dress if the Austrians go without foreign-made dresses (“surely one must dress like other nations?”), Von Hornick explodes: “It would be a good thing if we sent Dame Fashion to the Devil, her father!” For extracts from this very interesting book, see “Austria Over All If She Only Will” in Arthur Eli Monroe (ed.), Early Economic Thought: Selected Writings from Aristotle to Hume (1951), pp. 221-243. But the piece to the administrative puzzle that was missing for the Historicals was to explain how money operates within their state-led economy with an actual theory rather than ad hoc explanations, and that was why Knapp’s State Theory of Money was so pivotal to their project, and also to the history of chartalism.

Knapp’s theory was a sensation almost immediately upon his publication. It received responses – many of them positive – from such high-profile German economists and thinkers as Knut Wicksell, Georg Simmel, and Joseph Schumpeter. When the book was translated into English in 1924, it became a sensation in the Anglosphere as well – proving a decisive influence, as we’ll see, on John Maynard Keynes. During his lifetime and at the time of his death in 1926, Knapp was considered one of the most important and accomplished German economists of all time, his name often taking pride of place in textbooks and intellectual surveys as a key representative of the German Historical School. This makes it all the more striking that he is so little-known today.24For the most detailed history of Knapp’s reception in Germany and abroad, see Dirk H. Ehnts, “Knapp’s State Theory of Money and its Reception in German Academic Discourse,” Institute for International Political Economy Berlin (2019).

Then again, perhaps it isn’t all that strange. The German Historical School did, after all, decline in importance in Germany and Austria at some point in the middle twentieth century, such that after the Second World War neoclassical economics dominated there as most everywhere else. And of course there was a certain political angle to this decline as well. Knapp was, as we’ve seen, part of a long tradition of ministers whose economic theory was always subordinated to the goal of aiding German statecraft. Thus we shouldn’t be surprised to find that after his death Knapp became the pet economist of many high-level Nazi officials, including the famous “money magician” and Nazi central bank president Hjalmar Schacht. 

Indeed, some believe it was actually under Nazi rule that Knapp’s ideas reached their greatest level of influence. “Before the 1930s,” writes one historian, “Knapp’s ideas had not yet triumphed in Germany, and banking scholars remained divided between Knapp’s followers and those who believed money was best understood as a physical commodity.” Yet all that changed when the Nazis began to take inspiration from Knapp’s state theory in their economic policy. Empowered by the idea that money is fundamentally a legal construct and a state issuance, they cut off the gold standard and effectively repudiated their foreign debt (denominated in gold). Furthermore, to secure the biophysical resources they still needed from abroad, they instituted a system euphemistically referred to as “bilateralism” – essentially, using their military might to force neighbors into highly disadvantageous trade deals with or imposed debt obligations to Germany, the end result of which was to ruthlessly extract raw materials from these countries, dump German manufactured goods in their markets, and force these weaker countries into using the reichsmark for international payments, all to the Third Reich’s enormous profit. But this was only the first stage of the Nazi plan. Ultimately, Knappian chartalism served as the foundation for a nightmare plot to eventually make Nazi state currency the currency of a fascist-controlled European trade bloc:

Yet the emergence of bilateralism in the 1930s led many to question if this precious metal [gold] had a future. In particular, theorists began asking if one could create a stable international monetary order without gold at all; or, put differently, how to extend the use of fiat money from the domestic to the international sphere. Within Germany, the weight began tipping away from commodity theories in 1940. To be sure, some tried to reconcile the gold standard with National Socialist ideology. But far more now advocated a fiat currency to regulate exchange between states, at least within Europe. As Germany and Europe became gold-scarce, they argued, gold was losing its symbolic value and becoming just ‘like any other raw material.’ As Hans Herbert Hohlfeld, professor at the University of Cologne argued, there are, in any case, ‘stronger foundations for a currency…the labour power of a great and industrial people, or furthermore, its political might’…In a German-controlled Europe, ‘gold would obviously play no role at all,’ nor would it be tied to the reichsmark…In the inner circle of Europe – Denmark, Belgium, the Netherlands, Luxemburg, Norway, and perhaps Slovakia – local currencies would be pegged to the reichsmark without reference to gold. Germany would encourage if not outright coerce European central banks to hold reichsmarks as reserves instead of gold, and to use these to settle trade imbalances with one another. These policies would, in effect, turn the reichsmark into Europe’s reserve currency. Indeed, victory in Western Europe gave the Reichsbank an arrogant confidence in German unilateralism: in the New Order ‘other countries must adjust themselves to our currency, and not ours to theirs.’25Stephen G. Gross, “Gold, Debt and the Quest for Monetary Order: The Nazi Campaign to Integrate Europe in 1940.” Contemporary European History 26, no. 2 (2017): 287–309. Of course, savvy readers will note that while the Nazi plot ultimately failed as a result of their defeat in the war, the US empire was able to follow a course of development that led it, today, into a position similar to that the Nazis dreamed of but on a truly global scale – the US dollar being, after all, the dominant international means of payment. Questions of how the US accomplished this, what it means for us today, and whether this ought to be how the international monetary system is structured are beyond the scope of this essay but are near the top of our list for future essays.

The defeat of international fascism in the war meant these plans never came to pass. But they cast a dark pall on the idea of centralized state control over money, revealing the connection that such an institutional arrangement can potentially have with authoritarianism, militarism, imperialism, and genocide. Knapp is certainly a father of chartalism, but his legacy also reveals chartalism’s dark side.

Mitchell-Innes and the Credit Theory of Money

Meanwhile, a separate chartalist theory was actually being developed in roughly the same period, by the British diplomat and economist Alfred Mitchell-Innes. A rather eccentric character from what little is known of his biography, Mitchell-Innes was not a professor or a public intellectual. He served on a number of missions in the service of the British Empire from the late nineteenth century to the end of the First World War, some of them rather bizarre: a diplomatic official in Cairo, a financial advisor to the King of Siam, an Under-Secretary of State for Finance in Egypt, a Councilor for the British Embassy in Washington, and a Minister Plenipotentiary to the President of Uruguay. At the war’s end he retired, got married, and busied himself with local politics, frequently winning elections for positions on the council of his provincial English town for the next several decades. He seems to have had a radical anti-carceral streak: around the time of his death in 1950, he was befriending convicts in his local prison and advocating for a less punitive approach to justice modeled on East Asian traditions (or his idea of these anyway). Most of these late essays are, alas, not only out of print but, apparently, “were published on Her Majesty’s Stationery and, consequently, can only be examined on site in London.”26For these biographical details on Mitchell-Innes, see L. Randall Wray & Stephanie Bell [Kelton], “Introduction” in Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell-Innes (pp. 2-3).

The main work for which Mitchell-Innes is remembered – by chartalists at any rate – are his two long essays for The Banking Law Journal in 1913 and 1914. The essays are rather rambling and go off in many different directions; there’s also much overlap in what they cover. But for the most part, they consist of generalizations from then-new anthropological and historical findings on the credit and debt instruments of the ancient, medieval, and early modern worlds and their states.27See Alfred Mitchell-Innes, “What is Money,”The Banking Law Journal, May 1913, pp. 377–408 and “The Credit Theory of Money,”The Banking Law Journal, Vol. 31 (1914), Dec./Jan., pp. 151–168.

Mitchell-Innes traces a theory from this evidence which says that state money is but one type of credit money within a larger credit system upon which all commerce depends. Rather than the state money being the “real” money which the credit monies of private economic actors ultimately must get into from their “less real” money, they are each just as “real” as the next credit, in the sense that each represents a claim on purchasing power. Marketplaces are then primarily clearinghouses for debits and credits, and the government is a participant in them. States become debtors when they spend their credit money into existence. Other institutions, such as banks, do much the same thing when they spend their credit money into existence (ie, make loans).

Mitchell-Innes contributes a much more generalized account of money as a simple credit, one example of which is state-issued money. He reviews the anthropological evidence and finds there is a tendency for credit to be centrally-issued, but leaves open the question of whether or not states have an exclusive monopoly over its issuance. For example, he frequently notes examples of the conflict between state and non-state currency issuers in early modern European history:

From long before the fourteenth century in England and France (and I think, in all countries), there were in common use large quantities of private metal tokens against which the governments made constant war with little success. It was not indeed till well on in the nineteenth century that their use was suppressed in England and the United States. We are so accustomed to our present system of a government monopoly of coinage that we have come to regard it as one of the prime functions of government, and we firmly hold the doctrine that some catastrophe would occur if this monopoly were not maintained. History does not bear out this contention; and the reasons which led the medieval governments to make repeated attempts to establish their monopoly was in France at any rate not altogether parental care for the good of their subjects, but partly because they hoped by suppressing private tokens which were convenient and seemed generally (though not always) to have enjoyed the full confidence of the public, that the people would be forced by the necessity of having some instrument for retail commerce to make more general use of the government coins which from frequent “mutations” were not always popular…

This seems like a minor point, but it actually has some serious intellectual-historical importance. A century later, MMT’s neo-chartalism would often argue as if Knapp and Mitchell-Innes are basically saying the same thing. And indeed they have in common a notion of money as a circulating token, or chartal money. But in fact there are two rather distinct lineages within chartalism, and not just because Knapp and Mitchell-Innes seem to have written in total ignorance of each other.28If Knapp traced his lineage back to the Cameralist school of Prussian state officialdom, Mitchell-Innes’s lineage seems to go back to one Henry Dunning Macleod, a nineteenth-century disciple of Smith and Ricardo who had a strict supply-and-demand theory of prices that anticipated the rise of marginalism, but whose work on banking in a book called Theory of Credit (1889) is both more historically grounded and basically chartalist. The tradition seems to go even further back to proto-chartalists of an “anti-metallist” disposition such as Bishop George Berkeley, John Law, Pierre le Pesant the Sieur de Boisguilbert, and James Steuart. See Gonçalo L. Fonseca, “Henry Dunning Macleod, 1821-1902” on the History of Economic Thought Website. One of these traditions sees many sorts of currency-issuers as potentially important and many institutions being capable of creating and destroying money (the Credit Theorists of Money), while the other stipulates the primary importance of state currency-issuance due to its ultimate control over the unit of account and greater power of coercion (the State Theorists of Money). Neo-chartalism, as we’ll see, synthesizes the two through the notion of a Hierarchy of Money with state money at the top and bank money subordinated to it as a matter of course; but there are chartalist traditions which do not have this emphasis, such as the Circuitist tradition and its theory of endogenous bank money, that we’ll discuss later in this essay. Credit-theory chartalists have had a big influence on MMT, but they have been digested only with some difficulty, since their perspective cuts against some of the statist points of emphasis preferred by neo-chartalist theory and hints at holes that may exist in the chartalist framework as a whole.29In his history of chartalism, Ingham makes a similar distinction to ours between two distinct strands: he refers first to what he calls “credit theories,” and then notes “a second strand of heterodoxy comes from the ‘state theory of money’ that was developed by the German Historical School.” See The Nature of Money, pp. 38-39. Very occasionally, one can even catch a neo-chartalist admitting in print the distinction between Knapp and Mitchell-Innes. For example, here are Randall Wray and Stephanie Kelton (emphases ours): “Knapp’s German edition had preceded the Innes articles by nearly a decade, although there is no indication that Innes was familiar with Knapp’s work. So far as we know, the first explicit attempt to link the approaches [of Knapp and Mitchell-Innes] was in Wray (1998)…As the contributions to this present volume will make clear, there is an overlap – although not a simple one – between Knapp’s state money approach and Innes’s credit money approach that must have intrigued Keynes. However, the promising integration that may have sparked Keynes’s interest was lost in the watered-down version of Chartalism passed down by Josef Schumpeter.” See L. Randall Wray & Stephanie Bell [Kelton], “Introduction” in Wray (ed.), Credit and State Theories of Money: The Contributions of A. Mitchell-Innes (pp. 2-3).

Chartalism and the Keynesian Planners

By the early 1920s, chartalism had been initially theorized by Mitchell-Innes and Knapp, but while it sparked huge debates among academic theorists, it lacked attention from policymakers. Both Innes and Knapp were theorists par excellence – drawing on the historical record, they had taken what used to be mere intuitions about the nature of money from the point of view of its issuance and made a comprehensive framework out of it that could extend into further research – but they awaited their practitioners. We have already seen the grisly uses to which the Nazis placed Knapp in the 1930s. But both Knapp and Mitchell-Innes would also have an enormous and little-known impact on a very different sort of practitioner with a very different sort of politics. Chartalist ideas from both the credit and state theories were, it turns out, a key but often forgotten pillar of the thought of the eminent twentieth-century economist John Maynard Keynes. And through their influence on the subsequent generation of Keynesian economic planners formed in the crucible of the Great Depression, they played an enormous role in the construction of postwar social democracy in Europe and North America.

Keynes the Chartalist

Part of the reason this history has remained obscure is the difficulty of reconstructing its exact chronology. But here are a few key highlights.

Keynes seems to have become interested in alternative theories of money through an examination of the historical evidence. For initial reasons that remain unclear, he spent a good five or so years during the 1920s privately obsessing over the archeological literature concerning the Bronze Age Near East – the remotest antiquity that had been uncovered by the then-recent translation of cuneiform tablets out of Akkadian and Sumerian. Whatever may have sparked Keynes’s interest in the first place, his lasting concern is quite clear: this period is the origin not only of writing, agrarianism, and urbanism but also of the first monetary systems. And far from the metallist stories about barter on which he’d been weaned by neoclassical tutors, Keynes found a remarkably different story in the history of the Mesopotamian temples – money’s earliest origins were as an accounting system devised as a tool of economic planning by temple priests. This search for the anthropological and technical origins of money seems to have been exhausting. Keynes wrote in a letter to his wife Lydia that at times the pursuit was “purely absurd and quite useless” but that later he “…became absorbed to the point of frenzy”. He liked to refer to this period of his life as his Babylonian Madness. This is an experience with which we greatly sympathize.30See Geoffrey Ingham, “Babylonian Madness: on the Historical and Sociological Origins of Money” in John Smithin (ed.), What is Money?, pp 16-41. Routledge (1999). The evidence of our own Babylonian madness will become apparent in our upcoming essay examining the true origins of money in the Bronze Age Near East, titled “Meet the Mesopotamians.”

It’s possible that Keynes was set along this path by Mitchell-Innes. The eccentric diplomat did, after all, base much of his credit theory on the Mesopotamian evidence (among other things); and we know that Keynes read Mitchell-Innes due to a highly favorable review he wrote of the latter’s essays on money in 1914. Keynes calls the evidence Mitchell-Innes marshals for the thesis that credit precedes metal money as a means of payment by millennia “certainly interesting,” and he concludes the essay with a paean:

Mr. Innes’s development of this thesis is of unquestionable interest. It is difficult to check his assertions or to be certain that they do not contain some element of exaggeration. But the main historical conclusions which he seeks to drive home have, I think, much foundation, and have often been unduly neglected by writers excessively influenced by the “sound currency” dogmas of the mid-nineteenth century. Not only has it been held that only intrinsic-value money is “sound,” but an appeal to the history of currency has often been supposed to show that intrinsic-value money is the ancient and primitive ideal, from which only the wicked have fallen away. Mr. Innes has gone some way towards showing that such a history is quite mythical.31John Maynard Keynes, “Review of What is Money? by A. Mitchell Innes,” The Economic Journal Vol 24 No 95 (Sep 1914) pp 419-421. It’s also worth noting that this review may also be the beginning of Keynes’s mealy-mouthed, two-faced attitude towards chartalism. The overwhelming thrust of the review is positive; but he makes sure, near the start, to hedge his praise with a dutiful appeal to the metallist common sense of his time: “The fallacy – if I am right in thinking that this theory of the effect of credit is a fallacy – is a familiar one, and it will not be worth while to discuss it in this review. The distinctive value of the pamphlet arises from a different source, as indicated below, and the writer’s strength is on the historical, not on the theoretical, side.” This vague criticism is never followed up in the review, and it cuts against all of Keynes’s subsequent investment in studying and building on chartalism.

At about the same time, Keynes was taking a similarly healthy interest in Knapp’s state-theory chartalism as well. The very same year, he wrote a dual review of two recent books from Germany. The first was the Theory of Money and Credit (1912) by the Viennese aristocrat and Austrian School economist Ludwig Von Mises, an inveterate metallist and probably something like third runner-up for most famous licker of capitalist boots in economics. The second is Money and Capital by Friedrich Bendixen, a banker from Hamburg and an avowed disciple of Knapp who uses his book to argue for a version of the state theory of money. Hilariously, and with his characteristic mischievousness, Keynes politely dismisses Von Mises in a paragraph…then immediately follows this up by heaping enormous praise on the Hamburg banker and his chartalist theory. The final verdict? “Hamburg’s mind is not so clever as Vienna’s, but more comes of it.”32John Maynard Keynes, “Reviewed Works: Theorie des Geldes und der Umlaufsmittel. by Ludwig von Mises; Geld und Kapital. by Friedrich Bendixen,”The Economic Journal Vol. 24, No. 95 (Sep., 1914), pp. 417-419.

Nor is this the only Keynes-Knapp connection. Recent scholarship has also revealed a fact that long escaped Keynes scholarship: Keynes’s role in the first translation of Knapp’s State Theory of Money into English in 1924. In a preface to the English edition, Knapp talks about the insistence of the Royal Economic Society upon making the translation happen, and in that contexts gives special thanks to “”Messrs. Keynes and Bonar.” Thus Keynes had not only read Knapp’s followers and the man himself, but played a personal role in bringing his ideas to Britain as well.33See Dirk H. Ehnts, “Knapp’s State Theory of Money and its Reception in German Academic Discourse,” Institute for International Political Economy Berlin (2019), p. 3.

These influences – the credit theory of Mitchell-Innes, the state theory of Knapp, and the Babylonian Madness – all seem to have converged in Keynes’s highly influential Treatise on Money (1930), which contains his most explicit avowals of chartalism. Here he cites “Knapp’s chartalism – the doctrine that money is peculiarly a creation of the State” by name and approvingly, saying of money-creation that “[t]his right is claimed by all modern States and has been claimed for some four thousand years at least” – a clear reference to the Mesopotamia of his obsessions. Keynes’s chronology is a bit unclear, and it’s not entirely certain whether or to what extent he rejected metallist barter theories (indeed, this is perhaps intentionally left ambiguous), but the upshot for the present day is remarkably clear:

Thus the age of money had succeeded to [come after] the age of barter as soon as men had adopted a money of account. And the age of chartalist or State money was reached when the State claimed the right to declare what thing should answer as money to the current money of account – when it claimed the right not only to enforce the dictionary but also to write the dictionary. To-day all civilised money is, beyond the possibility of dispute, chartalist.34John Maynard Keynes, Treatise on Money (1930), p. 4.

But alas, Keynes was not always so clear in his statements. In a 1943 letter to fellow economist James Meade, Keynes indicates that he encountered chartalist ideas which he finds convincing, but worries about such a radical concept’s acceptance by the public:

I recently read an interesting article by [US chartalist economist Abba] Lerner on deficit budgeting…His argument is impeccable. But, heaven help anyone who tries to put it across to the plain man at this stage of the evolution of our ideas.35See “CW 2, Keynes to J.E. Meade (1943)” in John Maynard Keynes, The Essential Keynes (2015).

And indeed this reluctance to write about chartalist concepts explicitly would become a feature in Keynes’ most famous works, such as the General Theory of Employment, Interest, and Money (1936), where it goes unmentioned. The reasons for this obfuscation or ambiguity are unclear. Perhaps Keynes just hadn’t fully made up his mind on the subject; perhaps it was for fear of the public’s reaction to chartalist notions; or most concerningly (and perhaps most likely to us), he was worried about his peers’ perceptions and saving face within the profession, lest he be deemed a “crank” and exiled from the halls of power. 

Nonetheless, Keynes went on to publish somewhat lesser-known but still influential work deploying chartalist concepts in which he artfully sneaks them in through the back door, intellectually speaking. In How to Pay for the War (1940), Keynes offers British military planners his unsolicited advice on how to mobilize all resources in support of the war effort while maintaining stable prices – and despite the name of this book, he never once mentions levying taxes or issuing sovereign debt specifically to finance these activities. Rather, he offered up those policy tools as means to control credit and prices in a war-time economy that risked overheating as it went about the business of supporting allied troops during World War II. 

The quintessence of Keynes’ pragmatic chartalism is perhaps best summarized in the following passage from a radio broadcast he made on the BBC:

Why should we not set aside, let us say, £50 million a year for the next twenty years to add in every substantial city of the realm the dignity of an ancient university or a European capital to our local schools and their surroundings, to our local government and its offices, and above all perhaps, to provide a local centre of refreshment and entertainment with an ample theatre, a concert hall, a dance hall, a gallery, a British restaurant, canteens, cafes and so forth. Assuredly we can afford this and much more. Anything we can actually do we can afford. Once done, it is there. Nothing can take it from us … Yet these must be only the trimmings on the more solid, urgent and necessary outgoings on housing the people, on reconstructing industry and transport and on re-​planning the environment of our daily life. Not only shall we come to possess these excellent things. With a big programme carried out at a regulated pace we can hope to keep employment good for many years to come. We shall, in fact, have built our New Jerusalem out of the labour which in our former vain folly we were keeping unused and unhappy in enforced idleness.”36James Crotty. Keynes Against Capitalism: His Economic Case for Liberal Socialism. Routledge (2019). From Complete Works 27, p. 270 – quoted in Crotty, Keynes Against Capitalism, p.7

Reflecting on the likely biophysical limits of a wartime economy – of resource shortages, bottlenecks in supply chains, and lack of manpower – Keynes was able to offer valuable insights into the management of a full-employment, national effort to defeat Germany. 

Chartalist Planning in the US

Not all of the planners who adopted chartalist-inspired ideas early on became ideologically chartalist. Some, however, did – like Abba Lerner, whose work Keynes privately spoke highly of in his letters. Lerner introduced a version of Keynesianism called Functional Finance which emphasized that any proposed government policy should be evaluated on the likely effects the spending would have on the economy, and never on the basis of budget deficits or the national debt, which are things he regarded as essentially self-imposed constraints:

The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money, and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.”37Abba P. Lerner, “Functional Finance and the Federal Debt,” Social Research 10:51 (1943)

Lerner accepted Knapp’s earlier State Theory of Money as the basis for receivability of money in his theory. The reason the state has so much fiscal space to conduct its fiscal policy, according to Lerner and numerous other chartalism-influenced economists of his day, was due to the tax-receivability of state money as the primary driver of the value of the currency.38Abba P. Lerner “Money as a Creature of the State.” The American Economic Review 37, no. 2 (1947) “The modern state can make anything it chooses generally acceptable as money…. It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.” However, although it goes beyond the scope of this essay and cannot be treated in detail, it is urgently worth noting that Lerner, who did so much to popularize chartalist ideas in the 1940s, would abandon them or at least betray them in the 1970s. At the height of the neoliberal turn in 1977, Lerner would write a bizarre essay extolling the virtues of market mechanisms, and proposing, among other things, a deranged scheme to suppress incomes using what amounts to cap-and-trade vouchers but for wages. See Abba Lerner, “From Pre-Keynes to Post-Keynes,” Social Research, 44(3) (1977) 387-415.

Still other economists of Lerner’s era publicly deployed chartalist concepts in support of policy-making, sometimes in much starker terms. For instance, Beardsley Ruml, who served as chairman of the New York Federal Reserve from 1941-46, dropped any pretense of budget-balancing at the federal level for its own sake when he wrote the essay Taxes for Revenue are Obsolete that due to the the creation of the federal reserve system and the elimination of domestic convertibility of dollars into gold at any fixed rate, the government had no need for taxes in the conventional sense of being used to pay the government’s US dollar-denominated bills. He then poses the follow-up question: what exactly are taxes for if not to finance spending. To wit:

What are taxes really for? Federal Taxes can be made to serve four principal purposes of a social and economic character. These purposes are: 1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar; 2. To express public policy in the distribution of wealth and income, as in the case of the progressive income and estate taxes; 3. To express public policy in subsidizing or in penalizing various industries and economic groups; 4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.39B. Ruml, “Taxes for Revenue are Obsolete” American Affairs, Vol XIII no. 1, p35 (1946).

Each of the authors mentioned above were keenly focused on the question of how to mobilize the economy towards the war effort, and how to sustain such a mobilization without the economy overheating (ie. without inflation). They knew that the federal government was going to have to play a critical role in deficit-spending to fully utilize the productive forces of what would essentially become a centrally planned economy; for this is much what every major belligerent nation of World War II became. They followed Keynes’s advice from How to Pay for the War. Strategic biophysical resources were produced in amounts and sold at prices fixed by planners in Washington. And the level of government control over the economy didn’t stop at decrees over price and quantity – in some cases, companies who could not or would not comply with the centrally-administered prices or production quotas were simply taken over by the government.40J.W. Mason, “The Economy During Wartime” Dissent, Fall 2017 p139; a review of Mark R. Wilson, Destructive Creation: American Business and the Winning of World War II (2017). FDR coined the term arsenal of democracy to describe his administration’s vision for the US supplying an unending quantity of war materials to its allies who were actively fighting Germany.41At the time he first mentioned it on a radio broadcast, the US had not yet entered World War II, and FDR also envisioned keeping the US out while still actively supplying its allies And it wasn’t only the sheer output which won the war for the allies, though that obviously proved a necessary factor. It was the capacity for strategic planning, logistics, weapons, engineering, and the monetary system, which proved decisive. Some of the economist planners during the War period would go on to fame for their chartalism-inspired contributions.42Marriner Eccles, who was Fed Chairman 1934-48 and later had the main Fed building named after him, once gave an address saying, “…I am interested in the money system merely as a means or instrument to that end…make our profit-motive economy and our democratic system function so that it will produce and distribute more and more of the real wealth which our people want in the form of clothing, shelter, food, and the luxuries as well as the necessaries of life.” See Marriner S. Eccles, “Address Responding to Criticisms Leveled by Orval Adams” (1938), from the Marriner S. Eccles Papers 1910-1985 in the FRASER database, University of Utah. 

But if chartalist ideas were apparently on the march in the 40s and associated with all these rockstar names within the discipline of economics, such as Keynes, then why is it the case these ideas aren’t popular now? Indeed, why have we taken you through this intellectual history in the first place? Surely one of the reasons for it is because the ideas fell out of favor, but why?

The Twilight of Chartalism

The Purge

In the 1930s, the total failure of economic theory to predict or help recover from the crash made new ideas necessary. It was this failure which led to the rise of Keynes and his ideas in the first place – and eventually to the adoption of some chartalist ideas by economists in the federal government who needed actionable plans for how to pay for war mobilizations, largely through Keynes’ influence. Keynes acknowledged privately how important he thought chartalism was but, ever the pragmatic statesman, chose to thread the needle to meet the exigent political circumstances of his time – publicly toeing the party line of neoclassical economic theories of money, while at the same time quietly introducing the dangerous new (old) idea that money was a tool for central planning and biophysical resource management. His most famous works, such as the General Theory and the Treatise on Money, were a mix of attempts to stay within the confines of neoclassical economics at the abstract level, and of truly radical subversions of the dominant neoclassical orthodoxy on a deeper level. 

The efforts of the Keynesian planners – not only in the realm of theory but in actual practice as wartime state administrators – helped promote the idea that economics as a profession had something tangible to contribute to war planning. This rehabilitated economists in the eyes of elected officials and their appointed technocrats during the 1940s, continuing for a number of years after the war into the 1950s. The discipline was saved! 

However, the prestige the economists gained from their performance during the war ended up becoming the seeds of the profession’s downfall – at least as far as intellectual honesty is concerned. Having secured relatively cushier jobs within the upper echelons of the post-war social democracy, rather than having a reckoning with the parts of neoclassical economic theory which Keynes tried hard to critique on the sly, the planner-economists refused to truly challenge the prewar consensus that had failed so utterly in the face of the Depression. Instead – outrageously and obscenely – they restored neoclassical theory to its glorious central position in the discipline. 

Part of this restoration meant domesticating Keynes: sweeping the more radical parts of his work under the rug while taking the places where he paid lip service to neoclassical economics and thoroughly integrating them into the New Keynesian synthesis. This bastardized and bowdlerized Keynesianism led ultimately to people like Paul Krugman and Joseph Stiglitz, and it is what most people think of when they think of Keynesians today.43The neoclassical synthesis combined some of Keynes’ insights with some of the model assumptions from neoclassical economics to produce a new model that essentially yielded Keynesian “unemployment equilibrium” solutions in the short run (for neoclassicals, a “market imperfection”), while in the long run in a “perfect” system arriving at the standard market-clearing, “full-employment” (read: minimal, inflation-non-accelerating unemployment) neoclassical result. This model was formalized during the immediate post-war years by a group of mostly American economists. One modern application of the model is to suggest to policymakers and central banks that they can “steer” the economy with Keynesian-like interventions using monetary policy rather than fiscal policy. Yet it was precisely fiscal policy that was used so effectively during the War and was advocated for initially by Keynes, himself.

Rather unfortunately, the economics discipline did not stop at merely papering over earlier successful Keynesian fiscal interventions in order to build their New Keynesian Synthesis into the dominant force it became. During the emerging Cold War atmosphere of academic censorship in the 1950s, economics papers which attempted to build on the more radical core of Keynes’ General Theory had come under what we might call non-scientifically motivated scrutiny. Ideas such as the acknowledgement of involuntary unemployment as a widespread phenomenon and the use of federal deficit-spending on direct employment programs to curtail it faced disproportionate scrutiny, to name one example. 

Canadian economist Lori Tarshis, who had attended some of Keynes’ lectures at Cambridge, wrote an economics textbook which drew upon her notes as a student of Keynes. Rather than rolling out the New Keynesian Synthesis (of Keynesian involuntary unemployment as being merely a special case of the long run neoclassical scenario of maximal employment given perfectly elastic wages and prices) Tarshis released a textbook which was truer to the radical intentions of Keynes, and indeed grounded in its analysis to the observed reality of using federal deficit-spending to overcome unemployment and output gaps during the war. The reaction to her work from the establishment was chilling. Academic trustees derided it as a “socialist heresy.” William F Buckley in his book God and Man at Yale, attacked Tarshis’s analysis as “communist inspired.” In the context of the growing Red Scare, their meaning was easily interpreted by the economics elites, and Tarshis’ textbook was pulled from universities throughout North America and Europe. This was a central but little-known moment of the Red Scare, and it was just one of thousands of instances of what can only be described as an ideological purge of the economics profession – a purge which has lasted to the present day.44For Tarshis, see David Colander and Harry Landreth, “Political Influence on the Textbook Keynesian Revolution: God, Man, and Laurie Tarshis at Yale”. Middlebury College (1998). For a general account, see Frederic S. Lee, A History of Heterodox Economics: Challenging the Mainstream in the Twentieth Century. Routledge (2009).

Post-Keynesian Contributions to Chartalism

Despite all this, the more radical proponents of Keynes were eventually able to continue publishing. They became known as Post-Keynesians , which did not refer only to the fact it was economics done using Keynesian concepts after Keynes himself used them, but rather to a heterodox economics which incorporated the more radical concepts from Keynes instead of the neoclassical synthesis ideas. The Post-Keynesians made three major theoretical contributions to chartalist thought. 

Endogenous Money Theory

First, they developed the concept of endogenous money originally introduced formally by economist Knut Wicksell in his 1898 Interest and Prices.45Wicksell was explicitly a chartalist – he personally attended lectures by Knapp. See Dirk H. Ehnts, “Knapp’s State Theory of Money and its Reception in German Academic Discourse”. Institute for International Political Economy Berlin (2019). Endogenous money is essentially a more detailed elaboration of chartalism as a credit theory of money, a la Mitchell-Innes, and how that works operationally in modern economies. It describes how money is generated into existence by institutional actors through the act of making a loan, such as would be the case for banks or governments (though in principle, anyone or any institution). For example, Basil Moore’s endogenous money emphasized private endogenous money creation by banks in the form of deposits issued to borrowers through the act of lending; by keystroke, as it were. This is not only a theoretical matter. In fact, one of us works a day-job where he directly experiences the keystroking of money into existence in the form of bank deposits. Endogenous money is hugely important, since it is the theory which underlies the idea of the Pyramid of Money we explained to you above in our discussion of the dollar system.

Circuitism and Stock-Flow Consistent Modeling

Secondly, building on the insights of the endogenous money theory, some post-Keynesians created full-fledged mathematical models of the entire economy, called stock-flow consistent models.46By “stock”, we mean a pile of money, and by “flow” we mean an income stream which either goes into or out of said stock(s). When a model is said to be “stock-flow consistent”, what it means is the model can be completely described using only stocks and the flows which move between them, all denominated in a unit of account. Remember the phrase “follow the money?” Well, these people took it literally – they followed the flow of money from its birth in loans and government spending to its death in loan repayment and taxes, creating a map of all economic activity in monetary terms. We refer to this as the monetary circuit, and to this strand of Post-Keynesian economists as Circuitists. The Circuitist school includes economists such as Augusto Graziani, Wynne Godley, Marc Lavoie, Riccardo Bellofiore, and Riccardo Realfonzo. The early Circuitists were initially clustered geographically in Europe through the 70s, before expanding to a few heterodox American and Canadian university economics departments beginning in the early 80s. Circuitist contributions to economic modeling continue to this day and are widely accepted even beyond the heterodoxy. But the Circuitists have been called “the most heterodox troop under the post-Keynesian banner.” The Circuitists’ maps weren’t just illustrations: they had interesting consequences for theory.47For example, according to the mainstream theory, money is merely a “veil” over a “real” economy essentially composed of barter and using money as a mere intermediary or equivalent to facilitate it; furthermore, money is purely symbolic and has no direct effects on real economic activity, except inasmuch as the quantity of the overall quantity of money in the economy (the “money supply”) affects the price of money to create inflation (a notion known as the “quantity theory of money”). Thus a central bank can, in principle, control the money supply to prevent that inflation, injecting money when it’s lacking and taking it out when it’s excessive. The Circuitists’ maps, however, irrefutably demonstrate the chartalist insight that money isn’t something saved up by banks to lend later but is created by bank loans; and money, far from being little more than a mere “sterile” symbol or a veil disguising what’s ultimately barter, is a sort of lubricant without which the machinery of production grinds to a halt. Far from only an excessive money supply being important, the far more common problem is for there not to be enough lubricant to sustain necessary levels of economic activity; and indeed, not only the actual presence of money but the mere possibility of credit issuance dynamically causes feedback into the rest of the economy. To take a common example, the price of capital assets — like houses, securities, financial assets, etc. — partially reflects the availability of credit: how easily money can be obtained in order to purchase an asset can actually drive effective demand (create more customers backed by cash) for that asset. Since the pricing of such assets often has to do with “animal spirits,” or the expectations of the price-setter about how the whole economy is doing, this increase in customers can drive asset prices up. But the causality runs almost directly in reverse of the mainstream theory’s quantity theory of money! The “availability of credit” is not the mainstream story’s “money supply” — it’s the willingness of banks to loan, not the amount of money already in existence. The money only comes into existence after a loan is made. Stock-flow consistent models clearly demonstrate this. Therefore, the quantity of money in the economy overall (if one could even measure it consistently) cannot be what affects asset prices. The mechanisms controlling asset prices must be different, and conform to the endogenous money theory’s expectations, as demonstrated by the Circuitist maps of real-world money flows. For more on endogenous money/Circuitism vs. mainstream theory, see Geoffrey Ingham The nature of money. Cambridge (GB): Polity Press (2004). pp. 53-54. For an explanation of how capital asset pricing is expectations-driven, see Hyman Minsky, “The Financial Instability Hypothesis: an Interpretation of Keynes and an Alternative to ‘Standard’ Theory” Nebraska Journal of Economics and Business 16, no. 1 (1977): 5–16, as well as the discussion in Steve Keen, “The Nonlinear Economics of Debt Deflation”. In W. Barnett, C. Chiarella, S. Keen, R. Marks, & H. Schnabl (Eds.), Commerce, Complexity, and Evolution: Topics in Economics, Finance, Marketing, and Management: Proceedings of the Twelfth International Symposium in Economic Theory and Econometrics (International Symposia in Economic Theory and Econometrics, pp. 83-110). Cambridge: Cambridge University Press (2000). In its most radical forms, Circuitism is explicitly chartalist (“money is a debt which circulates freely,” one writes) and has fundamentally demolished a core idea of mainstream economics: “a number of these French and Italian writers entirely reject the analytical framework of a supply and demand for money.”48Quotes from Ingham, The Nature of Money pp. 54-55. If you want to see an example of these stock-flow consistent models — the Circuitist maps — in action, there is no more thorough introduction than Marc Lavoie and Wynne Godley’s Monetary Economics: An Integrated Approach to Credit, Money, Income, Production, and Wealth (2012). This magisterial account reads like they’re building the model in front of you chapter by chapter. Unfortunately, it is also an extremely difficult text. Beginners are advised to start instead with Chapters 4, 6, and 33 of Bill Mitchell, L. Randall Wray, and Martin Watts Macroeconomics, Bloomsbury (2019).

The Job Guarantee

Thirdly, post-Keynesians considered it of extreme importance to achieve true full-employment, namely, to use macroeconomic policy tools such as deficit spending towards direct employment programs to create the conditions where everyone looking for a job can find one. In The Role of Employment Policy, Hyman Minsky advocates for an “Employer of Last Resort” (ELR) program – in modern terms, a job guarantee. “Work should be made available to all those who want to work at the national minimum wage,” Minsky writes, “…to qualify for employment at these terms, all that would be necessary would be to register at a local employment office.”

The analytic model of labor economists from Minsky’s day was one of choosing a favored industrial sector to develop and then having the government deficit-spend on it to spur the private sector to create relatively higher income manufacturing jobs. Unfortunately, the number of jobs directly created by this industrial policy were relatively few, leaving many unemployed. Government planners believed that this targeted approach would supposedly lead to the knock-on creation of lower-wage jobs that support the work of the higher-wage jobs. Minsky looked at data that told him this “trickle down” effect didn’t in fact take place. Thus, he instead proposed that the government just create the low-wage jobs directly, scooping up “unskilled” and unemployed workers through a job guarantee and then creating a “bubble-up” effect as their labor itself trains them and filters them up into higher-wage positions.

Minsky consistently stressed that the ELR should “take workers as they are”, meaning the direct employment programs should not have any experience requirements at all, so as to maximize the number of newly employed workers. The existence of an ELR would, Minsky argued, effectively determine the prevailing minimum wage, since by definition with the ELR all who are actively looking for a job would have one, and the lowest wage jobs would be whatever jobs the ELR was supplying to the labor market (without which support the minimum wage is effectively zero, Minsky said). Outside of achieving true full-employment (meaning, 0% involuntary unemployment), Minsky was also keen to sell the ELR idea as a tool governments could use to augment their economies’ biophysical capacity. It may be necessary for the government to sell the idea of the ELR politically to the tax-paying public, Minsky argues, by focusing a significant portion of the ELR work upon public works projects which provide material benefits to a sufficiently wide swath of society. 

The ELR proposal – which arguably depends upon the chartalist belief that the true limits on government spending are biophysical, such that the government can and should employ the entire population in biophysically productive production – would prove highly influential on Modern Monetary Theory (MMT) in later years. The MMTers would not only add to this theory, but rebrand Minsky’s proposal as the now-famous job guarantee.49Minsky had an undeniable chartalist influence through Abba Lerner and Functional Finance, which demonstrably influenced his early work. However, whether or not he is consistently chartalist is a matter of nervous controversy. To name one of many examples,in an essay discussing an industrial shift away from militarism towards more socially useful production Minsky once wrote, “In the US, military spending, on both weapons and manpower, supported workers whose costs were not covered by incomes based upon fees or services. Taxes and government borrowing raised the funds for these expenditures” (“Full Employment and Economic Growth as an Objective of Economic Policy: Some Thoughts on the Limits of Capitalism” in Jan Kregel & Paul Davidson (eds.), Employment, Growth, and Finance: Economic Reality, and Economic Growth [1994]). The idea that the government needs to raise funds; that it can only do so through tax revenue or borrowing; that there is only so many of these funds to go around; and that therefore the government must first raise through taxing and borrowing the funds it needs to do military or welfare spending, are all clearly postulates of the loanable funds theory — in other words, as anti-chartalist as you can get. The myth of a chartalist Minsky is very important to the self-image of the MMTers; very occasionally, they sometimes debate among themselves whether it’s actually true. For a view that Minsky abandoned chartalism in favor of false neoclassical notions, see Bill Mitchell’s essay “The provenance of the Job Guarantee concept in MMT ” on his blog. For a view that Minsky never abandoned chartalism but that his interpretation of it simply grew “more nuanced”, see L. Randall Wray, “Functional Finance: A comparison of the evolution of the positions of Hyman Minsky and Abba Lerner”. Levy Institute Working Paper no. 900 (2018). 


But each idea and every trend we’ve discussed in the section above was a minor perturbation in a vast academic sea. As time went on, chartalist ideas – which less and less were even recognized by anybody under that label – became the province of obscure professors working as dissidents within the field of economics in lonely outposts far outside the spotlight. This period would last until the very last decade of the twentieth century; until recently, any casual observer might simply have concluded that chartalism, if it had ever really mattered at all, was dead. 

All this would change dramatically in the 1990s, although its effects have only just been felt in the last years of the 2010s. It turns out that chartalism had a far longer half-life than anybody expected – and through a bizarre series of events, this lost theory of money would even in its decay play a role in shaping the world. ~

Strange Matters is a cooperative magazine of new and unconventional thinking in economics, politics, and culture.