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Chartalism

Chartalism is a heterodox theory of money, originated by German economist Georg Friedrich Knapp in his 1905 work The State Theory of Money, positing that the nature and value of currency derive fundamentally from the state's sovereign authority to designate it as legal tender, particularly for discharging obligations like taxes to the government.^[1]^[2] Under this view, known as the "chartal" (token-based) approach, money functions as a situational counterclaim validated by the issuing authority rather than any intrinsic commodity value, with the state's demand for its own tokens creating the primary driver of acceptability in an economy.^[2] This contrasts sharply with metallism, the orthodox commodity theory tracing money's evolution from barter mediums like gold or silver, where value stems from scarcity and private acceptance independent of state fiat.^[1] Knapp's framework emphasized the state's role in defining the monetary unit of account and issuing "chartal means of payment"—tokens accepted due to their prescribed form and legal enforceability—arguing that historical monetary systems, even those with metallic standards, operated under state validation to organize economic activity.^[2] Chartalism gained renewed attention in the late 20th century as a foundational element of Modern Monetary Theory (MMT), which extends its logic to contend that sovereign currency issuers face no inherent financial constraint on spending, limited instead by real resource availability and inflation risks, thereby prioritizing tax-driven currency demand to control prices.^[1] Proponents highlight its explanatory power for fiat systems post-gold standard, where government monopoly issuance supplants commodity backing, but empirical assessments of money's origins remain contested, with anthropological evidence suggesting pre-state private credit and commodity exchanges often preceded centralized token systems, challenging pure chartalist causality.^[3] The theory's defining characteristic lies in its causal emphasis on public sector imposition over spontaneous market evolution, influencing debates on fiscal policy by implying governments can leverage monetary sovereignty for full employment without traditional borrowing limits, though this has sparked controversies over sustainability.^[1] Critics, drawing from historical episodes like Weimar Germany or Zimbabwe, argue that unchecked state money creation via deficit monetization erodes value through inflation, as the mechanism for repaying public debt often devolves into debasing the currency rather than genuine revenue generation, underscoring risks when tax discipline fails to anchor demand.^[3] While Knapp's original formulation avoided prescriptive policy excesses, later neo-chartalist extensions have faced scrutiny for underemphasizing political incentives toward fiscal profligacy, with mainstream economic analysis favoring hybrid views that integrate market dynamics and institutional constraints over state-centric determinism.^[2]

Core Principles

Definition and Fundamental Tenets

Chartalism, also known as the state theory of money, posits that money originates as a creature of the state, with its value deriving primarily from the sovereign's imposition of legal tender status and the requirement that public obligations, such as taxes, be discharged exclusively in that designated currency.^[1] This framework rejects commodity-based explanations of money's emergence, arguing instead that state decree creates systemic demand, rendering the currency acceptable for private transactions as a secondary effect.^[4] The theory emphasizes the state's monopoly on defining the unit of account and enforcing its use through fiscal mechanisms, independent of intrinsic material properties or spontaneous barter evolution.^[5] A core tenet, articulated in Georg Friedrich Knapp's The State Theory of Money (1905), is that money's chartal nature—its token-like quality imposed by law—precedes and enables widespread circulation, as the government's acceptance of tokens for tax liabilities generates the initial and sustained demand necessary for value stability.^[6] Under this view, fiat money functions not because of market-derived scarcity or utility, but due to the causal primacy of sovereign power in mandating liability settlements, which compels economic agents to acquire and hold the currency to meet state-imposed burdens.^[7] This state-centric mechanism distinguishes Chartalism from metallist theories, where value inheres in the money commodity itself, by asserting that legal enforceability, rather than physical attributes, underpins monetary efficacy.^[5] Fundamental to Chartalism is the principle that without the state's ongoing fiscal reinforcement—through tax demands payable solely in its currency—money would lack enduring purchasing power, as voluntary acceptance alone proves insufficient for systemic stability.^[4] This top-down imposition creates a unidirectional causal chain: state nomination of the monetary standard leads to obligatory use, fostering acceptability that extends beyond public payments to broader exchange networks.^[1] Proponents contend this explains the persistence of fiat systems, where value accrues from enforced universality rather than redeemability or inherent worth.^[5]

Mechanisms of State-Imposed Value

In Chartalism, the state imposes value on its fiat currency primarily by mandating that tax liabilities be discharged exclusively in units of that currency, thereby generating a sustained demand as citizens and firms seek to acquire it to fulfill their obligations and avoid penalties such as asset seizure or imprisonment. This mechanism establishes the currency's acceptability not through intrinsic worth or market exchange alone, but via the coercive power of the sovereign to define and enforce public receivability at its pay offices.^[8]^[9] Legal tender laws complement this by requiring private debts to be settled in the designated currency, with courts upholding non-acceptance as invalid, further embedding its role in contractual settlements.^[10] The state operationalizes this demand by first injecting currency into the private sector through expenditures that exceed tax revenues—creating budget deficits which credit bank reserves and deposit accounts, supplying the net financial assets available for private holdings. Subsequent taxation drains a portion of this money supply, preventing indefinite expansion while reinforcing the currency's velocity as agents anticipate future liabilities. Without such state-enforced obligations, fiat tokens would lack the systemic compulsion to circulate widely, as their supply could proliferate unchecked absent the destruction effect of tax payments.^[5]^[11] Empirical instances from colonial administrations demonstrate this dynamic, as European powers levied taxes payable solely in metropolitan or issued currencies to supplant barter and compel economic integration. For example, in early 20th-century British Africa, direct taxes like poll and hut levies—introduced post-World War I and often set at levels equivalent to 10-20% of average incomes—required payment in sterling or local notes, prompting populations to enter cash economies via labor or commodity sales, thereby anchoring the currencies' value despite initial resistance.^[12]^[8] Penalties for default, including forced labor or hut demolition, ensured compliance, illustrating how taxation not only drives adoption but enforces scarcity through obligatory redemption at state offices.^[9]

Historical Development

Early Influences and Pre-Knapp Ideas

In ancient Mesopotamia, around 3000 BCE, temple and palace administrations developed accounting systems using the silver shekel as a standardized unit of account for debts, rents, and obligations, where these public institutions accepted silver payments for dues, generating demand for the medium through enforced institutional acceptance rather than spontaneous barter or commodity exchange.^[13]^[14] This palatial credit system predated widespread coined money and illustrated proto-state mechanisms for imposing monetary value, as temples and palaces—functioning as central economic authorities—recorded credits and debits in administrative tablets, often redeemable in silver or barley at fixed ratios.^[15] The Roman Empire provided another empirical precedent, where from the late Republic onward (circa 1st century BCE), provincial taxes and tributes were mandated payable in the state's denarius silver coin, minted at imperial facilities like the Temple of Juno Moneta, ensuring circulation by linking fiscal obligations to official currency and overriding local barter or foreign media.^[13] This policy, intensified under emperors like Augustus after 27 BCE, created de facto demand for Roman coinage across diverse regions, as non-compliance risked penalties, even as debasements periodically reduced silver content without eroding acceptability for state payments.^[16] During the absolutist era in Europe (16th–18th centuries), monarchs in states like France and Spain enforced coinage monopolies, requiring taxes, seigniorage fees, and feudal tributes in royal mintings while demonetizing competitors, which compelled subjects to acquire and value these coins primarily through sovereign decree rather than market preference alone.^[17] For instance, French kings from Francis I (r. 1515–1547) onward centralized minting and mandated payments in écus or livres tournois, using fiscal exactions to circulate debased alloys, a practice that sustained currency viability amid recurrent debasements totaling over 50% in silver content by the 17th century.^[18] Such impositions echoed earlier medieval precedents, like England's 11th-century Danegeld levies collected in coin to fund tributes, where royal edicts converted in-kind goods into monetized obligations. These mechanisms demonstrated rulers leveraging compulsory acceptance to establish circulating media, independent of intrinsic worth. Intellectual precursors emerged in 19th-century Germany within the Historical School of economics, where thinkers like Karl Knies in his 1853 Geld und Kredit rejected strict commodity theories, portraying money as a state-sanctioned social institution whose validity derived from legal and communal enforcement rather than inherent exchangeability.^[19] Knies argued that money's function in capitalist economies relied on public confidence bolstered by state credit and regulation, influencing later formulations by highlighting historical contingencies over universal metallic standards.^[20] Contemporaries such as Wilhelm Roscher similarly examined money's evolution through national contexts, underscoring governmental roles in stabilizing currencies amid industrial transitions, though without formalizing tax-driven demand as a core tenet.^[21]

Georg Friedrich Knapp's Formulation

Georg Friedrich Knapp, a German economist and statistician, articulated the foundational principles of Chartalism in his 1905 treatise Der Staatstheorie des Geldes (The State Theory of Money), asserting that money derives its essence not from commodity properties but from state ordinance and legal validity.^[7] ^[6] Knapp contended that "money is a creature of law," emphasizing its role as an abstract unit imposed by sovereign authority to facilitate public accounting and fiscal obligations, rather than emerging spontaneously from barter or intrinsic value.^[7] ^[5] This formulation positioned the state as the originator of money's acceptability, sustained through mechanisms like taxation and public payments that compel its use.^[6] Central to Knapp's argument was the concept of chartal money, a term he derived from the Greek chartē (token or paper), to denote non-commodity tokens validated solely by their form and state decree, irrespective of material composition.^[7] ^[6] He defined money precisely as a "chartal means of payment," where validity stems from legal recognition rather than metallic content or market exchange, enabling the state to manage currency through its bookkeeping and debt structures.^[7] ^[22] Knapp classified monies genetically into primitive, imageless, and imaging types, all unified by state-imposed properties that prioritize nominal units over physical substance.^[5] This abstract approach allowed for paper or token currencies to function equivalently to gold in state-led economies, provided fiscal credibility endured.^[6] Knapp explicitly rejected metallism—the prevailing view that money's value inheres in its commodity backing, such as gold or silver—as historically inaccurate and theoretically flawed, arguing it conflated money's form with its substance.^[5] ^[1] Under metallism, currency acceptance allegedly depended on redeemability for metal, but Knapp countered that state fiat alone enforces circulation, as evidenced by inconvertible government notes that gain traction via tax liabilities.^[6] He maintained that even gold coins derive value from their stamped denomination, not bullion weight, underscoring the state's role in abstracting and imposing monetary units.^[7] This critique challenged the era's commodity-centric paradigms, positing instead that monetary stability hinges on institutional trust rather than reserves.^[5] Amid Imperial Germany's adherence to the gold standard since 1871, Knapp's work responded to ongoing debates over bimetallism, silver depreciation, and the rigidity of metallic standards, which exposed vulnerabilities in state finances during economic strains.^[23] ^[24] Subsequent editions of his book, up to the fourth in 1923, incorporated insights from World War I, where Germany's suspension of gold convertibility and issuance of paper marks illustrated his thesis: mark depreciation correlated with eroding state credibility and fiscal overextension, not merely quantity increases, validating chartal dependence on sovereign enforcement.^[6] ^[25] Knapp's framework thus provided analytical tools for understanding how state-imposed demand sustains currency amid convertibility crises, influencing interwar German monetary discourse.^[24]

Interwar and Postwar Evolution

During the interwar period, Chartalism faced significant scrutiny amid Germany's Weimar Republic hyperinflation of 1921–1923, where the Reichsbank issued vast quantities of Papiermarks to finance war reparations and fiscal deficits, reaching monthly inflation rates exceeding 29,500% by November 1923.^[26] Proponents of Knapp's state theory, such as Rudolf Hilferding, defended the framework by emphasizing that currency acceptance hinged on sustained state fiscal capacity, arguing the collapse stemmed from eroded tax enforcement and productive capacity rather than inherent flaws in fiat issuance.^[25] Critics, including Karl Helfferich, countered that unchecked money creation without commodity anchors undermined public confidence, highlighting limits to state-imposed value when issuance outpaced real economic backing.^[25] This episode tested Chartalism empirically, revealing that while taxes could drive initial demand, hyperpartisan deficits and reparative burdens—totaling 132 billion gold marks under the 1921 London Schedule—overwhelmed mechanisms, leading to velocity surges and barter resurgence.^[27] Post-World War II, the 1944 Bretton Woods Agreement imposed constraints on pure Chartalist principles through fixed exchange rates pegged to the U.S. dollar, which remained convertible to gold at $35 per ounce until 1971, thereby linking sovereign currencies to a commodity standard and limiting unilateral fiat expansion. The system's reliance on the dollar as a global reserve echoed Chartalist notions of state-backed trust, with the U.S. leveraging its fiscal sovereignty to underwrite international liquidity via deficits that financed reconstruction, yet gold convertibility tempered domestic money creation to maintain convertibility pressures.^[28] This hybrid regime sustained stability for major economies, with U.S. holdings of foreign dollar claims rising from $13.8 billion in 1950 to $42.5 billion by 1969, but exposed tensions when redemption demands strained reserves, prompting adaptive policy shifts.^[29] The 1971 Nixon Shock, suspending dollar-gold convertibility on August 15, dismantled Bretton Woods convertibility and ushered in floating exchange rates, enabling sovereign states to pursue deficit financing without commodity restraints and aligning more closely with Chartalist emphasis on tax-driven domestic demand for fiat currencies.^[30] U.S. money supply (M1) expanded from $228 billion in 1971 to over $400 billion by 1975 amid unleashed fiscal flexibility, facilitating policy responses to stagflation without immediate gold outflows.^[29] This shift revived interest in state-centric monetary theories by demonstrating sustained fiat viability when anchored by credible taxation and institutional trust, though early postwar applications remained hybrid until full delinking.^[5]

Theoretical Comparisons

Contrast with Metallist and Commodity Theories

Metallism, a foundational perspective in monetary theory, asserts that money originates from commodities possessing intrinsic value, such as precious metals, which naturally emerge as media of exchange due to their utility and scarcity independent of state intervention.^[31] Proponents like Aristotle viewed money primarily as a measure of exchange value derived from materials like metals, which served as a conventional but commodity-based standard rather than a purely nominal token.^[32] Similarly, [John Locke](/page/John Locke) treated money as a commodity akin to silver, whose value stemmed from its role in facilitating trade and whose quantity influenced prices, with the state acting mainly as a guarantor of purity and weight rather than the source of value.^[33] In this framework, the evolution from barter to commodity money precedes any sovereign role, emphasizing market-driven selection over imposed acceptance. Commodity theories extend this logic beyond metals to any widely marketable good, positing money's spontaneous emergence from individual exchanges amid barter inefficiencies. Carl Menger's 1892 analysis in "On the Origins of Money" describes how, through decentralized decision-making, participants converge on the most saleable commodities—such as gold or cattle—as general media of exchange, without requiring centralized authority.^[34] This contrasts sharply with Chartalism, which inverts the causality by arguing that states create money's value ex nihilo through fiscal mechanisms like tax obligations, rendering prior commodity-based markets unnecessary or illusory.^[35] Chartalists, following Georg Friedrich Knapp, dismiss metallist origins as ahistorical, claiming token currencies (charta) gain acceptance solely via sovereign decree, absent intrinsic worth.^[31] Empirical evidence challenges Chartalism's state-centric narrative, highlighting pre-state commodity uses and credit systems. Archaeological records indicate cowrie shells functioned as currency in African and Asian societies for millennia, often in decentralized trade networks predating formalized states, valued for portability and durability rather than fiscal imposition.^[36] Cattle served similarly as proto-money in pastoral economies, accumulating value through exchange without evident sovereign tokens.^[37] In ancient Mesopotamia, clay tokens and cuneiform tablets from circa 8000 BCE documented private debts and tallies for commodities like grain and livestock, suggesting credit and rudimentary exchange predated temple-issued standards around 3000 BCE.^[38] While some Mesopotamian accounting involved palatial oversight, the prevalence of non-state tallies underscores market origins over purely top-down imposition, complicating Chartalism's reversal of metallist causality.^[13] These findings prioritize observable exchange patterns, revealing debates over whether state demand amplified or supplanted emergent commodity functions.

Links to Keynesianism and Credit Theories

In his 1930 A Treatise on Money, John Maynard Keynes explicitly referenced Georg Friedrich Knapp's chartalist framework, asserting that "to-day all civilised money is, beyond the possibility of dispute, chartalist," thereby adopting the view of money as a state-imposed unit of account to underpin his theory of liquidity preference, while still incorporating commodity money influences in explaining money's role in uncertainty and interest rates.^[39] However, Keynes diverged from pure chartalism by emphasizing that the state's authority to designate money derives from its prior social acceptability rather than unilateral imposition, critiquing chartalist overemphasis on state fiat without market foundations.^[40] Keynes extended these chartalist borrowings in his 1936 The General Theory of Employment, Interest and Money to rationalize deficit spending as a tool for achieving full employment, positing that government expenditure could generate effective demand independently of balanced budgets, akin to chartalism's tax-driven demand mechanism, though his causal emphasis remained on investor psychology, animal spirits, and irreducible uncertainty rather than state taxation as the primary value anchor.^[41]^[5] Alfred Mitchell-Innes's credit theory, outlined in articles published in 1913 and 1914, aligned with and augmented chartalism by arguing that money emerges endogenously as a system of credits and debits—where every payment settles a debt with another credit—rejecting metallist origins and portraying state currency as just one hierarchical layer in a broader debt network.^[42] This formulation resonated with post-Keynesian thinkers, who drew on it alongside chartalism to develop endogenous money models, as seen in analyses of banking's role in credit expansion without exogenous commodity constraints.^[43]^[5]

Modern Extensions

Integration into Modern Monetary Theory

Modern Monetary Theory (MMT), formalized in the early 1990s, builds upon Chartalism's core assertion that the state imposes value on its currency through obligatory payments like taxes, extending this framework by integrating Abba Lerner's functional finance principles from 1943, which prioritize economic outcomes such as full employment over balanced budgets.^[44] This fusion emphasizes that monetarily sovereign governments—those issuing fiat currency without foreign debt pegs or gold standards—cannot involuntarily default on domestic obligations, as they create money via keystrokes in central bank reserves, shifting focus from solvency to real resource limits.^[5] Early MMT formulations, including Warren Mosler's 1993 Soft Currency Economics, reframed Chartalist tax-driven demand as a mechanism enabling deficit spending to inject net financial assets into the private sector. A central operational insight in MMT is that government spending logically precedes taxation: expenditures credit private bank accounts with newly created reserves, expanding the money supply, while taxes later drain excess reserves to curb inflationary pressures without "funding" the prior outlays.^[5] This sequence, detailed in Levy Economics Institute working papers from the late 1990s onward, underscores inflation as the binding constraint on fiscal expansion, arising from demand outstripping productive capacity rather than from debt accumulation or bond market pressures.^[45] Sectoral balances analysis, adapted from Wynne Godley's stock-flow consistent models, further refines this by identity: government deficits equal non-government surpluses, ensuring private sector net saving requires public dissaving in a closed economy.^[5] MMT diverges from classical Chartalism—focused primarily on state token imposition—by incorporating post-Keynesian endogenous money theory, wherein commercial bank lending drives money creation independently of base money, with the state currency serving as the unit of account and settlement medium. This endogeneity allows MMT to model credit expansion as amplifying state-driven monetary circuits, rather than subordinating banks entirely to fiscal authority.^[5] Policy-wise, MMT introduces tools like a permanent job guarantee program, where the state acts as employer of last resort at a fixed basic wage, to anchor price stability by buffering labor supply against economic cycles and enforcing a nominal wage floor, absent in Knapp's original formulations. These additions operationalize Chartalist logic within modern central banking, treating fiscal-monetary coordination as essential for demand management.^[44]

Contemporary Proponents and Policy Applications

L. Randall Wray, a professor at Bard College, has been a leading neo-chartalist thinker, extending Knapp's ideas in his 1998 book Understanding Modern Money: The Key to Full Employment and Price Stability, where he argues that state taxation creates demand for fiat currency, enabling sovereign governments to finance expenditures without solvency risks in their own unit of account.^[46] Warren Mosler, a hedge fund manager turned economist, contributed foundational insights in the 1990s through practical observations of currency-sovereign nations, positing in his 1995 paper Soft Currency Economics that governments issuing their own floating-rate currency face no inherent financial constraints beyond real resource availability, influencing early MMT formulations tied to chartalist principles. Stephanie Kelton, former chief economist for the U.S. Senate Budget Committee, popularized these views in her 2020 book The Deficit Myth, advocating deficit spending for priorities like green infrastructure without tax offsets, grounded in the chartalist claim that taxes drive currency acceptance rather than fund spending. Proponents apply chartalist logic to post-2008 fiscal experiments, citing Japan's experience from the 1990s onward, where persistent deficits pushed public debt to approximately 250% of GDP by 2023 amid near-zero inflation and interest rates, as evidence that tax-backed currency demand sustains high sovereign borrowing without default or monetary collapse in domestically denominated debt.^[47] The COVID-19 response in the U.S., involving over $5 trillion in federal stimulus from 2020 to 2022—financed via deficit spending without resorting to money printing or tax hikes—exemplifies chartalist assertions, as the Treasury issued obligations in dollars accepted for tax payments, averting insolvency while supporting demand amid lockdowns, though subsequent inflation rose to 9.1% in June 2022 due to supply disruptions rather than monetary mechanics alone.^[48] In policy debates, chartalist-influenced arguments surfaced in U.S. Congress from 2021 to 2023, particularly around the $1.9 trillion American Rescue Plan and $1.2 trillion Infrastructure Investment and Jobs Act, where advocates like Kelton pushed for unconstrained fiscal outlays to address unemployment and climate goals, emphasizing currency sovereignty over balanced budgets; however, these faced pushback for overlooking capacity constraints, as evidenced by labor shortages inflating costs in construction and energy sectors.^[49] Mosler has proposed real-world applications like payroll tax holidays to boost spending power without inflationary pressure, tested conceptually in his analyses of sovereign issuers, though empirical adoption remains limited to ad hoc measures rather than systemic chartalist redesign.

Empirical Evaluation

Cases Supporting Tax-Driven Currency Demand

In the American colonies, provincial governments issued fiat paper money known as bills of credit during the 18th century to finance expenditures, with demand enforced through tax redemption requirements. Virginia, for example, emitted over £1 million in such notes between 1755 and 1774, designating specific taxes—such as levies on land, imports, and licenses—payable exclusively in the notes to redeem them periodically, which sustained circulation and limited depreciation.^[50] Similarly, Pennsylvania's controlled emissions of paper currency, accepted for provincial taxes, maintained its value at or above par with specie, as observed by Adam Smith, because the tax liability created ongoing public demand exceeding supply when issuance was moderated.^[9] These cases illustrate how earmarked tax obligations backed colonial fiat, preventing collapse despite absence of metallic convertibility. In British colonial Africa, hut and poll taxes introduced in the late 19th century compelled monetization of subsistence economies by mandating cash payments, thereby generating demand for imperial fiat currencies like the British silver shilling or local notes. In Sierra Leone, the 1898 hut tax of 5 shillings per dwelling—payable only in coin or approved paper—prompted widespread resistance but ultimately forced households into wage labor on plantations or trades to acquire currency, with collections rising from £10,000 in 1899 to over £50,000 by 1905 as adoption spread.^[51] Administrators in regions like Natal and East Africa explicitly designed these levies, starting around 1849 in Natal and expanding empire-wide by the 1890s, to integrate Africans into the cash economy, with tax receipts directly funding colonial administration and reinforcing currency circulation.^[52] This fiscal imposition transitioned barter-based societies toward fiat usage without initial metallic backing.

Instances of Fiat Instability and Hyperinflation

In the Weimar Republic, hyperinflation erupted in 1923 as the government resorted to printing Reichsmarks to finance massive fiscal deficits, primarily driven by World War I reparations under the Treaty of Versailles and the economic fallout from the French-Belgian occupation of the Ruhr region in January 1923.^[53] This monetization outstripped any tax-driven demand for the currency, with monthly inflation rates surpassing 50% by August 1922—marking the onset of hyperinflation per standard definitions—and accelerating to extreme levels, including peaks where prices doubled multiple times per month by November 1923.^[54]^[55] The Reichsmark's exchange rate against the U.S. dollar deteriorated from approximately 17,000 marks per dollar in early 1923 to over 4.2 trillion by November, eroding public confidence in the state's fiat money despite obligatory tax acceptance in marks, as velocity of circulation surged and real economic output stagnated.^[56] Venezuela's hyperinflation in the late 2010s provides a contemporary example of fiat instability, where chronic fiscal deficits—financed through central bank money printing amid declining oil revenues—overwhelmed the bolívar's tax-backed demand despite government mandates requiring taxes in local currency.^[57] Annual inflation peaked at an estimated 1,698,488% in 2018 according to International Monetary Fund data, triggered by excessive liquidity injections to fund social spending and subsidies under the Maduro administration from 2013 onward.^[58] Even as the state imposed bolívar-denominated obligations, production shortfalls, import dependencies, and eroding credibility led to widespread dollarization and a breakdown in the currency's role as a store of value, with money supply growth far exceeding nominal GDP.^[59] Argentina's repeated currency crises illustrate correlations between unchecked fiscal deficits and fiat debasement, as seen in the 2001 collapse and the 2018 monetary turmoil. In 2001, abandonment of the peso-dollar peg amid rising public debt and deficits resulted in a sharp devaluation, with annual inflation reaching 41% in 2002 following the default on $102 billion in sovereign debt.^[60] By 2018, persistent overspending and money supply expansion drove the peso to lose over 50% of its value against the dollar in the first eight months, contributing to annual inflation of 47.6%.^[61]^[62] These episodes highlight how deficit monetization eroded currency stability, prompting capital flight and informal dollar use despite legal tender laws and tax requirements in pesos, underscoring limits to fiscal expansion without productivity gains.^[63]

Criticisms and Debates

Theoretical Flaws and Logical Challenges

Chartalism's assertion that the state's imposition of tax obligations in its own tokens is the primordial source of money's demand encounters fundamental difficulties in accounting for monetary phenomena predating organized states or occurring independently of them. For instance, Carl Menger's analysis demonstrates that money arises endogenously from individual exchanges in barter economies, where the most marketable commodity—such as cattle among pastoral societies or salt in others—naturally evolves into a general medium of exchange to mitigate the inconveniences of direct barter, without reliance on sovereign decree. This process, rooted in subjective value and spontaneous order, explains mediums like the Yap island stone money, which functioned as a store of value and unit of account in a stateless Micronesian society through customary acceptance rather than fiscal compulsion. Similarly, private banknotes issued by Scottish joint-stock banks during the 18th and early 19th centuries circulated widely as money without central state backing or tax enforcement, deriving acceptability from redeemability and market reputation. Chartalism's exogenous state-centric model thus struggles to derive these instances from first principles, as it presupposes an authoritative leviathan capable of dictating currency use prior to explaining the foundational acceptance of any token. A core logical circularity undermines the theory's causal structure: the state must first possess a valued currency to demand taxes payable in it, yet Chartalism inverts this by claiming tax liability imparts value ex nihilo, begging the question of how subjects acquire the means to comply without preexisting exchange value or alternative incentives.^[64] This assumes the state's coercive power as a primitive, unexamined given, rather than deriving it from individuals' voluntary recognition of utility in the token—precisely the endogenous mechanism Menger elucidates, where salability in exchange precedes any institutional overlay. Critics highlight that such circularity evades the "bootstrapping" problem: without intrinsic or market-driven demand, the state's edict alone cannot generate the real resources needed for initial tax payments, rendering the value-origin claim tautological rather than explanatory.^[65] Furthermore, Chartalism falters in addressing why, if tax-driven demand suffices for exclusive currency acceptance, alternative monies persist in regimes with enforced fiscal obligations, such as black markets favoring foreign exchange or barter equivalents despite penalties.^[66] In theory, universal tax liability should erode demand for non-official tokens, yet individuals routinely prefer dollars, gold, or cryptocurrencies in high-tax environments for their superior liquidity or store-of-value properties, indicating that acceptability stems from broader network effects and subjective utilities beyond state mandates.^[67] This persistence reveals an overlooked multiplicity in money's functions—medium of exchange, unit of account, and store of value—where fiscal enforcement influences but does not monopolize the latter two, as Menger's framework anticipates through emergent salability rather than imposed necessity.^[68]

Practical Risks to Fiscal Discipline

Chartalist theory, by emphasizing a sovereign government's ability to issue its own currency without default risk in nominal terms, risks promoting fiscal illusion among policymakers, where the true economic costs of deficit spending—such as resource allocation distortions and future inflationary burdens—are understated. This perspective encourages expansive fiscal programs, as elected officials may prioritize short-term political gains over long-term sustainability, exploiting the perceived absence of hard budget constraints inherent in commodity-backed systems like the gold standard, which automatically limited money creation and spending through supply discipline.^[69]^[47] In the United States, the federal debt-to-GDP ratio rose from approximately 64% in 2008 to 122% by 2024, coinciding with repeated fiscal expansions justified partly by modern interpretations of chartalist ideas within frameworks like Modern Monetary Theory, which downplay solvency concerns in favor of inflation as the primary limit. The post-2020 fiscal response, including stimulus measures totaling around $5 trillion, correlated with a sharp inflation spike, as the Consumer Price Index increased 9.1% year-over-year by June 2022—the highest in four decades—demonstrating the challenges in calibrating spending to real resource capacity without triggering demand-pull pressures.^[70]^[71]^[72] Such practices undermine market signals and fiscal restraint, potentially crowding out private investment by sustaining high public borrowing that absorbs savings or anticipates future tax hikes, while fostering voter and institutional dependency on government outlays. Critics argue this moral hazard erodes incentives for efficient resource use, as the lack of automatic checks—unlike under fixed exchange or commodity standards—allows deficits to persist until inflationary feedbacks become severe, often after significant economic damage.^[73]^[47]

Proponent Responses and Unresolved Questions

Chartalist proponents, particularly those associated with Modern Monetary Theory (MMT), counter criticisms of inflationary risks by asserting that inflation arises from real resource constraints and supply bottlenecks rather than nominal money creation alone. They argue that sovereign currency issuers can expand fiscal spending up to the point of full resource utilization without inherent inflationary pressure, as excess demand can be managed through taxation or bond issuance to drain reserves, emphasizing sector balances over simplistic monetary aggregates.^[45] In response to concerns over fiscal indiscipline, figures like L. Randall Wray maintain that government spending is constrained by inflation linked to productive capacity, not budget deficits, allowing for automatic stabilizers without needing balanced budgets ex ante.^[74] Regarding historical hyperinflations, chartalists rebut claims of causation from unchecked money printing by highlighting exogenous shocks such as wars, colonial extractions, or breakdowns in production and distribution. For instance, analyses of cases like Weimar Germany or Zimbabwe attribute acceleration not to tax-driven demand but to wartime destruction, sanctions, and supply collapses that severed fiscal-monetary linkages, insisting that stable taxation and institutional trust prevent such outcomes in sovereign contexts.^[75] Proponents like Wray emphasize that these episodes involved failures in real economy coordination, not the chartalist mechanism itself, and advocate job guarantees as buffers against demand-pull inflation.^[74] Persistent unresolved questions include the absence of rigorous formal models isolating tax-driven currency demand from alternative drivers like market acceptance or network effects in money's evolution. While descriptive accounts abound, econometric tests proving causality—such as vector autoregressions linking tax obligations to velocity or acceptance rates—remain underdeveloped, leaving room for metallist or credit-theoretic alternatives.^[76] Compatibility with endogenous money theories, where banks create deposits via loans independent of state initiation, sparks debate; MMT extends chartalism to incorporate horizontal money creation but faces scrutiny over whether state vertical money truly anchors the system amid private credit dynamics. A 2025 analysis in the Australian Journal of Agricultural and Resource Economics reviews these tensions, concluding that while reconcilable in operational terms, theoretical primacy of state imposition over bank-led expansion lacks consensus.^[77] Emerging debates over cryptocurrencies frame them as potential "private chartalisms" via decentralized ledgers mimicking tax-like incentives through scarcity rules or smart contracts, challenging state monopolies on unit-of-account imposition. Critics invoke Bitcoin's fixed supply as eroding fiat demand, yet chartalist advocates retort that states retain coercive superiority through legal tender laws, tax enforcement in national currency, and regulatory bans, preserving public money's hierarchical role over private alternatives.^[78] ^[79] These tensions highlight unresolved empirical gaps in how digital innovations might dilute tax-driven demand without full state displacement.^[80]

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There also had been considerable debate about 'Chartalism' – the idea that money derived its acceptance by legal means – in the German academic literature.
[8]
[PDF] Chartalism and the tax-driven approach to money - Rete MMT
As it will be discussed later, Chartalists recognize that the money monopolist need only set one price to anchor the value of its currency.
[9]
[PDF] Money and Taxes: The Chartalist Approach - EconStor
In the Chartalist approach, money is a state creation, defined by what the state accepts at public pay offices, mainly for taxes. Taxes create demand for money.
[10]
Money Creation and the State: A Critical Assessment of Chartalism
begs closer scrutiny. At the core of the chartalist approach is the ability of the state to impose and enforce tax liabilities. Accordingly, ...
[11]
In the spirit of debate … – William Mitchell – Modern Monetary Theory
Sep 27, 2009 · However, government, as the issuer of the currency, must spend first (credit private bank accounts) before it can subsequently tax (debit ...
[12]
[PDF] World War I and the Rise of Direct Taxation in Colonial Africa
The forced payment of these taxes in currency also motivated. Africans facing a high tax burden to work for landholders. As such, the direct tax on Africans.<|separator|>
[13]
Palatial Credit: Origins of Money and Interest | Michael Hudson
Apr 6, 2018 · The word “money” derives from Rome's Temple of Juno Moneta, where silver and gold coinage was struck during the Punic Wars, mainly to arm ...
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[PDF] MONEY HAS evolved from three traditions, each representing
Indeed, already in Mesopotamia we find the essential characteristics cited by. Georg Friedrich Knapp's State Theory of Money (1905) in place. Although at that ...Missing: driven | Show results with:driven
[15]
[PDF] Money, Prices and Market in the Ancient Near East
Abstract. This paper is about the role of money in the Ancient Near Eastern economy. Several aspects are treated. 1. The nature of the market.
[16]
Coinage and State Expenditure: The Reign of Claudius AD 41-54
Claudius must have found the treasury in a fairly healthy state. He gradually abolished most of the taxes, and refunded some of the money collected, even though ...
[17]
Money and Coinage in Late Medieval and Early Modern Europe
Chronically debased silver coinages would be highly suspect abroad and thus not readily acceptable; and at best their value in foreign trade was limited to ...Missing: tribute | Show results with:tribute
[18]
a New Fiscal Pact in the Early Modern Papal States
Central authority established its exclusive right to impose tributes while local powers were granted a large degree of autonomy in selecting fiscal ...
[19]
Danegeld - Wikipedia
Danegeld was a tax raised to pay tribute or protection money to the Viking raiders to save a land from being ravaged. It was called the geld or gafol in ...
[20]
(PDF) The German Historical School on Monetary Calculation and ...
Apr 27, 2023 · To sum up, Knies tried to understand the role that the institution of money plays in capitalism. As part of his analysis, he demonstrated the ...<|separator|>
[21]
German Historical School - The History of Economic Thought Website
The German Historical School burst into existence in the mid-19th Century, partly as a reaction to the growing laissez faire ideas spreading in Europe at ...
[22]
The German historical school on monetary calculation and the ...
May 3, 2023 · The German historical school on monetary calculation and the feasibility of socialism - Volume 19 Issue 5.
[23]
[PDF] THE STATE THEORY OF MONEY - Wikimedia Commons
Such pieces are called Chartal means of payment, or money. The validity is independent of the contents of the pieces. Law proceeds from the State; money is ...
[24]
Knapp's 'State Theory of Money' and its reception in German
Mar 8, 2019 · There also had been considerable debate about "Chartalism" - the idea that money derived its acceptance by legal means - in the German academic ...Missing: Staatstheorie | Show results with:Staatstheorie
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(PDF) Knapp's The State Theory of Money and its reception in ...
Mar 19, 2019 · Abstract. In 1905, Georg Friedrich Knapp published The State Theory of Money in his native German, claiming that money is a “creature of law” ...Missing: Staatstheorie | Show results with:Staatstheorie
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[PDF] Karl Helfferich and Rudolf Hilferding on Georg Friedrich Knapp's ...
The monetary ideas of Georg Friedrich Knapp have recently resurfaced in the context of the. Modern Monetary Theory whose representatives see themselves in his ...Missing: Staatstheorie | Show results with:Staatstheorie<|separator|>
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Weimar's Money Deluge - Federal Reserve Bank of Richmond
The Weimar Republic's hyperinflation, when printing presses were turning out currency so fast that stores sought retail clerks with banking experience.
[28]
Monetary Explanations of the Weimar Republic's Hyperinflation - jstor
Contemporary analyses of the Weimar hyperinflation, by Hahn, Bortkiewicz, and Mises, have been inadequately appreciated by earlier commentators.
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State Money and the Real World: Or Chartalism and Its Discontents
Income taxes were o casionally raised in times of war, and the tax rate was very low (e.g., late as 1870 the British tax revenue was only 8.7 percent of gross ...Missing: core | Show results with:core
[30]
Nixon Ends Convertibility of U.S. Dollars to Gold and Announces ...
President Richard Nixon's actions in 1971 to end dollar convertibility to gold and implement wage/price controls were intended to address the international ...Missing: Chartalism | Show results with:Chartalism
[31]
Nixon and the End of the Bretton Woods System, 1971–1973
Nixon announced his New Economic Policy, a program “to create a new prosperity without war.” Known colloquially as the “Nixon shock,” the initiative marked ...Missing: Chartalism | Show results with:Chartalism
[32]
Metallism vs Chartalism
Chartalism is a term derived from the Latin word 'charta' meaning a ticket or token. Chartal money is the token for value, while metallist money is the thing of ...
[33]
Aristotle, Schumpeter, and the Metalist Tradition - jstor
affirming that money is always and everywhere made from material that has a significant use value in its own right. necessity of the metal-money connection. ...
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John Locke: Mercantilist? - Econlib
May 1, 2023 · Locke was a mercantilist in the sense of favoring an excess of exports of consumable commodities over imports of consumable commodities.
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On the Origins of Money | Mises Institute
Individuals decide what the most marketable good is for use as a medium of exchange. “Man himself is the beginning and the end of every economy,” Menger wrote, ...
[36]
[PDF] Working Paper 231 - Levy Economics Institute of Bard College
To this end, Chartalist theory is concerned with the social and historical origins of money and, unlike the Metallist's vision, provides a non-market-based ...Missing: Metallism | Show results with:Metallism
[37]
10000 years of economy - Cowry shells, a form of currency
The cowry shell was used as a means of payment and regarded as a symbol of wealth and power. This monetary usage continued until the 20th century.Missing: empirical evidence commodity states cattle
[38]
[PDF] Its Origins, Development, Debasement, and Prospects - AIER
Until very recently, commodities valuable in their own right have served as money. Why have some commodities, but not others, been selected by traders as ...
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Prof. Goetzmann Discusses Finance Practices in Mesopotamia
May 5, 2023 · The earliest transaction records pre-date writing systems and go as far back as an estimated 8000 BCE. The system involved the use of clay ...
[40]
[PDF] John Maynard Keynes - A TREATISE ON MONEY - Free
It is when this stage in the evolution of money has been reached that Knapp's chartalism—the doctrine that money is peculiarly a creation of the State—is ...
[41]
Not So Modern Monetary Theory | Institute for New Economic Thinking
Oct 31, 2019 · In his Treatise of Money, Keynes (1930) observed that Chartalism ignores the fact that the state gives itself the right to rule that money ...
[42]
[PDF] Money, Credit and the State: Keynes, Hawtrey and Chartalism )
4). Chartalism, or the state theory of money, which is a view that regards the establishment of. money by the state as the nature of money and emphasizes the ...
[43]
[PDF] The Credit Theory of Money - School of Cooperative Individualism
Innes says that modern governments have conspired to raise the price of gold, but in this he errs. No legislation of the present time fixes the price of gold or ...
[44]
[PDF] The Contributions of Knapp and Innes to the Chartalist Theory of ...
Jan 24, 2024 · Based on the chartalist approach, Knapp proposes a genetic classification of money based on two main properties of means of payment: (i) ...
[45]
[PDF] Working Paper No. 900 - Functional Finance: A Comparison of the ...
Lerner's (1943, 1947) version was called the “functional finance” and “money as a creature of the state” approach—the first of these concerned budgetary policy ...
[46]
[PDF] Modern Money Theory 101: A Reply to Critics
MMT rejects the traditional trade-off between inflation and unemployment, and does not rely on economic growth and fine-tuning to reach full employment.
[47]
The Neo-Chartalist Approach to Money by L. Randall Wray :: SSRN
Jan 28, 2014 · Recent extensions to the Chartalist approach have been made by Post Keynesians, such as Knapp, Innes, and Lerner. As a result, the neo- ...Missing: contemporary | Show results with:contemporary
[48]
The Weakness of Modern Monetary Theory | National Affairs
MMT derives from a heterodox theory known as "chartalism," which emerged during the early 20th century as a rebuttal to the mainstream prevailing theory of ...
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The Anatomy of the $2 Trillion COVID-19 Stimulus Bill
Mar 30, 2020 · The act became the largest economic stimulus bill in modern history, more than doubling the stimulus act passed in 2009 during the Financial Crisis.
[50]
Stephanie Kelton and MMT: Understanding the deficit "myth" | LGT
Sep 12, 2024 · It all began in 1905, when the German economist Georg Friedrich Knapp founded the "chartalism" school of monetary economics, which argues ...
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[PDF] Colonial Virginia's Paper Money Regime, 1755-1774
After 1756, Virginia's notes paid no interest. They were, in effect, zero-coupon bonds. The typical method of tax-redemption was to set net new taxes to redeem ...
[52]
Hut Tax War - The Story of Africa| BBC World Service
The imposition of a tax on individual property in 1898 was the final straw for Temne and Mende chiefs who had seen a big increase in British intervention in ...
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The Hut Tax System in Colonial Natal 1849–1898
The Hut Tax. a form of property tax, was the system of revenue collection imposed upon the African inhabitants of Natal by the British colonial authorities ...
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[PDF] The Debt-Inflation Channel of the German Hyperinflation
May 27, 2023 · In theory, unexpected inflation can thus increase economic activity via a debt-inflation channel that can operate even when prices and wages ...
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[PDF] Modern Hyper- and High Inflations | MIT Economics
2. Cagan defined a hyperinflation as beginning in the month inflation first exceeds 50 per- cent (per month) and as ending in the month before the monthly ...
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[PDF] Monetary Policy - NYU Stern
• 1922 inflation peaks at 3.35 million percent per month. • 1923 fiscal-monetary reform: 1 'gold' mark = 1012 paper marks. 37. European hyperinflations. Country.
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1920s Hyperinflation in Germany and Bank Notes - Spurlock Museum
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[PDF] Hyperinflation and Seignorage in Venezuela - Mercatus Center
11 The underlying intuition here suggests that while higher rates of inflation may increase inflation tax revenues, they can also result in declining holdings ...
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[PDF] Inflation Targeting Venezuela's Hyperinflation
Consequently, the government triggered a vicious cycle: as prices soared, it printed more money to fund spending, resulting in one of the most severe episodes ...
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What caused hyperinflation in Venezuela: a rare blend of public ...
Feb 5, 2019 · As prices rose, the government printed more money to pay its bills. This cycle is what causes hyperinflation. Playing the currency market.
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Argentina crisis and recovery - Economics Help
Jun 18, 2012 · Leaving the currency peg, led to a huge devaluation in the Argentinian currency. From 1 Argentina Peso = 1 US Dollar. By 2002, the currency fell ...
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[PDF] Monetary policy challenges over two decades: a view from Argentina
Inflation accelerated to 47.6% in 2018 and 53.8% in 2019. From April 2018 ... The preceding review shows that sustainable growth and low inflation remain.<|control11|><|separator|>
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On Argentina's Currency Crisis of 2018 - SciELO Colombia
The country's persistent fiscal deficit also drove up demand for imports and contributed to a widening current account deficit.
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Argentina under a new government: what are the big economic ...
May 8, 2024 · The deep-rooted cause of Argentina's economic distress and chronic inflation is persistent public overspending financed by money creation.
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Menger vs. Chartalism on the Origins of Money: Theory and History
The dissertation begins by rebutting the Chartalist criticism that Menger's theory of money cannot explain credit existing before money. The second chapter is ...
[66]
Money Creation and the State : A Critical Assessment of Chartalism
The article discusses various issues related to money creation and the state. Chartalists believe that attempts at separating the central bank's and the ...
[67]
Black markets in foreign exchange: Origins, nature, and implications in
Mar 1, 1985 · This paper anlayzes the role of the International Financial Corporation (IFC) in promoting economic development in developing countries with the private sector.
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Fiat Money and Chartalism: Why MMT Is Wrong - Mises Institute
Jun 12, 2025 · Joshua Mawhorter joins us to talk about how the fiat-money theories of Modern Monetary Theory and chartalism aren't supported by the historical
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a contribution to the Chartalist critique of Menger's theories of value ...
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Fiscal Illusion and Deficit Spending | Cato at Liberty Blog
Dec 14, 2022 · Americans are under a fiscal illusion. High and persistent deficits and debt pass a large share of the cost of government spending to future generations.<|control11|><|separator|>
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United States Gross Federal Debt to GDP - Trading Economics
Government Debt to GDP in the United States averaged 66.38 percent of GDP from 1940 until 2024, reaching an all time high of 126.30 percent of GDP in 2020 and ...<|separator|>
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Where $5 Trillion in Pandemic Stimulus Money Went
Mar 11, 2022 · Roughly $5 trillion went to households, mom-and-pop shops, restaurants, airlines, hospitals, local governments, schools and other institutions ...
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Consumer prices up 9.1 percent over the year ended June 2022 ...
Jul 18, 2022 · The 9.1-percent increase in the all items index was the largest 12-month increase since the 12-month period ending November 1981.
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[PDF] Deficits Do Matter: A Review of Modern Monetary Theory
Dec 19, 2024 · In MMT, there is no difference in the inflation risk of deficit spending arising from different funding options, since the government is not ...
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Money and Inflation by L. Randall Wray - SSRN
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[PDF] Seven Replies to the Critiques of Modern Money Theory
Wars, political instabilities, technical problems, errors in setting up a monetary system, and ignorance have led to major monetary instability as the public ...<|separator|>
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Mainstream Macroeconomics and Modern Monetary Theory
Sep 6, 2018 · It is unfortunate, in our view, that many MMT texts begin with discussions of endogenous money, chartalism, and the mechanics of government ...
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Endogenous money and Chartalism: Are they compatible?
Abstract. The endogenous money approach has a long history and development, but the proponents of Modern. Monetary Theory point out that it can be extended ...
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Bitcoin Obliterates 'The State Theory Of Money' - Forbes
Apr 3, 2013 · The recent bitcoin piece from Karl Denninger raises some issues that warrant consideration from bitcoin economists.<|separator|>
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Private Cryptocurrencies versus Central Bank Digital Currency ...
Chartalism includes the concept of legal tender. This refers to money issued by the government (coins) or the central bank (banknotes, reserves, now also CBDC).
[81]
[PDF] The digital euro - maintaining the autonomy of the monetary system
Mar 20, 2025 · The state theory of money or "chartalism” emphasises the role of the state in declaring what constitutes legal tender and its capacity to ...