Chartalism: Definition, Origin, and Economic Impact

What is chartalism?

Chartalism, a non-mainstream monetary theory, delves into the impact of government policies on the origin and value of money. Coined by German economist Georg Friedrich Knapp, chartalism challenges traditional views on money.

Understanding chartalism

Chartalism challenges mainstream money theories by proposing that money’s value is not intrinsic but is bestowed by the government. Knapp, in his 1905 book “The State Theory of Money,” argued that money is a creation of law. The term “chartalism” itself is derived from the Latin word “charta,” meaning ticket or token—items accepted as payment without intrinsic value.

Unlike mainstream theories linking money to commodities, chartalism contends that governments define money’s value by fiat. This contrasts with the prevailing gold standard, where national currencies were tied to gold. Knapp asserted that governments, as ultimate authorities, could declare anything as money and compel its use through legal tender laws.

During Knapp’s time, the gold standard dominated, and paper money could be exchanged for specified gold quantities. Chartalism emerged as a critique of “metallism,” arguing that the state, not market dynamics, determines money’s acceptance.

Chartalism’s impact in the 20th century was significant, influencing economic theories like Keynesian economics and Monetarism. Today, virtually all money is chartalist fiat money, issued by governments and lacking intrinsic value.

Chartalism vs. neo-chartalism

Building on Knapp’s ideas, Modern Monetary Theory (MMT) proponents, known as neo-chartalists, argue that governments can print money without relying on taxes or borrowing. MMT posits that governments, as currency issuers, can meet their spending needs independently.

This theory challenges the conventional system where banks create most money through fractional reserve lending. While MMT offers economic flexibility, the real impact on inflation remains a crucial consideration.

Cryptocurrency and chartalism

In recent years, cryptocurrencies like Bitcoin have emerged as potential challengers to chartalism. Unlike traditional currencies, cryptocurrencies operate independently of governments. However, their limited legal tender status confines their use primarily to speculative markets.

The rise of cryptocurrencies questions the foundation of chartalism. If these market-based currencies gain broader acceptance, they could challenge existing monetary systems, emphasizing the desire for alternative systems free from government influence.

Frequently asked questions

Is chartalism widely accepted in economic circles?

While chartalism was once considered non-mainstream, its principles have influenced economic theories and policies, gaining acceptance over time.

How does chartalism impact government policies?

Chartalism suggests that governments play a central role in determining the value of money. It implies that governments have the authority to define and enforce the use of currency through legal tender laws.

Can chartalism coexist with other monetary theories?

Chartalism often coexists with other theories, and its principles have been integrated into broader economic frameworks like Keynesian economics and Modern Monetary Theory (MMT).

What challenges does chartalism face in the era of digital currencies?

The rise of digital currencies, particularly cryptocurrencies, challenges chartalism’s traditional view. The decentralized nature of these currencies questions the need for government control in determining money’s value.