Crank at the Financial Times

There is an article in the Financial Times by John Kay who in attempting to disprove the chartalist explanation of state money by example gives an illustration fully consistent with it. The article is entitled “Money, like hat-wearing, depends on convention, not laws”. You will need a subscription to view the article, which would not be the wisest expenditure of money you’ll ever make!

The Chartalist argument adopted by Modern Monetary Theorists is that the government is able to create a demand for its own money by imposing a lump-sum tax obligation – e.g. a property tax – on the non-government. The imposition of such a tax ensures that people in the non-government need to get hold of the government’s money to the extent necessary to meet their tax obligations. They could do so by selling goods or services, including their own labor services, to the government in exchange for the government’s money, or by transacting with others in the non-government who had previously transacted with the government.

This, according to Modern Monetary Theory, is sufficient to ensure the non-government, in aggregate, will transact with the government enough to enable the government to transfer some goods and services from the private to public domain.

It ultimately would not matter if in its other activities the non-government transacted in a different money in preference to the government’s money, although for many reasons (e.g. convenience) it usually will use the government’s money when the tax basis is operative. As long as the non-government abides by the tax laws, it will demand the government’s money to the extent required to facilitate the government’s transfer of some goods and services to the public domain.

John Kay writes:

A theory called chartalism, which sounds cranky, or modern monetary theory, which sounds better, argues that money derives its value from the willingness of governments to make payments and accept taxes in it. But this is easily refuted. Suppose the Scottish government would only accept payment in highland cows. Then there would be an active trade in highland cows, to meet tax payments, but people would continue to take their banknotes – English pounds, euros, or US dollars, as Tesco preferred – not their cattle to the superstores. The ingenious folk at RBS would quickly create tradeable highland cattle certificates. The only cows you would see would be those grazing outside the Scottish parliament in the fields rented by RBS. (Emphasis added.)

Kay concedes the point in the bold part of the passage. The non-government will transact in the government’s money to the extent necessary to meet its tax obligation. This is all that is required for the government to transfer the desired level of resources from the private to public domain.

So Kay thinks chartalism sounds cranky, yet inadvertently agrees with it. I suspected there might be cranks at the Financial Times.

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Value of the Currency

Resistance to the Chartalist View of State Money