More on Cranks at the Financial Times

It is a reflection on how silly the public debate has become when economists as patently unfamiliar with Modern Monetary Theory as John Kay get a free pass to characterize the chartal explanation of state money as a crank theory, without justification, in a prominent and supposedly serious publication such as the Financial Times. The chartal or tax basis of money is not only recognized by Modern Monetary Theorists, but in the history of economic thought by such notables as Keynes, Say, Mill and Adam Smith. So Kay has dismissed these economists as cranks as well.

Kay wrote:

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.

So Modern Monetary Theorists, by implication, are cranks renamed.

Here is Adam Smith on the tax basis of state money:

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 on the will of the prince. (Smith, 1776, Wealth of Nations, p. 312.)

Say noted:

In the first place, a paper, wherewith debts can be legally, though fraudulently, discharged, derives a kind of value from that single circumstance. Moreover, the paper-money may be made efficient to discharge the perpetually recurring claims of public taxation. Sometimes a tariff or maximum of price is established; which, indeed, soon extinguishes the production of the commodities affected by it, but gives to the paper-money a portion of the value of those actually in existence. (Say, 1964 [1880], A Treatise on Political Economy, p.280.)

John Stuart Mill:

… governments began to think that it would be a happy device if they could appropriate to themselves this benefit, free from the condition to which individuals issuing such paper substitutes for money were subject, of giving, when required, for the sign, the thing signified. They determined to try whether they could not emancipate themselves from this unpleasant obligation, and make a piece of paper issued by them pass for a pound, by merely calling it a pound, and consenting to receive it in payment of the taxes. And such is the influence of almost all established governments, that they have generally succeeded in attaining this object: I believe I might say they have always succeeded for a time, and the power has only been lost to them after they had compromised it by the most flagrant abuse. (Mill, 1848, Principles of Political Economy, pp.542-3.)

Compare Mill’s viewpoint with that of a Modern Monetary Theorist:

Because monetary policy is accommodative and fiscal policy is discretionary, Chartalism assigns the responsibility for maintaining the value of the currency to the latter. It was already shown that taxes impart value to government money. As Innes stressed: ‘A dollar of money is a dollar, not because of the material of which it is made, but because of the dollar of tax which is imposed to redeem it’ (1914: p. 165). But he also argued that ‘the more government money there is in circulation, the poorer we are’ (ibid.: p. 161). In other words, if government money in circulation far exceeds the total tax liability, the value of the currency will fall. So it is not only the requirement to pay taxes, but also the difficulty of obtaining that which is necessary for payment of taxes, that give money its value. (Tcherneva, 2006, ‘Chartalism and the tax-driven approach to money’, in Arestis and Sawyer, eds., Handbook of Alternative Monetary Economics, p.80.)

Keynes suggested that money has been chartal for at least four thousand years:

The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time – when, that is to say it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. 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 fully realized. . . . To-day all civilized money is, beyond the possibility of dispute, Chartalist. (Keynes, 1930, A Treatise on Money, pp. 4–5.)

If Kay is to be taken seriously, there have been an awful lot of influential cranks in the history of economic thought. Or maybe they aren’t the cranks.

Relevant Book Chapter

The examples in this post are drawn from a good book chapter by Pavlina Tcherneva.

Chartalism and the tax-driven approach to money

It makes for more informative reading than is on offer at the Financial Times.


7 thoughts on “More on Cranks at the Financial Times

  1. All very silly indeed.

    I think the whole passionate discussion over the JG, which prompted Cullen, Beo and Mike to “leave” the MMT fold, has created some unfortunate side affects. Now we have former MMTers attacking many of the base assertions of chartalism in a straw man fashion.

    Ive never seen anyone argue that extreme coercion by a state can make a currency valuable in and of itself. Of course there is a line which must not be crossed when a state currency is being managed. There is no argument here, but the notion that we all “chose” the US dollar from a menu of currency options is absurd. It was a creation of the US govt, and the US govt has for the most part done its part to keep our currency valuable, the feelings of monetary cranks like Ron Paul not withstanding, It has been mostly the private banking systems antics that have caused the financial crises in our times, not govt fiscal policies, although it can certainly be argued that banks are largely owning the govt.

    Yes,when chartalism is explained at its most basic level, there is a moment of “Yuck, that sounds too authoriatrian, we are free willed creatures”, unfortunately modern neuroscience seems to be pointing to the idea that “free will” in and of itself is an illusion too.

    Some of us humans dont like reality

  2. Maybe the following comment is appropriate…

    Physics got an astounding success as a science because of the engineering accomplishments it enabled.

    That success mired many economists to fashion (macro)”economics” as physics.

    Yet, there is a fundamental problem. As a science, physics discourses about the behavior of “things”,ie, entities plausibly assumed devoid of deliberation and responsibility.

    The wannabe science of economics must discourse about humans. Plausibly, humans are not devoid of deliberation and responsibility.

    So, let us suppose that “things” would behave as humans. And one would ask Newton about the attractive behavior of bodies. I assume his answer would not be the classical:

    “Two bodies attract themselves with a force directly proportional to their masses and inversely proportional to the square of their distance.”

    But rather:

    “It all depends on the previous political decisions they have made.”

  3. Great post Peter. Just one thing: the old debate between chartalists and metallists is not exactly the same thing as the debate between the tax-driven theory and alternatives.

    A chartal money system can be based on government regulation of payment contracts of many kinds, not just the payments to the government. If people make legally binding contracts for payment in dollars, and the government enforces such contracts through the courts and law enforcement system, and the government determines what sort of thing counts as answering to the description “dollar”when it enters into these contracts, and then even has a monopoly on the production of the things that legally constitute dollars, then that’s a chartal money system.

    I think Keynes’s comments are invoking this broader conception of chartalism, while Smith, Say and Mill are specifically referencing the role of tax payments.

    I also think some of the recent discussion by Cullen has been vague as to whether what is being criticized is chartalism broadly construed, or the tax-driven money theory more specifically.

  4. Kay’s cow example is very poorly thought-out indeed. Think it through. Of all the money in private hands at any particular time, a very sizable proportion of it is designated for the discharge of tax obligations in the near term. So suppose the government stopped accepting the government-issued currency in payment of taxes. Then everybody would suddenly find themselves with massive amounts of newly-disposable monetary income on their hands, as the government tax drain that continually withdraws money from the private sector would be stopped up. Massive inflation would result.

    Suppose also that the government stopped supporting the government-issued currency altogether, not just by eliminating the tax obligations, but by discontinuing the process of providing and managing the supply of reserves through the central banking system. Then sure, the currency in existence already would survive for a time through the sheer force of habit and convention. But eventually there would be a financial crisis, things would go haywire. People would create debts denominated in ye olde government money. As alwasy tends to happen, the structure of these debts would become overleveraged and fragile, while at the same time the government was no longer supplying additional reserves as the economy grew. Eventually there would be a deflationary collapse. Since the government couldn’t step in to provide liquidity, there would be a rapid flight from the old money into whatever new system any bank is willing to set up.

    Long term monetary stability and reliability doesn’t just happen through invisible hand phenomena. It requires a significantly extensive regulatory and monetary supply regime affecting credit, contracts and both spending and taxation via the supplier of the currency.

  5. Brilliant, both the quotes from Smith, Say, Mill and Keynes and the Forstater paper.

    I was aware of Say’s, which I found some time ago, while reading about Say’s law. But the references to Smith and Mill come as a complete surprise to me.

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