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