Resistance to the Chartalist View of State Money

There is quite a lot of resistance in the MMT blogosphere to the Chartalist theory that the tax obligation underpins demand for the currency. A notable recent example is an interesting discussion at Pragmatic Capitalism. But a similar reaction seems to pop up in many places. The consternation on this point has surprised me in the past. It is not the disagreement over the theory that surprises me, but the strength of the reaction the theory seems to incite in some people otherwise sympathetic to MMT. Lately, a couple of possible explanations have occurred to me.

The Chartalist Explanation in a Nutshell

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 tax obligation on the non-government. A simple case would be a head tax. The imposition of such a tax would ensure that people in the non-government needed to get hold of the government’s money in order to meet their 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.

Personally, I find this explanation convincing, but that’s not my focus here. Rather, I am interested in speculating on why some people not only disagree but seem to react so strongly against the idea, and perhaps addressing those concerns.

Coercion Underpinning State Money

The most common objection seems to be that the Chartalist explanation implies there is coercion underpinning state money. For the viability of state money to be assured, the tax obligation must be enforced, in the last instance through a resort to the state’s monopoly on violence. There is no suggestion that this compulsion is a good thing, although it is probably necessary unless and until we reach a point where people are willing to cooperate voluntarily in the common use of some resources.

What surprised me at first about this objection is that I would have thought many of the people making it – typically in the right-libertarian quadrant of the political compass – would have been in agreement with the view that the state is coercive and prone at times to brute force. But then it occurred to me that two separate issues might be getting conflated, one that is anathema to right-libertarians (the state) but the other which is prized (a monetary market economy). Perhaps what is partly causing the disquiet is a perception that Chartalism implicates money itself in coercion.

If so, I think the concerns can be allayed. First, the theory pertains to state money, not other monies. Second, the effective enforcement of a tax obligation is a sufficient but not necessary condition for the viability of a currency.

Other monies are possible. Even for a private money, state coercion is sufficient. If the private currency issuer (e.g. a private bank) imposes a debt obligation on customers, and these obligations are enforceable, backed by the state’s legal apparatus, that would be sufficient for the viability of the private money.

However, it is also the case that under the right conditions private monies can be issued and accepted without compulsion or a resort to the state’s monopoly on violence. These monies will circulate among active participants in their particular circuits, provided there is sufficient trust among the participants. It is unlikely that one money will become dominant over another in the absence of state compulsion, but provided trust is present, this will be enough to ensure viability of a private money.

What matters for state money, in the MMT view, is not that all other monies are eliminated or that people only use state money. The critical factor is simply that people use state money to the extent necessary to enable the government to transfer the desired goods and services to the public domain, as indicated through the democratic process. The way the government ensures this is by making sure the tax obligation is large enough relative to its own currency issuance and the non-government’s net saving desire in the government’s money.

Of course, in many nations, state money or bank money denominated in the government’s unit of account will be widely used out of convenience. But this is not strictly necessary for the viability of the government’s money. For example, there are some countries in which people largely transact in a foreign currency (e.g. the US Dollar) except to the extent necessary to meet the tax obligation in the domestic government’s money.

Resources Precede Taxation

Another objection seems to concern how productivity fits in to all this. For example, in the thread linked to above at Pragmatic Capitalism, there is a comment along the lines that “productivity precedes taxation” and an objection that MMT does not recognize this. The reason MMT does not recognize it is that it is not actually correct.

It would be truer to say that “resources precede taxation”. If the non-government had no resources to offer the government in exchange for the state money, there would be no point imposing a tax obligation. But the non-government always has at the very least its own capacity to work (labor power). The non-government is always in a position to provide labor services to the government.

The level of productivity does not matter in this sense. What the government can command, through its coercive tax obligation, are resources, including labor services. If the non-government possessed nothing other than its capacity to work, the government would be able to command some of this labor time.

This is not to imply that productivity is unimportant. Far from it. But the value of the currency is a monetary concept, and money is a social relation. The social relation, in the case of state money, is in the first instance the government’s capacity to impose a tax obligation on the non-government denominated in its own tokens and specify what must be done to obtain the tokens. Some people give up goods or services, or their own time, in exchange for the government’s money. The value of the currency can be regarded as the amount of simple labor time that must be given up in exchange for a unit of the currency.

Productivity improvements mean that more goods and services can be commanded with a unit of the currency. But no matter how low the level of productivity, state money will remain viable provided the tax obligation is enforceable.

Note on Productivity

There is no suggestion that productivity is less important than the value of the currency. Quite the reverse. After all, in principle we could have a highly prosperous non-monetary economy thanks to a high level of productivity, technical knowledge and organization. Productivity is not necessarily contingent on a viable money, and conversely a viable money is not contingent on productivity. They are two different considerations.

It is true that in a monetary economy we try to obtain measures of what really matters – e.g. productivity – in terms of money. But when we do this, what we are really interested in is getting a sense of how productive we are in real, not monetary, terms. We resort to monetary measures for want of a better alternative, because heterogenous material and non-material outputs cannot be added together to produce a true single measure.