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“. The article is behind a paywall.

The chartalist argument adopted by Modern Monetary Theorists is that government is able to create a demand for its currency by imposing a tax obligation on non-government that is payable only in the currency. The imposition of taxes (or other obligations such as fees and fines) ensures that members of non-government need to get hold of the currency to the extent necessary to extinguish their financial obligations to the state. They can do so by selling goods or services, including their own labor services, to government in exchange for the currency, or by transacting with others in non-government who have previously obtained the currency or claims on the currency (e.g. commercial bank deposits, which are a bank’s promise to supply currency either on demand or at a specified time).

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

It ultimately would not matter if in its other activities non-government transacted in some other currency or commodity or through barter in preference to the nation’s currency, although for many reasons (e.g. convenience) it usually will use the national currency when the tax basis is effectively enforced. So long as non-government abides by the tax laws, it will demand the currency 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. Non-government will transact in the government’s currency 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.

 
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