According to the overwhelming historical and anthropological records*, in every major economy during the past 5,000 years, money is a creature of the state. This also means that, in modern economies**, “taxes drive money.” This idea is called the state theory of money or Chartalism. Chartalism stands in stark contrast to the idea of barter, which is the a historical idea that says money is a creature of the market, which government only later stepped in to “take over” in order to make the barter and market systems more efficient (to “lubricate” that system).
(*Highlighted by David Graeber’s 2011 book, Debt: The first 5,000 years. Here is a twelve-part podcast series by the BBC where Graeber discusses the topics in his book.
**According to John Maynard Keynes, as quoted in this 2014 paper by L. Randall Wray, The “modern era” is “for some 4,000 years at least.”)
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This post was last updated October 10, 2020.
Disclaimer: I am a layperson who has studied MMT since February of 2018. I’m not an economist or academic and I don’t speak for MMT. The information in this post is my best understanding (especially based on my reading of Wray’s paper and my conversation with Wray about it) but I don’t assert it to be perfectly accurate. In order to ensure accuracy, you should rely on the expert sources linked throughout. If you have feedback to improve this post, please get in touch.
Barter versus modern money
“No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing.”
— C. Humphrey’s 1985 book Barter and Economic Disintegration (p. 48)
A prince, who should enact a certain proportion of his taxes be paid in a paper money of a certain kind, might thereby give a certain value to this paper money.
— Adam Smith’s 1775 book, The Wealth of Nations
A barter economy is the a historical idea that the ultimate goal of people in the economy is to accumulate more (real, tangible) stuff: that is, commodities. In other words, you use the stuff you already have, in order to get more money, in order to get even more stuff:
C, M, C'. In this system, money is neutral, meaning it has no real world effects. It is merely a tool to accumulate more commodities. In the barter view, money is also a commodity in and of itself, meaning the money itself has intrinsic value.
The chartalist view flips all of this on its head: in the modern economy, the ultimate goal is to accumulate more money (which translates to power). Commodities are merely the tool for getting more money:
M, C, M'. As Randy Wray told me in episode 53 of Activist #MMT: “A shoe producer has no interest in shoes, they have an interest in profit.” This
M, C, M' idea is called “the monetary theory of production” and is accepted by all major heterodox schools of thought: Marxism, Institutionalism, and Post-Keynesianism. (MMT mostly fits into the latter, but contains elements from all three.)
In a barter system, as soon as the trade is complete, the relationship ends. In the chartalist view, money is a representation, an accounting, of an ongoing, credit-and-debt relationship – the money itself is not a commodity and so does not have any intrinsic value. An example of a (similar kind of) relationship is a contract for car insurance. The paper on which the contract is written is valueless. However, it represents a relationship between you and the insurance company if your car breaks down or is damaged. If either party violates the contract, the state’s judicial and justice systems can be used to enforce it. (With thanks to Christian Reilly of MMT Podcast for the analogy.)
An alternative term for debt-credit relationship is an IOU (“I owe you”). Both sides of the transaction owe the other something, as signified by that contract/accounting/representation. For example, in a bank loan, the bank is owed the money plus interest at some point in the future, the loan recipient is guaranteed access to the loan funds immediately.
Resources to learn more
- An important and short (11 pages) 1998 paper by Stephanie Kelton (then Bell) called The Hierarchy of Money that compares the a-historical “metallist,” or barter, view with the chartalist view.
- A more in-depth take by by L. Randall Wray called “From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy” (2014, 35 pages).
- A November 2018 interview with Modern Money Network president Rohan Grey, on the podcast Historic-ly with Esha Krishnaswamy.
- A Brief History of Money (with some good external sources) by the U.K.’s Gower Initiative for Modern Money Studies
More general information
Again from Wray in our (not-yet-released) interview:
David Dillard was one of the great institutionalists. He said, money itself is an institution. Money cannot be a thing. It cannot be a commodity. It’s an institution.
Here is a quote from (Ehnts, Voldsgaard 2020):
(See that paper‘s bibliography for the quoted sources.)
[MMT] rejects [the] metallist view of money originating as physical things through market exchange in barter economies. Money has for all recorded history been a political phenomenon, rather than a market phenomenon (Henry, 2004; Hudson, 2004; Ingham, 2004). Further, economic anthropological studies conclude that money did not originate from bartering (Humphrey, 1985, p. 48; see also Graeber, 2013). The chartalist theory of money, where payments to the government drives the demand for the country’s currency, is corroborated by the monetary and fiscal dynamics in the early US colonies (Grubb, 2018) and in the monetisation of colonies (Forstater, 2005). These historical insights substantiate the chartalist view of the government as issuer, rather than user of the currency. In the age of ‘independent’ central banks, MMT studies have shown that treasury spending is still accommodated by the central bank’s ordinary monetary operations (Fullwiler, 2017; Tymoigne, 2016, 2014; Voldsgaard Ruge, 2018).
Some final points:
- At the root of chartalism is the idea of state power: a sovereign entity that has a monopoly on violence within its own borders.
- When you hear that “mainstream economics doesn’t even recognize the existence of money,” it means that in the barter story, money is nothing more than a special kind of commodity. In the chartalist story, money is an accounting record representing an ongoing credit-and-debt relationship.
- When a government does not spend money (create money or issue currency) when that spending is desperately needed by millions, it can result in mass suffering and death. When a government spends money on things that are helpful only to the elite, who then use that power to exert outsized control on the rest, it can result in mass suffering and death. In other words, money is not neutral.