MMT Basics: An Introduction to Chartalism – The State Theory of Money
MMT Economics: Why Understanding Theories of Money Matters: From Commodity Myths to Chartalism And the Power of State Money
MMT Economics: What you will learn:
The two main theories of money and how they differ; why mainstream economists treat money as scarce; how the credit theory of money frames money as relationships of debt and claim; what Chartalism adds with the state’s role; why money is a public tool, not a scarce commodity; how these views shape government policy and spending; the real constraints on government action are resources, not finance; why understanding Chartalism is key to understanding MMT and economic possibilities.
Technical Terms/Jargon Used in This Article
You will find definitions of all of the technical terms/jargon used in this article in my series of MMT Economic Jargon Buster articles. Paid subscribers can also download my MMT Dictionary.
From Commodity Myths to Chartalism And the Power of State Money
In this post I will introduce a ‘theory of money’ known as chartalism. By ‘theory of money’ I simply mean an explanation of what money is and the role it plays in the economy. To make sense of chartalism, I’ll set it alongside the more orthodox view of money so that we can see what makes Chartalism different and why it sits at the core of understanding MMT.
But before we get there we need to take a small step back to set the context.
Over time our understanding of what money is and its role in society, markets and government has changed. However, in general, money has been defined in two main ways (note, that I’m simplifying for the sake of building a story):
Money is a physical commodity (for example, a gold coin) used as a handy intermediary to allow the exchange of goods and services.
Money is a concept not a physical thing. By that I mean money represents an idea: that idea being that it represents a way to measure and record debts or assets.
The first is called ‘commodity money’ and the second, ‘the credit theory of money’. That’s not to say that the latter idea has superseded the former. These ideas, even today, still coexist.
The adoption of these ‘theories of money’ has tended to be attached to different schools of economic thought. For example, neoliberal/mainstream economists understand money in a way that is related to commodity money. Whereas, MMT/Post-Keynsian schools of economic thought, have an understanding of money that is an extension of the credit theory of money.
Neoliberal/mainstream schools of thought do recognise that money is not only a physical commodity, for example, they accept the existence of fiat money. However, they believe that money behaves like a commodity, i.e. it is scarce, neutral, and outside of government control. This is an important idea - as it shapes the way governments adhere to the neoliberal/orthodox creed when managing their budgets and balance sheets.
“…fiat money has no inherent utility beyond its role as a medium of exchange” Economic Brief, Federal Reserve Bank of Richmond, January 2024
The Neoclassical / mainstream view: Money does not shape the economy
Neoclassical / mainstream economics often describe money as ‘a neutral veil over barter’, a convenient tool for facilitating exchange. Money is not a force shaping the economy, it is just a handy ‘lubricant’ making trade easier. Money does not alter the underlying economic relationships.
For mainstream economists the study of money and the monetary system is, therefore, not a topic of great interest.
This clearly contrasts starkly with the MMT view that the monetary system is central to an understanding of how the economy works.
If you have any questions or if you disagree with anything I write in this article, I want to hear from you. Please add your comments in the discussion area. Contrary views are welcome.
Getting from ‘credit theory of money’ to Chartalism
Earlier I defined the credit theory of money as a way to represent debts or assets. This means it is also about relationships; the relationship between debtors and creditors. Or, to put it another way, money is about obligations and claims between people and between different entities.
So, in contrast to the orthodox view, money touches every aspect of society: it has a social dynamic, it is about control and it is about power. And it is about whose money is widely accepted and whose money is not; an idea that is at the heart of chartalism.
Chartalism - the state theory of money
Chartalism is an extension of the ‘credit theory of money’ with a crucial addition: the state. Chartalists argue that it is the fact that the government demands taxes to be paid in the currency that makes the governments currency valuable. The need to work to acquire that currency both serves the needs of government (an army, national infrastructure, government buildings, a civil service and so on) and drives the growth of the wider economy: as individuals and businesses use what’s left over after they have paid their taxes – to demand goods and services from businesses.
So, the state’s money is valuable because you have to pay your taxes in it. Its value does not come from its scarcity or from being inherently useful (like gold, silver, or any other scarce resource commodity). However, in a wider definition of money, anyone can create it. For example, an IOU is money. But not anyone can have their particular form of money widely accepted.
So, whereas credit theory explains money as a social relation of debt, Chartalism adds the state’s role - and explains the practical power the governments currency wields in a modern economy.
Why does it matter what theory of money you adhere to?
I mentioned earlier that for many mainstream economists, the study of money and the monetary system does not tend to be a topic of great interest. Money simply exists to make the exchange of goods and services easier.
“Most economists focus on market exchanges, and begin with the hypothesis that money originated as a cost-reducing innovation to replace barter. They highlight the medium of exchange and store of value functions of money. The ideal medium of exchange is a commodity whose value is intrinsic, and the value of each marketed commodity is denominated in the medium of exchange through the asocial forces of supply and demand.” Money - An Alternative Story by Eric Tymoigne and L. Randall Wray
And that would be fine if these different views on what money is did not impact upon our lives, if they remained only of academic interest. However, that’s not the case: different theories of money result in different understandings of how the economy works and those different understandings lead to different policy outcomes. Policy outcomes that affect lives.
Two ways in which competing theories about money differ in their impact
1. If money acts like a commodity, money is scarce
The neoliberal approach tells us that money acts like a commodity and, like all commodities, it is scarce. This belief impacts the decisions that governments make. There is no shortage of politicians talking about how they cannot spend because there is a ‘£22bn black hole in the public finances.’ (Rachel Reeves, Spending Review 2025 speech), or as Barack Obama said during a press conference in 2009, “Well, we are out of money now …”.
When governments treat money as scarce, governments act in the same way a household acts: limited income, means limited choice: if the country needs a new frigate to defend its shores, or if politicians should get a long-overdue pay rise, that might mean public services have to be cut to accommodate that spending. Because the ‘money pie’ is limited.
So, from the ‘‘money is a neutral veil over barter’ perspective everything is. ‘either you can have this or you can have that’ - your choices are limited. Do you want healthcare, education, infrastructure or do you want the government to tackle climate change—because the government’s finances. This is the opposite of what you will hear an MMT economists say.
The chartalist theory of money leads to a different conclusion: money is a public tool created by the state: it is not scarce. In fact, it is technically unlimited. When a government decides to spend on services or a project, the money comes into existence when it is deposited in the account of the customers bank. The politicians in government decide what is needed and the central bank is legally bound to enact the transaction — and in the process create the money. All spending is new money. There is no pre-existing pile of money that the spending money is drawn from.
This puts an entirely different light on what governments can do: fiscal policy can be used to achieve whatever is possible within the limits of the resources available; whether that be full employment, mitigation of the climate crisis, eradication of extreme poverty, spending for public purpose. There is no need for artificial ‘fiscal rules’.
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2. Understanding that money has a central role in the economy - helps with understanding the behaviour of the economy itself
Mainstream economists have a poor record of predicting financial disasters (unlike MMT economists and MMT adjacent economists like Randal L. Wray and Steve Keen). Which is no surprise when - as I mentioned earlier - they have little interest in the monetary system.
Examples of this would include the 2008 financial crisis (for a full discussion on this topic see my article on the 2008 financial crash). And the Eurozone debt crisis in 2009 through 2014.
As far as the Eurozone is concerned, mainstream economists failed to appreciate the difference between a country’s own currency and a debt in a foreign currency (i.e., the Euro).
If you have debts in your own currency - the reality is that those debts can exist as a liability on your country’s balance sheet forever. If you have a debt in a foreign currency you are obliged to pay that debt off or face the consequences.
As far as foreign currency debt is concerned, you have to find that currency from somewhere to pay those debts: perhaps you need to sell state assets, or cut your spending, or take on a loan, or grow your tourist sector, or increase exports in goods that bring in the currency you need.
In the process of dealing with a foreign debt it is likely that you are harming your economy. For example, if you are reducing government spending, you may be creating unemployment, deskilling citizens and cutting your productive capacity as a country. If you are exporting food for foreign currency that means you are not giving that food to your own citizens. If you are growing your tourist sector and you are diverting human capital away from activities that could make your economy more robust.
In Conclusion: Chartalism - The State Theory Of Money
Understanding money matters because is impacts on the world you live in; it impacts government policy and it impacts government spending.
Understanding chartalism matters because it clears away the fog around how money works. If we believe money is scarce, we believe it when governments tell us that their hands are tied; they can’t spend on health, housing, education, or mitigation of climate change. But if we understand money as a tool created by the state, then we see that the real limits are not financial, but the actual resources, skills, and capacities we have as a society.
That shift in perspective is not academic. It changes what we expect from our governments, and it changes what is politically possible.
That’s all for now. Don’t forget to subscribe for more MMT economics related content from MMT101.
If you have any questions or if you disagree with anything I write in this article, I want to hear from you. Please add your comments in the discussion area. Contrary views are welcome.
Resources
Money - An Alternative Story - Eric Tymoigne and L. Randall Wray.
‘£22bn black hole in the public finances.’ (Rachel Reeves, Spending Review 2025 speech).
Barack Obama said during a press conference in 2009, “Well, we are out of money now …”.
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