Money and Taxes: The Chartalist Approach

Abstract

"[T]he money of a State is not what is of compulsory general acceptance, but what is accepted at the public pay offices..." (Georg Friedrich Knapp 1924) "In an economy where government debt is a major asset on the books of the deposit-issuing banks, the fact that taxes need to be paid gives value to the money of the economy.... [T]he need to pay taxes means that people work and produce in order to get that in which taxes can be paid." (Hyman P. Minsky 1986)

This paper examines the Chartalist approach to money, which can be traced from Adam Smith through Georg Friedrich Knapp to John Maynard Keynes and to Hyman Minsky. In the Chartalist approach, money is a creature of the State; at least in the case of modern money, one cannot conceive of Stateless money. The State defines money as that which it accepts at public pay offices (mainly, in payment of taxes). This has important policy implications. Taxes create a demand for money, and government spending provides the supply. The government does not "need" the public's money in order to spend; rather, the public needs the government's money in order to pay taxes. This means that neither taxes nor bond sales really "finance" government spending. It also means that the government can determine the "terms" on which the public obtains the money required to pay taxes; it determines what the public must do to "earn" government-provided money. This stands conventional analysis on its head: fiscal policy is the primary determinant of the quantity of money issued, and of the value of money, while monetary policy primarily has to do with interest rate determination. Thus, the Chartalist view of money, if fully understood, would lead to a much different view of appropriate monetary and fiscal policy goals. Most notably, it would be recognized that rather than striving for a balanced budget, deficits would be accepted as the "norm". And rather than trying to use monetary policy to achieve stable prices, monetary policy would recognize that its role is to establish the short term interest rate, while fiscal policy would be used to stabilize the value of the currency.

JEL Classification: E51