In this working paper I will examine the intellectual history of an alternative to the orthodox approach to money and credit. Charles Goodhart has usefully distinguished between what he called the orthodox “Metalist” and the heterodox “Chartalist” approaches. The first focuses on money as a medium of exchange, which in the past derived its value through a link to precious metal. This is not meant to imply orthodoxy excludes the other functions of money, or to claim that modern orthodox economists would want to return to a gold standard. Rather, the focus on money’s metallic origins as a cost-minimizing medium of exchange frames thinking about the nature of money.
Many orthodox policy prescriptions follow fairly directly from this vision, in particular the view that money’s value is linked to its scarcity. The advantage of the gold standard was precisely the imposed scarcity, while the problem with fiat money is that it can be “dropped by helicopters,” as in Friedman’s famous analogy. Hence in the absence of linking money to gold, we must find another way to constrain its supply so that the money supply just matches demand at a stable price.
The second approach is much more consistent with the legal view of money. It could be said that “money is a creature of law” with emphasis on the link between money and contracts; for example, whatever is defined as legal money can be delivered to settle contracts. 2Legal tender laws normally require that the State’s own currency must be accepted. Hence, it highlights the important role played by “authorities” in the origins and evolution of money. In the Chartalist approach, the State (or any other authority able to impose an obligation) imposes a liability in the form of a generalized, social or legal unit of account—a money—used for measuring the obligation. This does not require the pre-existence of markets, and, indeed, almost certainly predates them. Once the authorities can levy such obligations, they can name what fulfills this obligation by denominating those things that can be delivered, in other words, by pricing them. This resolves the conundrum faced by methodological individualists and emphasizes the social nature of money and markets—which did not spring from the minds of individual utility maximizers to replace barter, but rather were socially created
This paper will not address further the orthodox, Metalist approach in detail. Nor will it attempt to demonstrate that the Chartalist approach is more consistent with the historical facts— as we know them. Finally, this paper will not present a rigorous history of thought. Instead, it will focus only on a handful of major figures whose work was important in building a modern version of Chartalism, an approach now called Modern Money Theory (MMT). The main contributors to the Chartalist tradition were Knapp, Innes, Keynes, Lerner, and Minsky, and more recently Goodhart and Ingham. This chapter will not attempt to examine the influences on each of these but rather will identify their contributions that influenced the development of MMT.
In recent years, MMT has risen to prominence, especially on the Internet, largely for two reasons. First, its understanding of the nature of money leads to interesting policy conclusions. Second, and related to that, MMT provides a description of modern fiscal and policy operations that is quite different from orthodox economics. Indeed, it is this alternative exposition that leads quite directly to the different approach to policy-making. We first examine the early contributions of Knapp, Innes and Keynes while including a brief summary of Schumpeter’s views on money and credit. We then move to the more recent contributions in this tradition, focusing on those of Minsky, Lerner, and Ingham. This chapter will conclude with a brief examination of related policy issues.