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Metallism vs Chartalism

The following was excerpted, with some editing, from the paper titled The Hierarchy of Money by Stephanie Bell, written for The Jerome Levy Economics Institute. 

There is no shortage of views on the nature and role of money among the different schools of economics.  However subtle the differences may be, they can all be associated with one of two basic theories, metallism or chartalism.  Chartalism is a term derived from the Latin word 'charta' meaning a ticket or token.  Chartal money is the token for value, while metallist money is the thing of value itself. 

Precious Metal Viewed as Money

Metallists believe money developed spontaneously as a medium of exchange in order to eliminate the obvious limitations of barter.  Society is thought to have settled on precious metal as currency so that money would have intrinsic value.  Money's value then is explained in terms of its precious metal content or backing.

As a producible commodity, metallist money was really no different from any other commodity.  To guarantee the weight and purity of precious metal as money, a stamp certifying its integrity came to be required before it could circulate widely.  The State could play a role in terms of producing stamped coinage, but its power was viewed as limited to supporting the will of the private sector.

Money as A Neutral Medium of Exchange

Early metallists and modern metallists, including monetarists, treat money as irrelevant to 'real' analysis in economics.  They believed money's ability to operate as the medium of exchange depended on its being a commodity with an exchange value independent of its form as currency.  Milton Friedman declared "nothing is so unimportant as the quantity of money expressed in terms of the nominal monetary unit. . . The situation is very different with respect to the real quantity of money."  In other words the economy behaves, at least in the long run, as though money were merely a neutral medium of exchange. 

A Problem with the Metallist Theory

When coins or paper with no precious metal content came into use, metallists explained the transition on the basis that they were 'backed' by precious metals which would imbue them with value.  When the community continued to accept intrinsically worthless paper after the elimination of metal backing, metallists were left with a fundamental problem.

Chartalists argue that money's value is independent of the medium used to represent it.  Theirs is a non-market based theory of money which is not preoccupied with its medium of exchange function.  An interesting distinction can be found in how worn coins would be viewed.  If a coin must be weighed at the time of payment in order to certify its worth, that is evidence of metallist usage.  Acceptance of a worn coin at face value is evidence of chartal usage.

The State Monopoly and Chartalism

Chartalists place the State center-stage.  They argue that the age of chartalist or State money was reached when the State claimed the right to declare what thing should answer as money in payment of debts owed to it.  The modern State has assumed a monopoly in the creation of the money that it will accept in payment of taxes and other liabilities due.  Obviously the State must make its money available to the public before the public can discharge its debts to the State. 

Money as a Form of IOU

The State issues its money by simply spending it on goods, services, or financial assets available from the public.  State money is an asset to the individual who holds it, and a liability to the State itself -- an IOU or promise to accept it in payment of taxes.  In contrast, pure commodity money of metallism is an asset to its holder and a liability to no one.  It cannot be viewed in the context of a balance sheet operation. 

Ultimately, the value of chartal money involves a willingness to accept another's IOU.  The value of State money derives from the fact that nearly all households, require some of its IOUs in order to pay taxes or other fees to the State.  Being in wide demand, it naturally becomes useful as a medium of exchange within the private sector.  There can be no doubt that monetary systems of modern economies are based on chartal money.

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