The Nature, Origins, and Role of Money:
Broad and Specific Propositions and Their Implications for Policy
Economists, numismatists, sociologists,
and anthropologists alike have long probed the vexing question ‘What is Money?’
And it seems Keynes’s ‘Babylonian madness’ has infected a new generation of
scholars unsettled by the conventional accounts of the origins, nature, and role
Among them are the advocates of a heterodox approach identified as ‘Chartalism,’
‘Neo-Chartalism,’ ‘Tax-Driven Money,’ ‘Modern Money,’ or ‘Money as a Creature of
The Chartalist contribution turns on
the recognition that money cannot be appropriately studied in isolation from the
powers of the state – be it modern nation-states or ancient governing bodies.
It thus offers a view diametrically opposed to that of orthodox theory, where
money spontaneously emerges as a medium of exchange from the attempts of
enterprising individuals to minimize the transaction costs of barter. The
standard story deems money to be neutral – a veil, a simple medium of exchange,
which lubricates markets and derives its value from its metallic content.
Chartalism, on the other hand, posits
that money (broadly speaking) is a unit of account, designated by a public
authority for the codification of social debt obligations. More specifically,
in the modern world, this debt relation is between the population and the
nation-state in the form of a tax liability. Thus, money is a creature of the
state and a tax credit for extinguishing this debt. If money is to be
considered a veil at all, it is a veil of the historically specific nature of
these debt relationships. Therefore, Chartalism insists on a historically
grounded and socially embedded analysis of money.
This chapter distinguishes between
several broad Chartalist propositions about the origin, nature, and role of
money and several specific propositions about money in the modern context. It
offers only a cursory examination of the historical record to illuminate the
essential characteristics of money emphasized in the Chartalist tradition.
Chartalist ideas are not new, although they are most closely associated with the
writings of Georg Friedrich Knapp of the German Historical School. Thus, the
chapter briefly overviews instances in the history of thought which have
emphasized the chartal nature of money. The paper then expounds on Chartalism,
clarifying aspects of the concepts and drawing out the implications for modern
currencies. It concludes with a discussion of the various applications of this
approach to policy, offering insightson subjects such as employment
policy, monetary unions and social security.
Chartalism: The Broad Propositions
The historical record suggests an
examination of Chartalism according to its broad and specific propositions. The
latter address the nature of money in the modern context, and although
Chartalism should not be narrowly identified with the Modern Money approach, the
specific propositions are more important for understanding today’s economies,
modern currencies, and government monetary and fiscal policy.
Very briefly, the broad propositions of
The atomistic view of money
emerging as a medium of exchange to minimize transaction costs of barter
between utility-maximizing individuals finds no support in the historical
The appropriate context for
the study of money is cultural and institutional, with special emphasis on
social and political considerations.
Consequently, Chartalists locate
the origins of money in the public sector, however broadly defined.
In its very nature money is
a social relation of a particular kind—it is a credit-debt relationship.
Chartalism offers a stratified view
of social debt relationships where definitive money (the liability of the
ruling body) sits at the top of the hierarchy.
Money functions, first and
foremost, as an abstract unit of account, which is then used as a means of
payment and the settling of debt. Silver, paper, gold or whatever ‘thing’
serves as a medium of exchange is only the empirical manifestation of what
is essentially a state-administered unit of account. Thus, the function of
money as a medium of exchange is incidental to and contingent on its first
two functions as a unit of account and a means of payment.
From here, as Ingham aptly put it,
‘Money of account is logically anterior and historically prior to the
market’ (2004a: p. 181).
Neo-Chartalism: The Specific
The recent revival of the Chartalist
tradition, also dubbed Neo-Chartalism, Tax-Driven Money, or Modern Money
approach is particularly concerned with understanding modern currencies. Thus,
contemporary Chartalists advance several specific propositions about money in
the modern world:
1.Modern currencies exist within the context of certain state powers. The
two essential powers are:
a.the power to levy taxes on its subjects, and
b.the power to declare what it will accept in payment of taxes.
2.Thus, the state delimits money to be that which will be accepted at
government pay-offices for extinguishing debt to the state.
3.The purpose of taxation is not to finance government spending but to
create demand for the currency – hence the term ‘tax-driven money.’
4.Logically, and in practice, government spending comes prior to
taxation, to provide that which is necessary to pay taxes.
5.In the modern world, states usually have monopoly power over the issue of
their currency. States with sovereign control over their currencies (i.e. which
do not operate under the restrictions of fixed exchange rates, dollarization,
monetary unions or currency boards) do not face any operational financial
constraints (although they may face political constraints).
6.Nations that issue their own currency have no imperative to borrow or tax
to finance spending. While taxes create demand for the currency, borrowing is an
ex ante interest rate maintenance operation. This leads to dramatically
different policy conclusions.
7.As a monopolist over its currency, the state also has the power to set
prices, which include both the interest rate and how the currency exchanges for
other goods and services.
Neo-Chartalism is appropriately subsumed
under the broad Chartalist school of thought. When it is said that ‘money is a
creature of the state’ or that ‘taxes drive money,’ two things are important to
keep in mind. First, ‘state’ refers not just to modern nation-states, but also
to any governing authority such as a sovereign government, ancient palace,
priest, temple, or a colonial governor. Second, ‘tax’ denotes not just modern
income, estate or other head-tax, but also any non-reciprocal obligation to that
governing authority – compulsory fines, fees, dues, tribute, taxes and other
Before detailing the broad and specific
propositions of Chartalism, the next two sections take a cursory look at the
historical record of the origins of money and the recognition of the chartal
nature of money in the history of thought.
II. History of Money
Chartalists insist on a socially
embedded and historically grounded study of money. While a conclusive chronicle
of its genesis is perhaps impossible to attain, they turn to a historically
informed analysis to unearth a more accurate account of the nature, origin and
role of money. Since a detailed analysis of the history of money is beyond the
scope of this paper,
this section will selectively discuss the historical record to illustrate the
essential features of money emphasized in the Chartalist tradition.
It is a well-established fact that money
predated minting by nearly 3000 years. Thus, Chartalists aim to correct a common
error of conflating the origins of money with the origins of coinage (Innes
1914: p. 394, Knapp 1924: p 1, Hudson 2003: p. 40).
Very generally they advance two
accounts of money’s origins. Grierson (1997), Goodhart (1998), Wray (2001) posit
that money originated in ancient penal systems which instituted compensation
schedules of fines, similar to wergild, as a means of settling one’s debt
for inflicted wrongdoing to the injured party.
These debts were settled according to a complex system of disbursements, which
were eventually centralized into payments to the state for crimes (see also
Innes 1932). Subsequently, the public authority added various other fines, dues,
fees, and taxes to the list of compulsory obligations of the population.
The second account offered by Hudson (2004), and supported
by some Assyriologist scholars (see Hudson 2003: p. 45n3), traces the origins of
money to the Mesopotamian temples and palaces, which developed an elaborate
system of internal accounting of credits and debts. These large public
institutions played a key role in establishing a general unit of account and
store of value (initially for internal record keeping but also for administering
Hudson argues that money evolved through public institutions as standardized
weight, independently from the practice of injury payments.
These stories are not mutually
exclusive. As Ingham speculates, since a system of debts for social
transgressions existed in pre-Mesopotamian societies, it is highly likely that
‘… the calculation of social obligations was transformed into a means of
measuring the equivalencies between commodities’ (2004b: p. 91). Henry’s
analysis of ancient Egypt (2004) bridges the two accounts. In Egypt, as in
Mesopotamia, money emerged from the necessity of the ruling class to maintain
accounts of agricultural crops and accumulated surpluses, but it also served as
a means of accounting for payment of levies, foreign tribute, and tribal
obligations to the kings and priests.
The importance of the historical record
is: 1) to delineate the nature of money as a social debt relationship; 2) to
stress the role of public institutions in establishing a standard unit of
account by codifying accounting schemes and price lists, and; 3) to show that in
all cases money was a pre-market phenomenon, representing initially an abstract
unit of account and means of payment, and only later a generalized medium of
exchange. As Goodhart encapsulates it:
… money first arose as an acceptable way of
resolving inter-communal debt obligations, and only subsequently (when money’s
functions had thus become accepted and ratified as a unit of account and means
of payment), became widely adopted in market transactions. (Goodhart 2003: p.
Chartality of Money
The above discussion gives a preliminary
indication of the chartal nature of money. History reveals the role of the
public authority in establishing a universal equivalent for measuring debts and
in determining what ‘thing’ will be used to correspond to this accounting
As Knapp explains, payments are always
measured in units of value (1973 : pp. 7-8). Money then is chartal because
the state makes a ‘proclamation … that a piece of such and such a description
shall be valid as so many units of value’ (Knapp 1973 : p. 30). And it is
beside the point what material will be used to correspond to those units of
value. Money is a ‘ticket’ or ‘token’ used as a means of payment or measure of
value. The means of payment ‘whether coins or warrants’ or any ‘object made of a
worthless material’ is a ‘sign-bearing object’ to which ‘[state] ordinance gives
a use independent of its material’ (Knapp 1973 : p. 32).
This is what gives Chartalism its name:
‘Perhaps the Latin word “Charta” can bear the sense of ticket or token…Our means
of payment have this token, or Chartal, form’ (ibid.). Hereafter, Knapp provides
the definition for money:
signifies a Chartal means of payment. Every Chartal means of payment we call
money. The definition of money is therefore a “Chartal means of payment.”
(Knapp 1973 : p. 38)
It is important to distinguish between
the ‘money of account’ and the ‘money thing’, i.e., between the abstract unit of
account and the physical object that corresponds to it. Keynes explains:
…money-of-account is the description or title and the money is the
thing which answers to the description. (Keynes 1930: pp. 3-4, original
Orthodox theories fail to differentiate
the money of account from the empirical object that serves as money, leading to
several irresolvable conundrums of monetary theory (see below).
Finally, ‘definitive’ money is that
which is accepted at state pay offices: ‘…chartality has developed…for the State
says that the pieces have such and such an appearance and that their validity is
fixed by proclamation’ (Knapp 1973 : p. 36).
Keynes similarly argues that:
…the Age of Chartalist or State Money was reached
when the State claimed the right to declare what thing should answer as money to
the current money-of-account – when it claims the right not only to enforce the
dictionary but also to write the dictionary. (Keynes 1930: p. 5)
From Mesopotamia and Egypt to modern
economies, rulers, governors and nation states have always ‘written the
dictionary’. Chartalism is thus able to explain why seemingly worthless objects
such as tally sticks, clay tablets or paper have been used to serve as money.
Governing authorities have not only picked the money of account and declared
what ‘thing’ will answer as money, but they have also used taxation as a vehicle
for launching new currencies. This is perhaps nowhere clearer than in the cases
of colonial Africa.
economies were monetised by imposing taxes and insisting on payment of taxes
with the European currency. The experience of paying taxes was not new to
Africa. What was new was the requirement that the taxes be paid in European
currency. Compulsory payment of taxes in European currency was a critical
measure in the monetisation of African economies as well as the spread of wage
labor. (Ake 1981: p. 34)
In those parts
of Africa where land was still in African hands, colonial governments forced
Africans to produce cash crops no matter how low the prices were. The favourite
technique was taxation. Money taxes were introduced on numerous items –
cattle, land, houses, and the people themselves. Money to pay taxes was got by
growing cash crops or working on European farms or in their mines. (Rodney 1972:
p. 165, original emphasis)
The tax requirement payable in European
currency was all that was needed for the colonized tribes to start using the new
money. Taxation compelled the community’s members to sell goods and services to
the colonizers in return for the currency that would discharge their tax
obligation. Taxation turned out to be a highly effective means of coercing
Africans to enter cash crop production and to offer their labor for sale (see
also Forstater 2005).
Public authorities, like colonial
governors, not only ‘wrote the dictionary’ but also did so for many millennia.
As Keynes pointed out money has been chartal money for at least 4000 years:
therefore, comes in first of all as the authority of law which enforces the
payment of the thing which corresponds to the name or description in the
contract. But it comes doubly when, in addition, it claims the right to
determine and declare what thing corresponds to the name, and to vary its
declaration from time to time – when, that is to say it claims the right to
re-edit the dictionary. This right is claimed by all modern States and has been
so claimed for some four thousand years at least. It is when this stage in the
evolution of Money has been reached that Knapp’s Chartalism – the doctrine that
money is peculiarly a creation of the State – is fully realized. … To-day all
civilized money is, beyond the possibility of dispute, chartalist. (Keynes 1930:
III. Chartal Money in the History of
Many scholars, both orthodox and
heterodox, have dealt with the chartal nature of money. Wray (1998) and
Forstater (2006) have documented these instances in the history of thought.
Their surveys seem to indicate two separate lines of research:
The first uses the chartal nature
of money to identify its role in the evolution of markets (Ingham, Henry),
the introduction of new currencies, the spread of centralized governments
(Polanyi, Lovejoy), and the emergence of capitalism and wage labor (Marx,
The second detects the tax-driven
nature of money in its attempts to discover why seemingly worthless paper
circulates as a medium of exchange (Smith, Say, Mill, Jevons, Wicksteed).
From the first group of scholars, for
example, Polanyi clearly rejects the traditional treatment of cowrie shells as
‘primitive money’ (Forstater 2006). In studying the introduction of
non-metallic money in Africa, Polanyi observes that cowrie existed alongside
metal currencies, which were already well established in the continent. The
cowrie was, in fact, an example of ‘the launching of a currency as an instrument
of taxation’ (1966: p. 189, quoted in Forstater 2006: p. 11). Polanyi
furthermore argues that the emergence of non-metallic currencies should be
correctly regarded ‘as a feature in the spread both of centralized government
and of food markets in the early [African] empires which left its imprint on
the local history of money’ (ibid.).
Lovejoy (as Ake and Rodney above)
similarly reports that taxation in pre-colonial Nigeria was used to generate
demand for new currencies:
Nigeria] paid their levies in cowries as well, so that the taxation system
effectively assured that people participated in the market economy and used the
currency, a policy remarkably similar to the one which the later colonial
regimes pursued in their efforts to see their own currencies accepted. (ibid.)
Forstater notes that many authors
recognized the ‘stringing of cowries’ as a ‘monopoly’ of the respective public
authority. Additionally, places that used cowries and those that did not were
separated ‘as if their boundaries were drawn by administrative authority’
(Polanyi 1966: p. 190 quoted in Forstater 2006: p. 11). This, as Chartalist
theory explains, is no accident. A Sovereign has the ability to impose a tax
obligation solely on its own subjects (Wray 2003a: p. 103). For Knapp, chartal
money can only be launched in a territory within that state’s jurisdiction:
form is associated with the State which introduces it, for the use of the
piece…is limited to the state’s territory… (Knapp 1973 : p. 40)
Marx also wrote on the tax imperative
behind modern money but his focus was on its role in the rise of capitalism and
wage-labor. It is well known that Marx had a commodity theory of money, but he
nonetheless emphasized that money relations obfuscate the underlying social
relations of production (Ingham 2004b: p. 61). This, Forstater argues, played a
key role in Marx’s emphasis on the role of taxation and the state in monetizing
primitive economies and accelerating the accumulation of capital (see detailed
analysis in Forstater 2006). The transformation of all taxes into money taxes
has led to the transformation of all labor into wage labor, a lot like the
African colonial experience above (Marx 1857).
The second group of scholars who had
contemplated the idea of tax-driven money were those concerned with the value of
money and those who attempted to solve the (neo)classical riddle, why certain
units of seemingly useless material circulate as medium of exchange while
others, of apparent worth, do not.
One need not look further than Adam
Smith’s Wealth of Nations for acknowledgement of the chartal nature of
money and the role of taxation.
A prince, who should enact that a certain proportion of his
taxes should be paid in a paper money of a certain kind, might thereby give a
certain value to this paper money; even though the term of its final discharge
and redemption should depend altogether on the will of the prince. (Smith 1776:
Forstater reports that Say and Mill too
recognized that paper had value because it was ‘made efficient to discharge the
perpetually recurring claims of public taxation’ (Say 1964 : p. 280 quoted
in Forstater 2006: p. 2) and because the state had consented ‘to receive it in
payment of taxes’ (Mill 1848: pp. 542-543 quoted in Forstater 2006: p. 3). Mill
furthermore argued that ‘the quantity of paper currency can be arbitrarily
fixed; especially if the issuer is the sovereign power of the state. The value,
therefore, of such currency is entirely arbitrary’ (ibid.). Mill here seems to
acknowledge the Chartalist claim that the sovereign state, in effect, ‘writes
the dictionary’ by picking the unit of account and arbitrarily fixing its value.
Jevons too recognized that the value of
the currency was maintained by the issuing authority: ‘Inconvertible paper money
may be freely issued, but an attempt may be made to keep up its value by
receiving it in place of coin in the payment of taxes’ (Jevons 1875: p. 214
quoted in Forstater 2006: p. 7). Finally, Forstater offers a long quote by
Wicksteed who explicitly acknowledged the role of taxation as a method of
creating a perpetual desire for money so that the government could acquire all
goods and service necessary for its official and other purposes (ibid.).
While the Tax-Driven Money approach
finds some support in the history of economic thought, simple recognition of the
tax imperative behind money was not sufficient to draw out the full implications
and logical extensions behind the chartality of money. Clearly neoclassical
economists grappled with the distinction between paper and coin, but the
tax-driven nature of money simply did not square with the traditional view of
money as a veil. Thus, the next section recaps the Chartalist position by means
of comparison with the orthodox story or – as Knapp (1973
) and Goodhart (1997, 1998) call it – the
IV. Metallism vs. Chartalism
Some of the
differences between Metallism and Chartalism (M-theory and C-theory respectively
[Goodhart 1998]), have already surfaced in the previous sections. The
traditional story of the origins, nature and role of money is all too familiar.
According to M-theory, markets formed first as a
result of individuals’ inherent disposition for exchange. Over time, money
naturally emerged to lubricate these markets by dramatically reducing
M-theory focuses on money as a medium of
exchange. Its value stems from the intrinsic properties of the commodity
that backs it – usually a type of precious metal (and hence the term
Metallism). Money owes its existence to rational agents who
spontaneously pick a commodity for exchange, pressed by the requirements of the
double coincidence of wants (Goodhart 1998: p. 410). Money, therefore,
originates in the private sector and only exists to facilitate market
transactions. Because money has no special properties that endow it with a
principal role, monetary analysis takes a backseat to ‘real’ analysis.
Since orthodox analysis turns on the
smooth functioning of private markets, it generally abstracts from the role (or
intervention) of government. The absence of any link between state and money
also explains why M-theory cannot account for the important and almost universal
‘one nation – one currency’ relationship (Goodhart 1998). Metallism struggles to
find value in modern fiat money, no longer backed by any commodity of intrinsic
worth. For M-theory, paper currency circulates because governments have usurped
control over money and because it continues to reduce transaction costs of
barter (Goodhart 1998: p. 417n21).
Chartalists find several problems with
the Metallist story. In particular they identify two circular arguments, which
pertain to the use of money as a medium of exchange, means of payment and store
of abstract value. The first deals with money’s existence. For M-theory, money
is a consequence of rational agents ‘holding the most tradeable commodity in a
barter economy’ (Ingham 2000: p. 20). In other words: a) money is universal
because rational agents use it, and; b) rational agents use it because it is
universal. Attempts to resolve this circularity by concentrating on money’s
role in reducing transaction costs have been unsatisfactory.
The logical difficulties emerge from the
‘identification problem’ – benefits from using a particular commodity as medium
of exchange can be recognized only after that commodity has already been
in use. Coins, for example, must be minted and circulated before the
benefits of reduced transaction cost are recognized. And as Goodhart points out,
the costs of using an unworked precious metal can themselves be quite high
(Goodhart 1998: p. 411). Thus, the argument that private agents collectively and
spontaneously chose a certain commodity for exchange because it reduces
costs is, at a minimum, tenuous.
The second circular argument pertains to
the other functions of money. Orthodox reasoning is that: a) money is a store of
abstract value because it is a means of payment, and; b) it is a means of
payment because it is a store of abstract value (Ingham 2000: p. 21).
Essentially, there is no definitive property that gives money its special
status. In the absence of an unambiguous condition that explains the use of
gold, wooden sticks or salt as money, spontaneous choice becomes
essential to the orthodox story and it must be assumed a priori. The
result is a ‘helicopter drop’ theory of money
(Cottrell 1994: p. 590n2).
C-theory does not suffer from the
‘identification problem’ or the ‘spontaneous choice’ paradox. It has no
difficulty explaining the introduction and circulation of fiat currency or the
‘one nation – one currency’ regularity. This is because the origin of money is
located outside private markets and rests within the
complex web of social (debt) relations where the state has a principal role.
The legitimate and sovereign powers of
the governing body render money ‘a creature of the state’ (Lerner
1947). Its value stems from the powers of the money-issuing
authority. There is nothing spontaneous about its existence; rather, it is
contingent on what the state has declared to accept in payment of taxed, fees,
and dues at public offices. Various ‘money things’ have dominated private
markets because they have been chosen for acceptation at government
pay offices for settling of debt. Chartalists avoid
circular reasoning by pointing out that money’s role as a unit of account
preceded its role as a means of payment and a medium of exchange. This role
was instituted by the state’s capacity to denominate price lists and debt
contracts into the elected unit of account.
V. Acceptation: Legal Tender Law or the Hierarchy of
Before elaborating on Chartalist theory
and drawing out its implications for policy, one additional clarification is in
order. It is commonly believed that the chartal nature of money rests within the
power of the state to administer legal tender laws (Schumpeter 1954: p. 1090).
Chartalists reject this view and posit that money is ‘a creature of the state’
in a much broader sense than implied by legal code.
When Knapp proclaimed that ‘money is a
creature of law’ (Knapp 1973 : p. 1), he did not propose that
‘money is a creature of legal tender law’, and in fact he explicitly rejected
such an interpretation. Chartalists argue that acceptation depends not on the
legal tender status of money but on the stratified order of social debt
relationships. The power to delegate taxes and determine how they will be paid,
explains why state money is the mostacceptable form of debt.
If money is debt, clearly anyone can
issue money (Minsky 1986: p. 228). Minsky stressed that as a balance sheet item,
money is an asset to the holder and a liability to the issuer. The question of
importance, however, is not the capacity to create debt but the ability to
induce someone else to hold it (ibid.). In a sense, debt becomes money only
after acceptation has occurred (Bell 2001: p. 151). Different monies have
varied degrees of acceptability, which suggests a hierarchical ordering of debts
(Minsky 1986, Foley 1987, Wray 1990, Bell 2001).
If social debt relationships are
organized in a pyramidal fashion, then the least acceptable forms of money are
at the bottom of the pyramid, while the most acceptable ones are at the top.
Furthermore, each liability is convertible into a higher and more acceptable
form of debt. What liability, then, sits at the top of the pyramid?
To settle debts, all economic
agents except one, the state, are always required to deliver a third party’s
IOU, or something outside the credit-debt relationship. Since only the
Sovereign can deliver its own IOU to settle debts, its promise sits at the top
of the pyramid. The only thing the state is ‘liable for’ is to accept its own
IOU at public pay-offices (Wray 2003b: p. 146n9).
This stratified view of social debt
relationships provides a preliminary indication of the primacy of state
currency. But can agents simply refuse to take the Sovereign’s money and,
therefore, undermine its position in the pyramid? The answer is ‘no’, because
as long as there is someone in the economy who is required to pay taxes
denominated in the state’s currency, that money will always be accepted.
This indicates that the emission
of currency is not an essential power of the state. In fact it has a contingent
character. The state may very well declare that it will accept payment of taxes
in, say, salt, cowries, or wooden sticks. Indeed such historical examples
exist, although generally Sovereigns have preferred to use their own stamp or
paper or something over which they possess full and unconditional control. The
essence of state money lies neither in the ability to create laws, nor in the
ability to print money, but in the ability of the government to create ‘the
promise of last resort’ (Ingham 2000: p. 29, emphasis added), that is to
levy taxes and declare what will be accepted at pay offices for extinguishing
debt to the state. The unit of account that settles tax obligations is delimited
by the special authority, which ‘does the counting’ (Ingham 2000: p. 22).
Knapp himself emphasized this point…
Nor can legal
tender be taken as the test, for in monetary systems there are frequently kinds
of money which are not legal tender…but the acceptation…is decisive.
State acceptation delimits the monetary system. (Knapp 1973 : p. 95,
…and Keynes endorsed it:
Knapp accepts as “Money” – rightly, I think –
anything which the State undertakes to accept at its pay-offices, whether or not
it is declared legal-tender between citizens. (Keynes 1930: p. 6n1)
Legal code is only a manifestation of
state powers. Lack of legal tender laws does not mean that state money is
unacceptable – such is the case in the European Union, for example, where no
formal legal tender laws exist, yet the Euro circulates widely.
What, then, is the purpose of legal
tender laws? Davidson provides the answer: legal tender laws determine that
which will be ‘universally acceptable – in the eyes of the court – in the
discharge of contractual obligations’ (2002: p. 75, emphasis added). Therefore,
legal tender laws only ensure that when a dispute is settled by the courts in
terms of dollars (for example), dollars must be accepted.
Note also that legal tender laws do not
mean that all transactions must be denominated (in our case) in dollars.
Clearly such a rule cannot be reinforced since market transactions cannot be all
monitored. Secondly, many places, in fact, refuse to take dollars, a practice
that is hardly illegal (recall the sign of a neighborhood store announcing
‘sorry, no cash accepted’). If a customer, however, files a complaint with the
court andthe court adjudicates in her favor, the store must accept cash
payment. This is the essence of the legal tender law: it only rules on how the
courts settle contractual obligations.
Money is indeed a creature of law – not
legal tender law, but law which imposes and enforces non-reciprocal obligations
on the population.
The ‘money thing’ is only the empirical manifestation of the state’s choice of
the ‘money of account’ that extinguishes these obligations. This is the nature
of the tax-driven money mechanism.
chapter began by outlining several broad and specific propositions of
Chartalism. Thus far, the focus has been primarily on the former. The role of
the public authority and taxation were used to decipher the nature of money as a
creature of the state and to locate its position in the topmost strata of social
debt relations. The contrast with the Metallist story revealed the importance of
distinguishing between the ‘money thing’ and the ‘money of account’. Finally it
was shown that the chartality of money stems not from legal tender laws but from
the state’s ability to create the promise of last resort.
then, does Chartalism shed on money in the modern world and specifically on
government fiscal and monetary operations? The remainder of this chapter
concentrates on the specific propositions of Neo-Chartalism and their
applications to policy.
VI. Money in the Modern World
Neo-Chartalists are particularly concerned with sovereign currencies – those
inconvertible into gold or any foreign currency through fixed exchange rates
(Mosler 1997-98, Wray 2001). Their main point of departure is that most modern
economies operate on the basis of high-powered money (HPM) systems.
HPM – reserves, coins, federal notes and treasury checks – is that which settles
tax obligations and sits at the top of the debt pyramid. Accordingly, it is also
the money ‘into which bank liabilities are converted’ and which is used for
clearing in the bank community (between banks themselves or between private
banks and the central bank) (Wray 1998: p. 77). Only a proper understanding of
how HPM is supplied through the economy and its effect on the monetary system
can lay bare the full implications of modern fiscal and monetary policy.
money is state money. Taxation today functions to create demand for state
currencies in order for the money-issuing authority to purchase requisite goods
and services from the private sector. Taxation, in a sense, is a vehicle for
moving resources from the private to the public domain. Government spending in
sovereign currency systems is not limited by the ability of the state to ‘raise’
In fact, as it will be explained below, sovereign governments face no
operational financial constraints.
grasp the logic of sovereign financing, one must make the analytic distinction
between the government and non-government sectors. For the private sector,
spending is indeed restricted by its capacity to earn revenue or to borrow. This
is not the case for the public sector, which ‘finances’ its expenditures in its
own money. This is a reflection of its single supplier (monopoly) status. For
example, in the United States, the dollar is not a ‘limited resource of the
government’ (Mosler 1997-98: p. 169). Rather it is a tax credit to the
population, which is confronted with a dollar-denominated tax liability. Thus,
government spending provides to the population that which is necessary to pay
taxes (dollars). The government need not collect taxes in order to spend; rather
it is the private sector, which must earn dollars to settle its tax debt. The
consolidated government (including the Treasury and the Central Bank) is never
revenue constrained in its own currency.
purpose of taxation is to create demand for state money, then logically and
operationally, tax collections cannot occur before the government has provided
that which it demands for payment of taxes. In other words, spending comes
first and taxation follows later. Another way of seeing this causality is to say
that government spending ‘finances’ private sector ‘tax payments’ and not vice
versa. Several other implications follow.
spending supplies high-powered money to the population. If the private sector
wishes to hoard some of it – a normal condition of the system – deficits
necessarily result as a matter of accounting logic.
Furthermore, the government cannot collect more in taxes than it has previously
spent; thus balanced budgets are the theoretical minimum that can be achieved.
But the private sector’s desire to net save ensures that deficits are generated.
The market demand for currency, therefore, determines the size of the deficit
(Wray 1998: pp. 77-80).
In a given
year, of course, surpluses are possible, but they are always limited by the
amount of deficit spending in previous years. If during the accounting period
government spending falls short of tax collections, private sector holdings of
net financial assets necessarily decline. The implication is that surpluses
always reduce private sector net savings, while deficits replenish them. It
should also be noted that, when governments run surpluses, they do not ‘get’
anything because tax collections ‘destroy’ high-powered money (Mitchell and
Mosler 2005: p. 9). To understand this, a closer look at government spending and
taxing operations is necessary.
Government Spending and Taxation
There is no
great mystery behind government spending and taxation. The government spends
simply by writing Treasury checks or by crediting private bank accounts.
Conversely, when the Treasury receives a check for tax payment, it debits the
commercial bank account on which the check was drawn. For the purposes of this
paper, it is not necessary to distinguish between the Federal Reserve and the
Treasury when discussing government outlays and receipts. The reason is that
when the Treasury writes a check drawn on its account at the Fed, it effectively
writes a claim on itself. As Bell and Wray (2002-3) point out, intergovernmental
balance sheet activity is of little consequence, because it has no impact on the
reserve level of the banking system as a whole (p. 264).
What is important, however, is that the consolidated actions of the Fed and the
Treasury result in an immediate change in the level of reserves of the banking
system as a whole. It is this effect on reserves that matters for understanding
fiscal policy is one of two important factors that change the level of reserve
balances in the banking system. The other is through Fed open market operations.
The Treasury is the main supplier of HPM. When it writes a check on its account
at the Fed, by accounting necessity, reserve balances in the banking system
increase. When it collects tax payments, on the other hand, bank reserves
decline. Alternatively, when the Fed buys bonds at the open market, it adds
reserves, and when it sells bonds, it drains them. What Chartalism makes clear
next is that the effect of fiscal policy on reserve balances can be large and
disruptive. Thus, while Treasury operations are discretionary, Central Bank
operations are largely defensive in nature.
High-Powered Money, Borrowing and Interest Rates
Historically banks have aimed to minimize non-interest bearing reserve
balances. Essentially, reserves in excess of what is necessary to meet daily
payment commitments are lent in the overnight market to earn interest.
Alternatively, if banks cannot meet reserve requirements, they will borrow
reserves in the overnight market. All else equal, these operations do not
change the level of reserves in the banking system as a whole. Government
spending and taxation, however, do. Any new injection of ‘outside money’ (HPM)
floods the banking system with excess reserves. Banks try to pass the unwanted
reserves to other member banks but, in the aggregate of course, these attempts
are ineffective and they only depress overnight interest rates. Government
spending, therefore, increases system-wide reserves and exerts a downward
pressure on interest rates.
Alternatively, the collection of tax revenue reduces high-powered money, i.e.
reserves are destroyed. Since required reserve ratios are computed with a lag (even
in a contemporaneous accounting system [for details see Wray 1998: pp. 102-4]),
all else equal, tax payments cause a system-wide deficiency of reserves. The
reserve effect is the opposite and, as banks scramble to obtain the necessary
reserves in the overnight market, the federal funds rate is bid up above its
target rate. In sum, discretionary Treasury action directly influences overnight
interest rates through its impact on reserves. These reserve effects are large
and can be very destabilizing (Bell 2000).
government has devised various ways for mitigating the reserve effect of fiscal
policy. The first modus operandi is the utilization of tax and loan
accounts (T&Ls), which offer only temporary relief to these considerable reserve
fluctuations (see Bell 2000 for detailed analysis). While T&Ls reduce the
reserve impact of government spending, the calls on these accounts never match
the exact amount of tax collections or government spending. Therefore, there is
always a flux in reserves in the banking system as a whole that must be
offset in order to avoid swings in the overnight interest rate (ibid.).
accounts do not eliminate fluctuations in reserves altogether, the Federal
Reserve employs a second method for dealing with the excess or deficiency in
reserve balances. To drain the infusion of excess reserves, the Fed offers bonds
for sale in the open market. With this action it effectively provides an
interest-bearing alternative to banks’ interest-free excess reserves and
prevents the overnight interest rate from falling to its logical zero-bid limit.
Bond purchases, conversely, add reserves when there is a system-wide reserve
deficiency and thus relieve any upward pressure on the overnight rate. Thus,
open market operations are more appropriately viewed, not as borrowing or
lending procedures of the government, but as interest rate maintenance
several considerations emerge. Coordinating activities between the Treasury and
the Fed notwithstanding, it is clear that fiscal policy is discretionary and has
a significant impact on reserve balances. Secondly, in an era of positive
interest rate policy, the Fed has no choice but to act defensively to offset
these reserve fluctuations via open market operations. Thus, the Fed largely
operates in a nondiscretionary manner (Wray 1998, Fullwiler 2003).
like taxation, does not fund government spending. Rather bond sales are monetary
operations to hit the target interest rate, not fiscal operations to
finance. Borrowing allows the private sector to earn interest on hoards.
In reality, because of the reserve effect of deficit spending on interest rates,
borrowing is necessary to maintain interest rates.
taxation and borrowing deplete reserves. Taxation simply destroys them, while
borrowing drains them by exchanging uncompensated private sector assets (excess
reserves) with interest-bearing ones (bonds). Taxation and borrowing are not
financing operations for the government but they do affect private sector
nominal wealth. The former simply reduces ‘outside money’ (i.e. private sector
net saving) while the latter exchanges one asset for another, leaving wealth
‘intact’ (Wray 2003b: p. 151).
All of the
above completely reverses conventional wisdom. Governments do not need the
public’s money to spend; rather the public needs the government’s money to pay
taxes. Government spending always creates new money, while taxation always
destroys it. Spending and taxing are two independent operations. Taxes are not
stockpiled and cannot be respent in order to ‘finance’ future expenditures.
Finally, bond sales are necessary to drain excess reserves generated by fiscal
operations in order to maintain a positive interest rate.
Neither taxes nor bond sales serve a financing purpose; the former generate
demand for the currency and the latter are needed to hit interest rate targets,
and thus government spending is not operationally constrained by either.
Value of the Currency and Exogenous Pricing
monetary policy is accommodative and fiscal policy is discretionary, Chartalism
assigns the responsibility for maintaining the value of the currency to the
latter. It was already shown that taxes impart value to government money. As
Innes stressed: ‘A dollar of money is a dollar, not because of the material of
which it is made, but because of the dollar of tax which is imposed to redeem
it’ (1914: p. 165). But he also argued that ‘the more government money there is
in circulation, the poorer we are’ (ibid.: p. 161). In other words, if
government money in circulation far exceeds the total tax liability, the value
of the currency will fall. So it is not only the requirement to pay
taxes, but also the difficulty of obtaining that which is necessary for
payment of taxes, that give money its value.
example, in discussing the experience of American colonies with inconvertible
paper money, Smith recognized that excessive issue relative to taxation was the
key to why some currencies maintained their value while others did not (for
details see Wray [1998: pp. 21-22]). Wray explains: ‘it is the acceptance of the
paper money in payment of taxes and the restriction of the issue in relation to
the total tax liability that gives value to the paper money’ (Wray 1998: p. 23).
important relationship between leakages and injections of HPM, however, is
difficult to gauge. Chartalists argue that, since the currency is a public
monopoly, the government has at its disposal a direct way of determining its
value. Recall that for Knapp payments with chartal money measure a certain
number of units of value. For example, if the state required that to obtain 1
unit of HPM, a person must supply 1 hour of labor, then money will be worth
exactly that – one hour of labor (Wray 2003a: p. 104). As a monopoly issuer of
the currency, the state can determine what money will be worth by setting the
terms on which HPM is obtained. Put differently, the single supplier of money
‘is in the position of being a price setter of its currency [by setting]
unilaterally the terms of exchange that it will offer to those seeking its
currency’ (Mosler and Forstater 1999: p. 174).
means is that the state as a monopoly supplier of HPM has the power to
exogenously set the price at which it will provide HPM, i.e. the price at which
it buys assets, goods and services from the private sector. While it is hardly
desirable for the state to set the prices of all goods and services it
purchases, it nonetheless has this prerogative. As it will be discussed later,
Chartalists recognize that the money monopolist need only set one price
to anchor the value of its currency.
Chartalists point out that it is not necessary to force slack on the economy (as
espoused by traditional economists) in order to maintain the purchasing power of
the currency. Rather full employment policies, if properly implemented, can do
the job (Wray 2003b: p. 106).
government deficit spending necessarily results in increased private sector
holdings of net financial assets. If the non-government sector chronically
desires to save more than it invests, the result will be a widening demand gap
(Wray 1998: p. 83). This demand gap cannot be filled by other private sector
agents, because in order for some people to increase their holdings of net
savings, others must decrease theirs. In the aggregate, an increase in the
desire to net save can only be accommodated by an increase in government deficit
spending. Mosler explains:
Unemployment occurs when, in aggregate, the private sector
wants to work and earn the monetary unit of account, but does not want to spend
all it would earn (if fully employed) on the current products of industry…
Involuntary unemployment is evidence that the desired holding of net financial
assets of the private sector exceeds the actual [net savings] allowed by
government fiscal policy. (Mosler 1997-98: pp. 176-177)
Wray concludes that ‘unemployment is de facto evidence that the
government’s deficit is too low to provide the level of net saving desired.’ In
a sense unemployment keeps the value of the currency, because it’s a reflection
of a position where the ‘government has kept the supply of fiat money too
scarce’ (Wray 1998: p. 84).
Chartalists it is not necessary to use unemployment to fight inflation. Rather
they advance a full employment policy in which the state exogenously sets one
important price in the economy, which in turn serves as stabilization anchor for
all other prices (Wray 1998: pp. 3-10). This proposal rests on the recognition
that the state does not face operational financial constraints, that
unemployment is a result of restricting the issue of the currency, and that the
state can exercise exogenous pricing.
explaining this proposal, it is important to point out that Chartalist
propositions are not necessarily tied to any particular policy
prescription; they are simply a way of understanding the state’s powers and
liabilities and its financing and pricing options.
implications of Chartalism outline the essential causal government powers
regardless of whether they are exercised or not. Many governments willingly
restrict the issue of the currency by balancing budgets. This in no way
indicates that they actually face operational financial constraints. These are
self-imposed, perhaps subject to political or ideological constraints.
Governments furthermore do not explicitly employ their prerogative to set
prices, even though they can. The value of the currency fluctuates, but it does
not mean that states cannot devise a mechanism that serves as an anchor for the
currency’s value. Chartalism simply delivers the important implications of
sovereign currency control that illuminate policy choices.
disclosing the nature of government finance, Chartalists argue that governments
can and should implement ‘functional finance’. The latter was
proposed by the late Abba Lerner, who vigorously objected to any conventional
ideas about what constitutes ‘sound’ finance.
finance can be subsumed under the Chartalist approach, because it appropriately
recognizes money as a creature of the state and attributes two important policy
roles to government. Lerner argued that the state, by virtue of its
discretionary power to create and destroy money, has the obligation to keep its
spending at a rate that maintains 1) the value of the currency and 2) the full
employment level of demand for current output (Lerner 1947).
policy, therefore, should be undertaken with the sole concern about its ability
to achieve these two goals and should not be influenced by ideas about balancing
the budget ‘over a solar year or any other arbitrary period’ (Lerner 1943: p.
41). It is the results of government actions that should guide policy
and not any ‘established traditional doctrine about what is sound or unsound’
(ibid.: p. 39).
government to achieve its two main objectives, Lerner proposed two principles of
functional finance, which inform decisions on the requisite amount of government
spending and the manner of financing it. More specifically, the first principle
provides that total government spending should be ‘neither greater nor less than
that rate which at the current prices would buy all the goods that it is
possible to produce’ (Lerner 1943: p. 39). Spending below this level results in
unemployment, while spending above it causes inflation. The goal is to keep
spending always at the ‘right’ level in order to ensure full employment and
price stability. The second principle states that government spending should be
‘financed’ through the issue of new currency. This second ‘law’ of functional
finance is based on Lerner’s recognition that taxation does not finance spending
but instead reduces private sector money hoards (ibid.: pp. 40-41).
finance can be implemented in any country in which the government provides the
domestic currency (Wray 2003b: p. 145). Two policies, virtually identical in
design, that embrace the functional finance approach are the Employer of Last
Resort (ELR) (Mosler 1997-98, Wray 1998) and the Buffer Stock Employment Model
(Mitchell 1998). These policy prescriptions aim to stabilize the value of the
currency by simultaneously eliminating unemployment. The proposals are motivated
by the recognition that sovereign states have no operational financial
constraints, can discretionarily set one important price in the economy, and can
provide an infinitely elastic demand for labor.
Chartalists have advocated such
employment programs based on the work of Hyman Minsky and Abba Lerner and which
recall the New Deal experience in the United States. The Employer of Last Resort
(to use Minsky’s terminology) is very simply a government program, which offers
a job at a fixed wage/benefits package to anyone who has not found employment in
the private sector but is ready, willing, and able to work.
The ELR is proposed as a universal
program without any means tests, thereby providing an infinitely elastic demand
for labor by definition. It eliminates unemployment by offering a job to anyone
who wants one. Through the ELR, the government sets only the price of public
sector labor, allowing all other prices to be determined in the market (Mosler
1997-98: p. 175). So long as the ELR wage is fixed, it will provide a
sufficiently stable benchmark for the value of the currency (Wray 1998: p. 131).
As it was explained above, the value of the currency is determined by what one
must do to obtain it, and with ELR in place, it is clear exactly what that is:
the value of the currency is equal to one hour of ELR work at the going ELR
Furthermore, it is argued that ELR
enhances price stability because of its buffer stock mechanism (Mitchell 1998).
In a nutshell, when recessions hit, jobless workers find employment in the
public sector at the ELR wage. Total government spending rises to relieve
deflationary pressures. Alternatively, when the economy heats up and
non-government demand for labor increases, ELR workers are hired into private
sector jobs at a premium over the ELR wage. Government spending automatically
contracts, relieving the inflationary pressures in the economy. Thus, public
sector employment acts as a buffer stock that shrinks and expands
counter-cyclically. This buffer stock mechanism ensures that government spending
is (as Lerner instructed) always at the ‘right’ level.
This proposal innovatively suggests that
full employment can anchor the value of the currency (quite contrary to the
conventional belief that unemployment is necessary to curb inflation). The ELR
proposal utilizes the logical extensions of chartal money to achieve the two
goals of government – the elimination of unemployment and the stabilization of
Space does not permit a detailed
discussion of this program; what is important is to emphasize its chartal
institutional features. The ELR/Buffer Stock approach recognizes that:
1)The government is the only institution that can divorce ‘the offer of
labor from the profitability of hiring workers’ (Minsky 1986: p. 308) and can
thus provide an infinitely elastic demand for labor, without concerns about
2)The government can formulate an anchor for the value of its currency by
exogenously fixing the wage of ELR workers.
3)The government can utilize a buffer stock mechanism to ensure that
spending is always at the right level – neither more, nor less.
4)The responsibility for full employment and price stability rests with the
Treasury, not the Fed. ‘Sound finance’ assumes a whole new meaning: it is that
which secures full employment and price stability.
Chartalists stress that such an
employment program is a policy option only for countries with sovereign control
over their currencies. It is not a viable proposal for nations that have
dollarized or operate under currency boards or other fixed exchange rate
regimes. This is because the important link between the money issuing authority
and the fiscal agent has been severed, thereby drastically reducing the range of
available stabilization policy options. Goodhart has pointed out that,
similarly, the present institutional design of the European Monetary Union
exhibits an ‘unprecedented divorce between the main monetary and fiscal
authorities’ (1998: p. 410).
Kregel (1999) has advanced an innovative proposal to correct for this
institutional flaw and allow the EMU to implement an ELR-type of program. He
recommends that the ECB act as the fiscal agent for the Eurozone as a whole and
implement functional finance to secure high employment and price stability.
Chartalist analysis can equally be
applied to the study of contemporary domestic issues, such as the provision of
universal retirement, healthcare and education. The present debate on the social
security ‘crisis’ in the U.S., for example, and virtually the entire rhetoric on
government budgeting, rest on fictitious beliefs concerning fiscal spending
limitations. Chartalism insists that focus on nonexistent problems disables
adequate policy responses to pressing issues such as economic growth,
development, and currency and price stability. Only after we abstract from
conjured obstacles to fiscal policy, can we begin to address problems relating
to the provision of adequate healthcare and education, viable employment
opportunities, and requisite goods and services for the aging population.
This chapter began with the broad and
specific propositions of Chartalism. These constructively illuminate the
tax-driven nature of money and the sovereign powers of modern states. While
Chartalism is not wedded to a single policy proposal, it logically identifies
functional finance as a viable tool for economic stabilization. Chartal
insights can be applied to many different areas, from understanding various
currency regimes to such issues as social security and unemployment. Chartalism
is especially suited for studying contemporary monetary and fiscal policy.
In closing it is suitable to recall
Lerner’s cogent observation that ‘The problem of money cannot be separated from
the problems of economics generally just as the problems of economics cannot be
separated from the larger problems of human prosperity, peace, and survival’
(Lerner 1947: p. 317).
Lerner further cautioned that in
sovereign currency regimes ‘Functional Finance will work no matter who pulls the
levers [and that] those who do not use Functional Finance, …will stand no chance
in the long run against others who will’ (Lerner 1943: p. 51). Chartalism is
capable of contributing constructively to the public debate about viable policy
actions in the public’s interest.
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 In a paper of the same title,
Ingham recounts what Keynes referred to as his ‘Babylonian madness’. In
a letter to Lydia Lopokova, Keynes wrote that, endeavoring to locate the
true origins of money in ancient Near East civilizations, he ‘became
absorbed to the point of frenzy’ (Ingham 2000: p. 16n3).
 In sovereign currency systems,
states do not promise convertibility into any commodity or foreign
currency (for details see Wray 2005). Chartalism, however, is not
limited to floating exchange rate systems – ‘even a gold standard can be
a Chartalist system’ (Wray 2001: p. 1). The choice of exchange rate
regime has various implications for state spending power, but it does
not mean that the state has lost the ability to levy a tax on its
subjects and declare how this tax will be paid.
 Interested readers are directed
to chapter X by Tymoigne and Wray
in the present volume.
 To ‘pay’ originally meant to
‘make peace’ or ‘to pacify’ (Hudson 2003: p. 47, Wray 2003a: p. 97).
 In a
sense, money was a ‘public good’ (Hudson 2003: p. 42).
 The evidence of clay tablets in
Mesopotamia also suggests that writing and numbers too emerged from the
necessity to record debt (Ingham 2004b: p. 91, Henry 2004: p. 94).
 Henry adds another dimension to
our understanding of money. By tracing the evolution of Egypt from an
egalitarian to class society, he argues that money cannot exist without
power and authority. Society based on hospitality and exchange simply
had no use for it, while in a stratified society the ruling class is
compelled to devise standard units of account, which measure not only
the economic surplus collected in the form of taxes, but also the royal
gifts and religious dues that were imposed on the underlying population
(Henry 2004: p. 90).
 The case of Egypt is
particularly interesting because the official unit of account, called
the deben, had no relation to any specific object. It was an
abstract weight measure equaling 92 grams, whereby various ‘things’ –
wheat, copper, or silver – equivalent to 92g, and multiples thereof,
served as money (Henry 2004: p. 92).
 For a detailed discussion of
Smith’s position, see Wray 1998: pp. 19-23 and Wray 2000: pp. 47-49.
 This does not mean of course
that the private sector cannot or has not created money (Goodhart 1998:
p. 418). The point is that the explanations of money’s origins, which
rest on the role of the state, are empirically more compelling.
 For structure and composition
of the debt pyramid, see Bell 2001.
For example, to be accepted, household or firm IOUs must at least be
convertible into deposits (bank money) or cash (state money). Likewise,
bank deposits must necessarily be convertible into reserves or cash
(state high-powered money) to be accepted. State money is always at
the end of the convertibility chain.
 Note also that a violation of
the ‘one nation – one currency’ regularity does not mean that the state
has lost the power to tax and declare what will extinguish tax
obligations. In the case of currency boards, for example, the state has
willingly abandoned sovereign control over its own currency in
favor of a foreign monetary unit but, as long as the domestic currency
is demanded for payment of taxes, it will circulate. In fully
dollarized countries, the state has chosen to declare that all
debts are payable in dollars (even if it does not have sovereign control
over the issue of dollars). In all of the above cases, the state has
nevertheless exercised its prerogative to determine what will serve as
 Throughout history, states
which have experienced a collapse of their tax systems have also faced a
collapse in their currencies (see Hudson 2003 for details).
 Chartalists prefer to describe
capitalist economies as HPM (high-powered money) systems as opposed to
fiat currency systems, because of the important role the state plays in
supplying reserves (see below), and because the term ‘fiat currency’ is
not always used to refer to bank reserves (Wray 2003b: p. 146n8).
 Although it may be limited by
what is available for sale (Mosler 1997-98: p. 175).
 Godley (1999) has demonstrated
that, by accounting necessity, public sector deficits equal private
sector surpluses (including those of firms, households and foreigners).
 Clearly, no monetary aggregate
includes the Treasury balance at the Fed (Bell and Wray 2002-3: p. 265).
 Private bank credit creation
in and of itself does not add or destroy reserves. Although loans create
deposits, they do not represent a net addition or subtraction from
reserves, because the creation of a private sector asset has been
simultaneously accompanied by a new private sector liability, and thus
no net new assets have been created. This is why bank money is referred
to as ‘inside money’ and the process of credit creation has been termed
‘leveraging of HPM’ (Wray 1998: p. 79 and p. 109).
 For technical discussion of
Fed operations, see Fullwiler 2003, 2004, 2005.
 The discretionary variables of
monetary policy are the two short-term interest rates, which the Fed
sets exogenously, i.e., the federal funds rate and the discount rate.
 It is, in fact, misleading to
refer to bond sales as ‘borrowing’, because they are never
undertaken to fund government spending. Once again, quite simply, they
are interest rate maintenance operations.
also that contrary to orthodox wisdom, deficits do not ‘crowd out’
private spending. In fact, one could argue that they have a ‘crowding
in’ effect (Wray 2003b: p. 157n3), since they result in a net
increase (not reduction) in reserve balances, i.e., an increase in
private sector net financial assets.
notes: ‘If the state simply handed HPM on request, its value would be
close to zero as anyone could meet her tax liability simply by
requesting HPM’ (2003a: p. 104).
 In the same vain, Wray has
argued that the responsibility for the value of the currency rests with
the Treasury and ‘prudent’ fiscal policy should be considered that which
maintains the currency’s value (1998: p. 1).
 Similar programs are also
knows as Public Service Employment and the Job Guarantee. See also
Harvey (1989) and Gordon (1997).
 Lerner recognized that
whatever mechanism for maintaining the value of the currency is chosen,
the key is not in the direct supply of money per se, but in the
determination of wage rates and rates of markup of selling prices over
costs (Lerner 1947: p. 315).
 Goodhart (1998) has shown that
the institutional design of the EMU is motivated by Optimum Currency
Area analysis, which is based on flawed M-theory.