Abstract

This article is a reassessment of the relation between Georg Friedrich Knapp and Modern Monetary Theory, a contemporary strand of economics that, under the term chartalism coined by Knapp, is presented by its proponents as a continuation of his 1905 State Theory of Money. It shows that, contrary to Modern Monetary Theory, which proposes a policy-oriented monetary view of public deficit, Knapp's scientific aim is restricted to finding a generally valid concept of means of payments. Different meanings of the terms chartalism and money also separate the two theories. However, both share an understanding of the use of money as driven by taxes and a general concept of means of payment as a situational counterclaim over a central issuer, be it private or public. In their view, private money always holds subordinate rank inside public monetary systems because of imposed convertibility into state currency. Despite such theoretical convergence, the article shows that Knapp's chartalist theory was not rediscovered from oblivion in the mid-1990s when Modern Monetary Theory made its appearance, in which it arguably played no decisive role.

Introduction

The “neochartalist” school of thought was born in the 1990s, following the publication of Warren Mosler's “Soft Currency Economics” in 1995 and early works by Pavlina R. Tcherneva (1996), L. Randall Wray (1998), William Mitchell (1998), and Stephanie Bell (2000), among others. Its fundamental idea is that as holders of taxation power and issuers of the domestic currency, governments are not financially constrained to accept unemployment. It has attracted a lot of public attention in recent years under the name Modern Monetary Theory, especially in the United States since 2016 and in other countries since recent general-audience books by Tcherneva (2020) and Kelton (2020) have been published and translated, thereby reaching non-Anglophone and nonacademic readers.

The term neochartalism is a nod to Georg Friedrich Knapp (1842–1926), the author of Staatliche Theorie des Geldes (The State Theory of Money), a book published in Germany in 1905 and partially translated into English in 1924. Knapp created the adjective chartalist signifying his understanding that money is a legal token, in contrast to the metallist understanding of money that he contested. Neochartalism was often used by its proponents in the early 2000s and was later gradually replaced by Modern Money Theory or Modern Monetary Theory (Wray 2020: 3), perhaps because the latter is more striking in the political arena of ideas.

The meaning of the adjective chartalist, as well as its revival led by “neochartalist” Modern Monetary Theory authors, is historically problematic. In a 2020 History of Political Economy article cleverly titled “Georg Friedrich Knapp Was Not a ‘Chartalist,’” Juan Ramón Rallo argues that “neochartalists” misunderstand Knapp's theory, owing to a politically biased reading of his work. Rallo (2020) argues that the meaning of the term chartalism used by Modern Monetary Theory economists differs from what Knapp meant (781–84) and overemphasizes the role of the state in the monetary system (784–86), as Knapp, contrary to his alleged contemporary followers, neither thought that taxes drove the use of money nor denied the possibility of nonstate money, used by private pay-societies.1 In Rallo's words,

Our purpose in this article is to sharply differentiate between the current use of the term “chartalism” (which we will distinguish by placing it in quotation marks), and the term as coined and used by Knapp (chartalism, without quotation marks). Contrary to initial appearances—and even to Knapp's discourse in much of his book—we will find that Knapp's chartalism does not necessarily link the origin of money to a particular body holding political authority, thus it can be said that Knapp was not a “chartalist” (although he indeed was a chartalist). (775)

Rallo's article, which adds a historical assessment to the numerous critical comments of Modern Monetary Theory regarding theory itself, has not yet received a response either from Modern Monetary Theory scholars themselves or from other historians of economics. The recent study by Drumetz and Pfister (2021) did not really question the role of Knapp's legacy in Modern Monetary Theory, despite their critical reading of both theories. Ocampo (2021) considered Knapp's legacy as obvious, and Ehnts (2019), although a Modern Monetary Theory specialist of Knapp's early reception in German economics, also postulated rather than showed the theoretical continuity between Knapp and Modern Monetary Theory, not focusing on the question of the meaning of the “neochartalist” label (henceforth we exclusively refer to “Modern Monetary Theory” instead of “neochartalism”). Trautwein (2003) summarized and assessed key aspects of Knapp's monetary thought, but he made no comparison with the still relatively unknown ideas of Modern Monetary Theory at the time. Greitens (2022) recently undertook a brief description of the Modern Monetary Theory interpretation of Knapp and found, in line with Rallo (2020), that Modern Monetary theorists overemphasize the power of the state in money management and money creation, a feature that he especially attributed to an erroneous translation of the first sentence of Knapp's book.2

Without prejudice to its links with Knapp's chartalism, Modern Monetary Theory can be summarized by listing its core ideas, here restricted to closed economies:

  • 1) The state has the power to define a money-of-account and to determine what can be used as money. It does so by choosing what it accepts in discharge of tax liabilities. Private-sector agents value money because it is the only instrument that can discharge their tax liabilities: that is the taxes-drive-money view (Wray 1998: 18). In the modern era, states acknowledge only two types of money by receiving them in payment of taxes: fiat currency that they issue themselves (or high-powered money) and privately issued bank money convertible into state fiat currency.

  • 2) State fiat currency issuance is the monopoly of the government sector, defined as the consolidation of the Treasury and the central bank.3 Any outflow from the government to the private sector is currency issuance, and any inflow, currency destruction. Consequentially,

    • 2a) Only Treasury expenditures expand the fiat currency stock, and only taxes contract it without financial counterpart operations. Public deficits (i.e., excess of expenditures over taxes) are thus the only source of net financial assets for the aggregate private sector in a closed economy (Wray 2015: 11).

    • 2b) The government sector (Treasury or central bank) sells and buys public debt securities in order to maintain interest rate targets. Selling securities (interest-earning assets) drains fiat currency reserves (non-interest-earning assets), thereby increasing interest rates, and buying securities releases fiat currency, thereby lowering interest rates. The fine-tuning of short-term interest rate policy requires a close monitoring of Treasury operations by the central bank, whose action is thus corrective (Mosler 1995: 7–10; Bell 2000: 609–11).

    • 2c) Currency inflows to the government sector in the form of taxes and public debt issuance are not needed prior to expenditures, as the government is the currency issuer, bound by no budget constraint.4 The only functions for taxes are to create demand for fiat currency and reduce aggregate demand, and the only function for public debt issuance is to manage interest rates.

  • 3) Convertible bank money is endogenously issued inside the private sector in counterpart of credits or asset purchases by banks, who use fiat currency reserves for interbank payments. Bank money issuance does not create net financial wealth for the aggregate private sector because bank money is a liability of the private banking system (Wray 2015: 12). Contrary to the money multiplier view, causality runs from the endogenous stock of bank money to the stock of banks’ currency reserves (Mosler 1995: 6–7; Wray 1998: 107–11).

  • 4) The implementation of an employer-of-last-resort program would in theory allow simultaneous full employment, output stabilization, and price stability, by anchoring the nominal cost of unskilled labor (Mosler 1997: 168). A state issuing its own currency can finance such a program.

Our aim here is to reexamine Knapp's State Theory of Money and to compare it with the core ideas advanced by Modern Monetary Theory, to ascertain what unites and differentiates them, and thus to assess the legitimacy of Modern Monetary Theory's claim on Knapp's legacy.

Knapp and Modern Monetary Theory: Epistemic Divergences and Contrasting Policy Views

The reader of Knapp's State Theory of Money and of L. Randall Wray's (1998) Understanding Modern Money, the first Modern Monetary Theory book following Mosler's (1995) seminal essay, might be struck first by the contrast between their intellectual projects. While Wray and Modern Monetary Theory proponents aim to advance an alternative macroeconomic theory, grounded on an updated analysis of modern monetary systems showing the usefulness of public deficits, Knapp's aim was restricted to formulating a generally valid concept of money that would explain how intrinsically valueless money could be given value by legal means. This was not related to political or normative intentions. “For myself,” Knapp ([1905] 1924: viii) wrote in the preface to the first edition of The State Theory of Money, “I came to give up any attempt to influence public men, and I give the first place to the theory or philosophy of the subject.”

Surprisingly, in this quotation, Knapp did not mention economics but rather claimed that his book belongs to “philosophy.” Indeed, Knapp seemed not to consider himself an economist in the book, although he had studied political economy (Staatwissenschaften) and was a university professor of economics (Trautwein 2003: 167–68). In his review of The State Theory of Money, James Bonar (1922: 44) emphasized that “Professor Knapp stands perhaps alone in presenting a theory of money without a theory of value” and thereby places himself outside of economics.5 This assessment was shared by many of Knapp's German contemporaries, such as Robert Liefmann,6 Ladislaus von Bortkiewicz, Melchior Palyi, and Ludwig von Mises, who wrote in 1924 that Knapp's State Theory does not belong “to a systematic theory of political economy” (Ellis 1934: 18). Joseph Schumpeter (1954: 1090) was also very critical of Knapp in discussing The State Theory of Money in his History of Economic Analysis, describing the controversy triggered by the book as a “tempest in a teapot” and dismissing its theory of money as a means of payment created by law for being “as true and as false as it is to say, for example, that the institution of marriage is a creature of law.”

Most of The State Theory of Money is indeed written in descriptive form and merely presents typologies about money, the general aim being to uncover from historical evidence an accurate general concept of money; very few pages are dedicated to analyzing economic causal and quantitative mechanisms, which perhaps Schumpeter (1954: 3), under the term “economic analysis,” understood as the only “intellectual efforts that men [make] in order to understand economic phenomena.” Knapp explicitly rejected the study of the value or purchasing power of money and was preoccupied with its sole validity. The term, being a translation of the German Geltung that can also be rendered as “recognition,” means the capacity to bear nominal value.7 The economic phenomenon that Knapp focused on was thus the capacity of given instruments to bear nominal value, irrespective of their intrinsic properties, and the provided answer was that the adequate concept of money included state acceptance in tax payments.

Perhaps Knapp's minimalist theoretical ambition is a consequence of his being close to the younger German historical school (Trautwein 2003: 168; Greitens 2022: 193), one of whose main tenets was the denial that any generally valid economic causal laws exist. His interest in definitions and descriptions is part of his empirical and “institutional complexion” underlined by Trautwein (2003: 167), as his previous fields of study were demographic statistics and agrarian history (168). Chapter 4 of The State Theory of Money, dedicated to eight case studies of monetary history, country by country, testifies to Knapp's empirical grounding. But this part of the book was less remembered, as it was never translated.

Knapp's almost exclusive search for a general concept of money instead of explanations of quantitative monetary mechanisms earned him the accusation of doing “metaphysics” (Ellis 1934: vii; Rist 1938: 368) or to have given birth to “scholastic disputes” (Trautwein 2003: 173). In his book, Knapp indeed advanced a first-principles theory of money that presumably cannot be easily tested and falsified, that is, money metaphysics. Similarly, Modern Monetary Theory was occasionally castigated as nonscientific, Ocampo (2021: 34) for instance rebranding it as “Magical Monetary Thinking.” As Ellis (1934: 3) remarked in the opening of his German Monetary Theory, that accusation should not be a ground for exclusion from the society of worthy economists, because most monetary theories cannot ultimately be based on anything but first principles that rely on untestable concepts. Consequently, “the economist can ill afford being disdainful of any honest effort to clarify the concepts with which he operates” (3). A close contemporary of Knapp such as Carl Menger, who was never blamed for not being an economist, also proposed a highly abstract, metaphysical, account for the origin and nature of money, identifying its ultimate raison d’être in the shared need for commercial liquidity (Menger 1892), whereas Knapp's theory saw it in the taxation power of political entities, as does Modern Monetary Theory.8

Despite being concerned mainly with purely theoretical and philosophical issues, Knapp did not withhold his opinion about the characteristics of an ideal monetary system. His ideal system was very different from that which Modern Monetary Theory scholars advocate. “Nothing,” Knapp ([1905] 1924: 1) warned in the opening chapter of his book, “is further from our wishes than to seem to recommend paper money pure and simple in such a form, for instance, as the Austrian State Notes of 1866. It is well for any State to wish to keep to specie money and to have the power to do so. And I know no reason why under normal circumstances we should depart from the gold standard.” The reason why Knapp mentioned his personal wish to stick to a gold-standard system is that, in his view, the metallist theory (“the view that we can define the unit of value as a given quantity of metal” [10]) confuses what it understands and what it advocates, that is, confuses its positive and normative conclusions. Metallists cannot reach a satisfying theory of money, because they simultaneously define and assess money; they consider their definition of good money as the definition of money in general, the mistake being most obvious when they consider paper money:

If the man in the street now raises the practical question that he does not want to have the paper Chartal form [paper money] at all, it seems to him dangerous, a menace to the general weal, he may very likely be right, but he is going outside the domain of theory—as indeed he likes to do, for the natural man has the temperament of a public man; he wishes, in laudable anxiety for the general welfare, to employ his activities in bringing the Good to birth. And who would wish to put obstacles in his path?

This, however, is not the attitude of the theorist. He must follow lytric forms,9 both good and bad, with equal attention. He will not begin by giving advice, but by laying down principles. For him the essence of a thing is something quite different from its practical importance. His temperament is not that of the public man, but of the philosopher.

The system, dangerous in practice, pleases him because essential characteristics are there most easily recognisable, but he takes care not to recommend such a system. He is not there to make recommendations but to explain phenomena. He leaves to the public man the business of bringing the Good to birth; and the most influential public man is often the weakest theorist. (48–49)

By informing the reader of his personal preference for gold-standard monetary systems, while holding a theory that paper money is as real money as gold money, Knapp acknowledged that there is no connection between his theory and any political agenda, the latter being left to “the public man,” thereby underlining the weakness of his metallist adversaries, whose understanding of money was limited by being able to think only about practical considerations. Disconnecting positive from normative analysis also distinguishes Knapp from Modern Monetary Theory, as Modern Monetary Theory writings always stress the link between the positive theory of money (the state as high-powered money issuer and net-of-debt financial asset provider, and the endogeneity of bank money) and normative aspects (support for public-sector deficits and for government to serve as the employer of last resort). Sometimes Modern Monetary Theory proponents seem to make positive and normative assertions simultaneously, taking as universal norms what are circumstantial realities: for instance, when they implicitly recommend a Treasury and central bank consolidation policy by considering such consolidation as an established fact, which of course it is not in most countries (Laurentjoye 2022: 130–31).10

A key difference between Knapp and Modern Monetary Theory, often overlooked by Modern Monetary Theory authors, is that Knapp did not support deficit spending by the government (Ocampo 2021: 41). The question whether deficit spending is good for the economy has no direct link with the question of the validity of money that occupied Knapp's attention. But Knapp did not even envisage the typical Modern Monetary Theory idea that the state, being the ultimate money issuer, does not need preexisting money invoices to spend money and can safely run deficits. On the contrary, Knapp ([1905] 1924: 178) wrote that “the economy of the State is in excellent order . . . when in the course of each year it only expends as much money as it is certain to receive.” Even a careful reader could not detect in The State Theory of Money any clue that Knapp believed, as Modern Monetary Theory does, that the state is an economic agent unbound by an intertemporal budget constraint, as he thought that even a yearly intratemporal budget constraint was to be enforced.

This major difference comes from opposed views of the money issuance process. Whereas Modern Monetary Theory is built upon the idea that payments from the state to the private sector in state currency are intrinsically money issuance, as there is no difference, from the accounting perspective of private agents, between money being held in state vaults and money not existing, Knapp's theory of money issuance was not based on the accounting logic of payments from the state. He more conventionally understood money issuance as the result either of an on-demand minting process called hylolepsy in the case of metallic money (Knapp [1905] 1924: 80) or of bank credit and discount operations in the case of banknotes (128–129).11 “State notes” are envisaged (128), but their issuance process is not explicit and is not regarded, as Modern Monetary Theory does with fiat currency, as a process creating net assets for the private sector in the aggregate and therefore as something to be advocated in situations of insufficient aggregate demand.

Besides these epistemic and policy divergences, the “neochartalist” label alluding to Knapp's work is problematic because of subsequent terminological changes that require clarification.

A Different Meaning Attributed to Knapp's Chartalism and Money Concepts by Modern Monetary Theory

Rallo (2020) rightly notices that Modern Monetary Theory authors, when using the terms chartalism and money, refer to different meanings from that used by Knapp.

Rallo (2020: 774–75) maintains that Modern Monetary Theory authors have a special understanding of “chartalism,” namely, “those doctrines that link the origin of money with the political authority of the state, that is, with any administrative body that enjoys the socially recognized right to make and enforce laws through the use of coercion. Therefore, ‘chartalism’ implies that money can be created only through a centralized imposition upon society by the rulers (by the holders of political authority).” The Modern Monetary Theory definition of chartalism, Rallo argues, is a misreading of Knapp, as Knapp produced a general theory of the means of payment in which private and decentralized money, and not only state-based money, is envisaged. Rallo therefore denies that Knapp was a “chartalist” (with quotation marks).

Rallo is certainly correct in noticing the difference between the meanings attached by Knapp and by Modern Monetary Theory to the word chartalism. Modern Monetary Theory authors do use chartalism to refer to the first core idea of their theory, that is, the theory of the state as the entity that, owing to its taxation power, can define and issue money. Wray (1998: 18) for instance refers to “the ‘taxes-drive-money view’ . . . which we might as well call the Chartalist approach.” However, Rallo correctly observes that Knapp did not coin the word chartalism to name what Wray refers to.

Indeed, Knapp used this new word for the first time in the second section of the first chapter of The State Theory of Money ([1905] 1924: 32), before presenting the idea that taxes are somehow relevant in defining money (except in a brief sentence in the preface [vii]). By coining the new word, Knapp sought to identify the source of the validity of a metallic means of payment: Are metallic means of payment accepted because of their metallic measurable content, or because of the specific forms stamped on them? The first case, validity being ensured by metallic content, is called “pensatory” validity, which is made from the Latin verb pensare (to weigh). The second case is called “proclamatory,” payment being ensured by proclaiming formed specie to be worth a given number of monetary units, regardless of its weight or metallic content. Knapp was looking for a new adjective to describe monetary specie that is both formed in a specific way (which Knapp calls morphic) and has a proclamatory validity. To explain his intuition to the reader, he used the examples of the cloakroom ticket, which only by virtue of its form carries the right for its holder to get his or her coat back, and of the stamp on the letter attesting that the required postage has been paid. He then wrote, “Perhaps the Latin word ‘Charta’ can bear the sense of ticket or token, and we can form a new but intelligible adjective—‘Chartal.’ Our means of payment have this token, or Chartal, form. Among civilised peoples in our day, payments can only be made with pay-tickets or Chartal pieces” (32).

Although Knapp's propensity to overcreate neologisms may be regrettable (e.g., proclamatory already bears the meaning of chartal, since “only morphic means of payment can be proclamatory” [Knapp (1905) 1924: 38]) and was criticized early on by Macquart (1906), the more important point is that chartal as an adjective was introduced not to signify that money is issued by the state and its use driven by taxes but to indicate that money can be valid not because of its weight but because its form has been proclaimed to bear a specific value.12 As such, chartal does not bear more conceptual specificity than the older distinction drawn in English between trading by weight and by tale, except that the underlying tale is of legal nature.

Some might object that, in Knapp's thought, a proclamation giving validity to chartal money relies on “law,” and that by “law” he meant “the legislative activity of the State, . . . legislative policy” (Knapp [1905] 1924: 40).13 Two clues nevertheless show that chartal does not refer to a means of payment being public or state-defined. First, in The State Theory of Money's section 8a, Knapp writes that a banknote is “nothing else but a chartal means of payment—issued privately; it is a private till-warrant available for payments to the bank (epitrapezic payments)” (134). A privately issued and accepted means of payment can therefore be called “chartal.” Second, in chapter 1, section 1, Knapp explains that the state can impose the use of pensatory (i.e., nonchartal) metallic means of payment by, for instance, deciding that copper as a metal and without any other particular characteristics shall be the official means of payment. Thus, the use of the word chartalism by Modern Monetary Theory authors to refer to money being a creation of the state appears inaccurate (Rallo 2020: 782), Knapp himself having mentioned the possibility of both nonchartal state means of payment and of private chartal means of payment.

It can be argued that the misuse of the word chartalism dates back to Keynes (Rallo 2020: 773), who, despite his role in promoting the 1924 translation of The State Theory of Money (he is thanked by Knapp in the preface to the English edition), wrote in his Treatise on Money that “Knapp's Chartalism [is] the doctrine that money is peculiarly a creation of the State” (Keynes 1930: 4). Additional evidence shows that Keynes's misuse of chartalism influenced Modern Monetary Theory, as Wray reports that he discovered Knapp in 1986 when he read the Treatise (Wray 2020: 4). This seems to explain why Modern Monetary Theory authors, relying on Keynes, misused chartalism from the beginning.

But the confusion between the two meanings of chartalism actually happened earlier, in the German-language debates around Knapp's book. With the notable exception of Max Weber ([1921] 2019), who in Wirtschaft und Gesellschaft (Economy and Society) wrote an extended comment on Knapp and understood rightly chartality as the token-ness of money, most German monetary theorists already considered chartalism as a short form for state theory of money. Ellis (1934: 4) explained:

Nominalism embraces two branches: “chartalism,” which represents money as the creature of the state, and another which discovers the origin of money in trade practice, in spontaneous agreement as to the unit of account . . . “orthodox nominalism.” . . . In Georg Friedrich Knapp's The State Theory of Money (London, 1924) “nominality” and “chartality,” applied to money, carry about the same connotation. But in the twenty-odd years which have elapsed since Knapp coined the term “chartal,” the distinction given above has evolved. An identification of the two still occurs with those writers who would detract from ordinary nominalism by connecting it with the “state theory.”

The change in the meaning of chartalism cannot therefore be blamed exclusively on Keynes and Modern Monetary Theory; while erroneous, the use of chartalism to designate a state-based understanding of money became common very early on, especially because early “orthodox” nominalists wanted to be considered separately from Knapp's theory (Ellis 1934: 34–35).

Rallo (2020: 778) also observes that money is more narrowly defined by Knapp than by Modern Monetary Theory scholars. He explains that according to Knapp, money is only one type of means of payment among three: “Authylism is the primitive form of structuring payment before money appears, chartal payment is the means of payment that Knapp specifically denominates money, and the giro payment is the form of structuring payments that overcomes money (and makes it unnecessary) after money has already appeared” (775–76).14 Knapp therefore defines money only as material specie that has a given form and that is accepted because of its form, that is, a chartal means of payment. But “means of payment” is a broader category than “money” in The State Theory of Money. Consequently, bank deposits are not considered “money,” in accordance with a common view at that time, although they are a means of payment (of the giro type). By contrast, Modern Monetary Theory authors hold today's consensual view that bank money deserves to be called money, although it has no materiality. Following Trautwein (2003: 174), Knapp's general insistence on the irrelevance of materiality can precisely be acknowledged to have induced later German nominalist economists to include transferable bank deposits in their concept of money, paving the way to today's view.

The inconsistent definitions adopted by Knapp and Modern Monetary Theory authors should not, however, conceal the major theoretical similarities, especially regarding the so-called tax-driven approach to money (we will henceforth use money as equivalent to means of payment, as the modern meaning of the former is what Knapp meant by the latter).

Knapp's and Modern Monetary Theory's Taxes-Drive-Money Views

Among the differences he spots between Knapp and Modern Monetary Theory, Rallo (2020) insists on their different understandings of the role of payments made to the state in their monetary theories. Knapp ([1905] 1924: 96–97) actually had created a useful terminology to classify different types of payment in the economy, based on their relation to the state. Centric payments are those that involve the state, apocentric payments are those made by the state to the private sector, and epicentric payments are those made by private agents to the state. Payments not made to the state are called anepicentric, and those between private agents, paracentric.15

The question that arises from this terminology is whether the insistence by the state that all epicentric payments be mediated by its designated medium implies that paracentric or anepicentric transactions will also be mediated by that medium. Rallo (2020: 788) argues that “Knapp believed that state notes were accepted by the public in its anepicentric payments not because they could be used in epicentric payments (i.e., to pay taxes) but because the internal rules of the pay-society (the state) established the obligation among its members to accept them in anepicentric payments (i.e., legal tender laws).” Thus, Rallo denies that Knapp endorsed the Modern Monetary Theory's taxes-drive-money view, which is perhaps the most important of Modern Monetary Theory's core ideas. Assessing whether a continuous conceptual strand connects Knapp and Modern Monetary Theory requires assessing whether Knapp endorsed or rejected the taxes-drive-money view.

However, doing so requires distinguishing between three possible interpretations of the taxes-drive-money view, according to their level of radicality.

  • 1) The taxes-define-money view, that is, the idea that money is defined by its acceptance by the state in discharging tax liabilities. This implies only that state acceptance is the correct criterion for identifying what is and what is not money in a given jurisdiction.

  • 2) The taxes-drive-money view itself, that is, the idea that by accepting a given thing in payment of taxes, the state induces an enlarged demand for that thing, which therefore circulates among private agents as money. This idea does not imply a mere definition but refers to an economic mechanism by which money circulates and becomes valuable.

  • 3) The taxes-only-drive-money view, that is, the idea that the only reason why taxes exist is because they make the public accept state-issued money and not, as commonly believed, because they finance public spending.16 Indeed, money issuance being a state monopoly, tax invoices are ultimately not needed, but such taxes are nevertheless required to induce the public to accept state-issued money in anepicentric payments.

There is undeniable evidence that the taxes-only-drive-money view, the most radical one, is advanced only by Modern Monetary Theory authors, not by Knapp. As discussed above, Knapp ([1905] 1924: 178) did accept that taxes do finance public expenditure, and he never suggested that taxes may not fulfill this function.

There is strong evidence as well that the taxes-define-money view can be found in Knapp's work. In the preface to The State Theory of Money, he writes that his “views” are “that the money of a State is not what is of compulsory general acceptance, but what is accepted at the public pay offices” (Knapp [1905] 1924: vii). Undoubtedly, when proposing a definition of money, Knapp emphasizes that legal-tender laws are a less relevant criterion than acceptance at “public pay offices.” In a section often quoted by Modern Monetary Theory scholars, he explains why:

It is not our fault if States for historical reasons possess complicated monetary systems, and, in such, the question at once arises, Where is the line to be drawn? What forms part of the monetary system of the State and what does not? We must not make our definition too narrow.

The criterion cannot be that the money is issued by the State, for that would exclude kinds of money which are of the highest importance; I refer to bank-notes: they are not issued by the State, but they form a part of its monetary system. Nor can legal tender be taken as the test, for in monetary systems there are very frequently kinds of money which are not legal tender (e.g. in Germany (1905) Treasury notes are not legal tender).

We keep most closely to the facts if we take as our test, that the money is accepted in payments made to the State's offices. Then all means by which a payment can be made to the State form part of the monetary system. On this basis it is not the issue, but the acceptation, as we call it, which is decisive. State acceptation delimits the monetary system. By the expression “State-acceptation” is to be understood only the acceptance at State pay offices where the State is the recipient. (95)

Rallo (2020: 788) acknowledges that, in relation to the definition of money, Knapp considers the relevant criterion to be its use in making epicentric payments. But “since Knapp never developed a theory about the value of money,” Rallo observes, “he was not really able to explain why chartal means of payment were actually accepted in payment by economic agents” (780). This statement seems to be in contradiction with the passage quoted above that “Knapp believed that state notes were accepted by the public . . . because the internal rules of the pay-society (the state) established the obligation among its members to accept them in anepicentric payments (i.e., legal tender laws)” (788). Thus, a twofold question arises: Did Knapp have an explanation of the demand for money, and if so, was this explanation based on money acceptance at public pay offices, or was it based on legal-tender laws? This question is equivalent to asking whether Knapp held a taxes-drive-money view or only a taxes-define-money view.

The answer is not easy, as Knapp often writes that the validity of a means of payment is decided by the state, but he does not explain how this decision is enforced. For instance, he writes, “The State declares silver to be the material for payment instead of copper” (Knapp [1905] 1924: 13), or “The State introduces new means of payment” (48), or “The choice of the means of payment is a free act of the State's authority” (24). Are such decisions to be understood as decisions to make legal tender a given means of payment? As mentioned above, Knapp noticed that “there are very frequently kinds of money which are not legal tender” (95). Knapp refuses to define money as what is legal tender, knowing examples of money that are not. It is therefore highly implausible, and even logically contradictory, that his explanation for the demand for money would be legal-tender laws.

Moreover, some sections of The State Theory of Money explicitly acknowledge that taxes are driving the use of money. In chapter 1, section 3, titled “Use in Circulation,” Knapp (1905: 43–44; [1905] 1924: 52) writes,

Instead of perpetually insisting on the defects of autogenic money [in this case, paper money], just think a little of its services. It frees us from our debts, and a man who gets rid of his debts does not need to spend time considering whether his means of payment were material or not. First and foremost it frees us from our debts towards the State, for the State, when emitting it, acknowledges that, in receiving, it will accept this means of payment.17 The greater the part played by the taxes, the more important is this fact to the tax-payer. When the State creates autogenic means of payment, it gives them at the same time the power to discharge debts and this is a characteristic that can show itself even when the material characteristic is lacking.18

In this quotation, Knapp clearly underlines the role of state acceptance, not in defining money in theory but in making it desirable and useful in practice. The sentence “The greater the part played by the taxes, the more important is this fact to the tax-payer” is especially telling, as it shows that Knapp is not trying to identify money, which he had already done, but to explain how taxes create an outlet for money holders, the outlet being a sufficient motive to hold paper money lacking intrinsic value.

Further, in chapter 2, section 8a (a section devoted to banknotes), Knapp ([1905] 1924: 137) discusses a bank whose notes have been accepted by the state in epicentric payments: “For the bank, this means an enormous increase in its profits, for now everybody is glad to take its bank-notes, since all the inhabitants of the State have occasion to make epicentric payments (e. g. for taxes).” This comment shows that Knapp endorsed the taxes-drive-money view; banknotes circulate among private agents because they discharge tax liabilities. Taxes drive the use of money. To summarize, it seems reasonable that Knapp did not merely think that acceptance by the state is a good criterion for defining money; he also believed that such acceptance is a force able to make a designated instrument circulate in the economy.

To the commentators who accused Knapp of doing monetary metaphysics rather than economics, it can be opposed that his taxes-drive-money view constitutes a full-fledged economic theory. In Ellis's (1934) words, “[Since The State Theory] is concerned primarily with the forces which give ‘valuableness’ to money and cause it to circulate” (19), “chartalism is a serious theory as to the origin of the social institution money” (16). Despite leaving aside the purchasing power of money, Knapp's theory is an explanation of an economic phenomenon.

In contemporary terms, resorting to retrospective analysis (Lapidus 1996), Knapp's view relies on a mechanism called network effect.19 The state can impose an instrument as money because it is almost always the biggest economic agent, to which most private agents under its jurisdiction make payments. If it chooses an exclusive instrument for discharging tax liabilities, very powerful incentives induce private agents to use that instrument for anepicentric payments as well in response to increasing returns to adoption (Arthur 1989; Orléan 2011). This network-effect view of Knapp's theory makes it closer than usually thought to Carl Menger's account of the origin of money: although Knapp considers the starting point of the process to be tax payments rather than a search by merchants for “superior saleableness” (Menger 1892: 248), both theories draw upon the idea that the utility of an instrument of payment is increasing with the number of its users and that the most used one becomes the only used one.20

Whether Knapp's adoption of a taxes-drive-money view is an original and distinctive feature of his thought remains questionable. Careful commentators noticed several previous occurrences of taxes-drive-money views throughout the history of economics. Ellis (1934: 9) highlighted a statement by Adam Smith ([1776] 1904) linking the value of paper money to its acceptance in tax payments, and he found evidence of a similar idea in the works of James Steuart (1805). Among German thinkers, Johann Gottlieb Fichte and Adam Müller gave the utmost importance to the state in their analyses of money, as part of early nineteenth-century economic romanticism. The former precisely attributed to taxes the power to impose a currency without intrinsic value, as part of the plan he proposed in his 1800 Der geschlossene Handelsstaat (The Closed Commercial State) (Gray 2003: 540). In the Anglo-Saxon literature, Forstater (2006) found passages in which Mill ([1848] 1987) and Jevons (1875) recognize taxes as a means to support the value of irredeemable paper money. Closer to Knapp, Rallo (2020: 788) even discovered a passage in Menger's 1876 Lectures to Crown Prince Rudolf of Austria in which taxes were also recognized as giving value to state notes.

Such traces of taxes-drive-money ideas in the course of the century preceding Knapp might be interpreted as evidence of his lacking originality. Indeed, The State Theory was certainly grounded in the reading of past economists, even if it is difficult to identify Knapp's inspiration, as the book contains no “direct references to the works of others” (Trautwein 2003: 170). But apart from Fichte, none of the economists named above attributed a decisive role to taxes in their general monetary theory, this role being recognized only in isolated passages of their works, often only for paper money. That made Ellis (1934: 11) write, “Since the beginning of the nineteenth century . . . the tax-foundation theory has sunk into almost complete desuetude.” By contrast, unlike his predecessors, Knapp included state acceptance in the very definition of money, and the capacity to discharge tax liabilities was essential to his theory of money. Rather than simply performing a signal service to a preexisting view, Knapp made it systematic and built a genuine theory upon it. That explains why “it is universally recognized that ‘the appearance of the State Theory of Money in the year 1905 represented a mile-stone in the history of German monetary theory’” (Ellis 1934: 12; quoting Döring 1922: 1).

A Common Theory of Private Means of Payment

The preceding section showed that, despite terminological differences, Knapp and Modern Monetary Theory converge on the taxes-drive-money view. However, Rallo (2020) argues that there is a more fundamental difference between them: the possibility of privately created money and private pay-communities. According to Rallo, whereas contemporary “chartalists” (i.e., Modern Monetary Theory economists) understand “means of payment narrowly as some device that only the state can create” (790), Knapp had a theory about “each pay-society, be it the state or other private pay-societies” (785). Rallo's understanding of Knapp relies heavily on The State Theory of Money's section 8b, in which Knapp ([1905] 1924: 148) writes, “The State can [make a unit of value for itself], because it is a pay-society, not because it is the State. The State is only the most familiar, the oldest society of payers; it is not the only one” (quoted by Rallo [2020: 783]). From this statement Rallo (2020: 785) concludes, “When Knapp, instead of talking about pay-societies, speaks about the state he is only using a synecdoche by which he equates the paradigmatic type of pay-society (the state) with the totality of pay-societies.” Rallo supports the argument by observing that “[Knapp used] many confusing expressions throughout his work (beginning with the title of the work)” (781), which is why it has occasioned so many misinterpretations.

Although surprising, the synecdoche argument is supported by cogent evidence. In section 8, especially section 8b dealing with giro payments (i.e., payments by bank transfer), Knapp acknowledges that pay-societies covered by his theory can be purely private. His main example, at the beginning of the section, is the “Giro bank at Hamburg” (Knapp [1905] 1924: 145), which inspired the word giro and which was a merchant society in which members got admitted by depositing a specified quantity of silver and then received a corresponding amount of “marks banco” on their account with which to pay other members of the society by a bank transfer. This historical example of a state-independent pay-society shows that Knapp did include private pay-societies in his theory.

However, Knapp's acknowledgment that private pay-societies exist does not show that Modern Monetary Theory fundamentally differs with Knapp or that “Knapp would surely urge present-day ‘chartalists’ to broaden their horizons by recognizing the possibility of other nonstate created means of payment” (Rallo 2020: 784). Although Modern Monetary Theory writings deal first and foremost with state-accepted and state-issued money (and so does Knapp, who starts considering private money only in sec. 8 of chap. 2 of The State Theory of Money), they do not deny that privately issued and accepted money exists.

In the introduction to Understanding Modern Money, Wray (1998) draws attention to the properties of private bank money.21 Modern Monetary Theory authors recognize that private money can exist independently of the state. When interpreting Knapp, Wray quotes the following passage in which the idea of a “private pay community” existing apart from the state is explicitly recognized: “What is important is that the note ‘is a private till-warrant available for payments to the bank . . . but clearly the customers of the bank can use it for payments between themselves, as they are sure it will be taken at the bank. These customers and the bank form, so to speak, a private pay community; the public pay community is the State” (Knapp [1905] 1924: 134; quoted by Wray [1998: 27]).

Knapp, as does Modern Monetary Theory, thinks that public and private pay-communities are analogous. On the one hand, the state makes currency acceptable to the public by making it a “tax credit” (Mosler 1995: 3), that is, a way to discharge tax liabilities. On the other hand, a private pay-community (e.g., a bank) creates a demand for its own money, even if it is not convertible into anything else, by accepting its money in payment, especially when a loan must be repaid. Rather than deny it, Modern Monetary Theory scholars emphasize the analogy. In particular, Wray cites Hyman Minsky and an earlier economist, Alfred Mitchell-Innes, to support this idea: money is always based on credit, and it draws its general acceptance from its power to discharge debts due to its issuer, be it the state or a private agent. “Minsky,” Wray (1998: 35) observes, “explained that people accept bank money in part because they can use it to meet their own commitments to banks.” As for Mitchell-Innes, Wray (2014: 12) summarizes his credit theory of money by the following formula: “The very nature of credit . . . is that the issuer must accept its own IOUs.” In the case of state money, “when the state spends, it becomes a debtor . . . as it issues state money. Hence, even state money is credit money, however, it is a special kind of credit, ‘redeemed by taxation’” (12).

In a heretofore largely overlooked passage of section 8b in which he presents one of the most important definitions of the book, that of means of payment, Knapp generalized this analogy, shedding additional light on his taxes-drive-money view. Knapp starts by saying that payments need not involve transferring a material object but can be made immaterially by giro. He then comments that “inside a pay-community, payments always take place through a certain involvement of the central office” (Knapp 1905: 141).22 Moreover, the central office is likely to have claims on its members from time to time, in given situations such as taxation or credit repayments. But how to pay what is owed to the central office if one lacks any “absolute counter-claim” against the office to offset the claim? The answer lies in the existence of “situational counter-claim[s]” (142), which Knapp defined as counterclaims that pay-society members can use to offset a claim that the central office holds against them, but only in situations when such a claim arises. “By this means the concept of ‘means of payment’ can be defined: In a pay-association, every transferable right to dispose of units of value is a means of payment, if the holder, through a transfer to the central office, can establish a counter-claim on this office which is at least situational” (143).23

Thus, Knapp is saying that a means of payment is a right, materialized by an object or not, to clear in whole or in part a debt that its holder may owe the central entity that created that right. Expressed in this way, the definition of a means of payment covers both a publicly issued money (defined by its property to discharge any debt owed to the state, e.g., a tax) and a privately issued money (whereby customers can discharge debts to the bank with its banknotes).24 While Rallo (2020: 775, 778) mentions that definition, he overlooks the similar understanding by Modern Monetary Theory of a means of payment and also overlooks the fact that the definition confirms that Knapp held the taxes-drive-money view, as the existence of public means of payment requires—even if public money is not the only possible money—the existence of “situational counter-claims” against the state's claims in the form of taxes.

The Hierarchical Structure of Monetary Systems

The previous section showed that Knapp and Modern Monetary Theory do share similar views about the nature of means of payments, confirming the similarity between public and private means of payment. But concluding at this point would be unsatisfying. If Knapp, like Modern Monetary Theory, believed there is only an analogy between private and public money, why did Knapp call his book The State Theory of Money and devote more attention to state money than bank money? And why would Modern Monetary Theory authors use expressions like “public monopoly” in characterizing the issuance of, say, dollars (Kelton 2020: 29)?

The answer is that Knapp, like Modern Monetary Theory authors, not only saw an analogy between private and public money and pay-societies, but also, like Modern Monetary Theory, held a similar view about the subordinate relationship between private money and public money.

This hierarchy is explicitly recognized by Modern Monetary Theory: money issued (and accepted) by the state is called, following common usage, “high-powered money” or “fiat currency” (whether material or not, its value not being derived from its material content). Fiat currency “is the money that sits at the top of the debt pyramid (or hierarchy)” (Wray 1998: 77). Fiat currency holds the top rank, and private bank deposits (since private banknotes are almost no longer issued) must be redeemable into it and hold subordinate rank.

This hierarchy can be understood through Wray's “soybean futures parable” (Mehrling 2000: 404), wherein the state is the only soybean producer (the equivalent of high-powered, net-of-debt money) and private agents like banks trade longs and shorts on the futures market (the equivalent of redeemable bank deposits), which in the aggregate sum up to net zero (Wray 1998: 113). Modern Monetary Theory actually views private pay-societies as subsocieties of the public pay-society: these private pay-societies enjoy some degree of autonomy (bank money is created endogenously with no direct control on its volume by the state) while still linked to the whole public pay-society through an interbank money, which is high-powered money issued by the state. The convertibility of private money guarantees that private pay-society members (bank customers) belong to the public pay-society and have ready access to state money.

Not surprisingly, Knapp had a similar understanding of the link between private money and public money, contrary to Rallo's (2020: 784–86) position that Knapp treats both types symmetrically. Section 8a in chapter 2, dedicated to banknotes, is enlightening on this issue. As seen earlier, Knapp did not consider convertibility of banknotes into state money as a necessary attribute in their definition (banknotes being defined by their capacity to discharge situational debts owed to the bank, not the state). However, Knapp ([1905] 1924: 131) believed that “a bank, such as we have described [issuing banknotes when granting loans], can obviously only be started if the undertaking has at its disposal a certain stock of State-issued money.” The very existence of bank money depends on access to state-issued money: “That bank-notes should make their first appearance as promises to pay [in state-issued money] is practically necessary, otherwise they would not make their way at all” (136). Here, the adverb “practically” presumably means “in practice,” not “almost,” which implies that, for Knapp, a bank cannot issue notes without convertibility into state money.25 Knapp also insisted that the requirement for banknotes to be convertible results from the action of the state: “The convertibility of the bank-notes is then one of the measures by means of which the State assures a superior position to the money which it issues itself, certainly a very important object” (139–40). He further explained that the state often supports banks by explicitly including their banknotes in state money, that is, by accepting them at its pay offices. In this case, the private pay-society, the bank and its customers, is absorbed into the public pay-society.26 And this process takes a further step when the state suspends convertibility and makes its own payments in the notes of a particular bank (143), a bank that we would nowadays call the central bank.

Thus, it is a mistake to assert that Knapp considered public and private pay-societies to be on the same level: on the contrary, public pay-societies subordinate private pay-societies, ordinarily by imposing a convertibility constraint upon them, and in some cases by simply absorbing one private pay-society into the public one to enlarge it. This, as explained above, coincides with the Modern Monetary Theory understanding of modern monetary systems.

Post Hoc Sed Non Propter Hoc: Knapp's Nonessential Legacy to Modern Monetary Theory

It's interesting because we came up with the ideas first and then found the history afterwards. Which is not necessarily, normally the way things work.

—Warren Mosler, First Fiscal Sustainability Teach-in and Counter-conference, Washington, D.C., April 28, 2010

Knapp and Modern Monetary Theory authors’ sharing a common view of money raises the question of the nature of the influence of the former on the latter.

The simplest hypothesis is that Knapp's reading by Modern Monetary Theory authors directly provided foundations to the theory, which is to be understood as a rebirth of chartalism (Desmedt and Piégay 2006: 116; Drumetz and Pfister 2021: 1; Ocampo 2021: 41; Greitens 2022: 197). This could be called the “rediscovery narrative”: a contemporary theory appearing after the rediscovery of a somehow forgotten economist who provided its founding “chartalist” ideas. The presentation of Modern Monetary Theory in Wray 1998 implicitly supports this narrative, as Knapp is introduced shortly after the beginning of the book, and quotations from The State Theory are used to bring fundamental ideas such as the taxes-drive-money view and the public-private money hierarchy to the reader's attention. It thus comes as no surprise that many Modern Monetary Theory commentators postulate a straightforward influence of Knapp on Modern Monetary Theory. That is the meaning of the word neochartalism, which was coined “by some critics” (Wray 2020: 3).

Our findings presented in the previous sections provide textual evidence that Modern Monetary Theory indeed espouses most of Knapp's theoretical views. But doubt is cast on the rediscovery narrative by three facts.

First, “Soft Currency Economics,” the first available text gathering the four key ideas defining Modern Monetary Theory, published in 1995 and written in 1993, according to its author, Warren Mosler, contains no reference to Knapp. At the time he wrote it, Mosler indicates that as a professional fixed-income financier he knew no economists supporting a taxes-drive-money view, a fortiori Knapp.27 He rather claims his ideas to be the result of twenty years of experience as an investment fund manager specialized in public debt securities, and he recounts that he got convinced that states issuing their own fiat currency can never default while he was deciding to buy Italian government securities in the early 1990s after meeting a Treasury Department senior official, Luigi Spaventa (Mosler 2010: 94–98). As opposed to the rediscovery narrative, Mosler thus explains the birth of Modern Monetary Theory following an “Italian epiphany” narrative that Laurentjoye (2022: 133) calls “autoreferential.” Similarly, Tcherneva (1996) and Mitchell (1998) did not refer to Knapp in their seminal articles.

Second, the evolution of L. Randall Wray's writings also shows that the influence of Knapp was neither direct nor decisive in fostering Modern Monetary Theory ideas. Wray's first book, Money and Credit in Capitalist Economies: The Endogenous Money Approach, was published in 1990 and contains several references to Knapp, but it is not an exposition of Modern Monetary Theory. Wray had indeed discovered Knapp's name in 1986 when reading Keynes's Treatise on Money (Wray 2020: 4). Had the influence of Knapp been decisive, Wray's first book could have supported a taxes-drive-money view inspired by The State Theory and laid down the basic principles of Modern Monetary Theory. In fact, the book does refer to similar ideas in some passages: “In most cases, any form of money accepted in payment of taxes may be called legal tender” (Wray 1990: 27–18); “The modern state can become a member of the giro [the bank pay-community] by accepting the liabilities of banks in payment on taxes and in other dealings with the state” (43). But the book does not put forward a taxes-drive-money view, that is, taxes as a sufficient condition to the circulation of a currency chosen by the state. Rather, it envisages the case of states recognizing preexisting bank money as state money, through convertibility and state acceptance, inconvertible bank money being considered the primary form of money (44). Wray's personal discovery of Knapp does therefore not appear as a foundational event in the birth of Modern Monetary Theory.

Lastly, the rediscovery narrative implies that Knapp had been forgotten before being brought to the fore by Modern Monetary Theory. Yet, a textual inquiry indicates that Knapp did not die without any heirs and that some of his intellectual legacy was passed on along two distinct lines across the twentieth century, making his ideas withstand time until they reached Modern Monetary Theory authors.

Along one line, Schumpeter paradoxically appears as one of the most influential economists who kept Knapp's legacy alive in the field, despite his judging The State Theory of poor interest (Schumpeter 1926: 514; 1954: 1090). The reason is that he kept Knapp's vocabulary in the distinction he drew, in his History of Economic Analysis, between metallism and cartalism. Both can be theoretical and practical: “Thus, we shall speak of theoretical cartalism wherever we find denial of the proposition that it is logically essential for money to consist of, say, gold, or to be promptly convertible into gold; of practical cartalism wherever we find sponsorship of the principle of policy that the value of the monetary unit ‘should’ not be tied to the value of any particular commodity” (Schumpeter 1954: 288).

In a footnote, Schumpeter credited Knapp with coining the term. But he used the concept of cartalism without linking it to a taxes-drive-money view or even to any role of the state, thereby following the original meaning of the word contrary to the most common usage emphasized by Ellis (1934), but also promoting what Wray and Bell (2004: 2) called a “watered-down version” of Knapp's idea. Schumpeter did not justify the “cartalism” spelling, which is presumably a mistake. But this spelling in turn allows identifying who referred to the concept through Schumpeter's interpretation rather than directly through Knapp's.

Many researchers used Schumpeter's cartalism as an analytical concept in their works. Gambino (1956) described John Law's financial endeavor in France as cartalism, while the historian Robert M. Hartwell (1971) identified cartalism as a strand of tenth- and eleventh-century Chinese economic thought. The sociologist Simon Smelt (1980) distinguished between metallism and cartalism in an article about money and society. None of these works ever referred to Knapp, as if Schumpeter had popularized the concept of cartalism at the cost of erasing its creator. Charles Goodhart, in Money, Information, and Uncertainty (1989), also adopted Schumpeter's reading of Knapp, using the “Cartalists” spelling without referring to Knapp's book, but brought back the role of the state into consideration, by naming Cartalists “those who argued that the use of currency was based essentially on its symbolism of the power of the issuing authority” (Goodhart 1989: 34). All works using cartalism as defined and spelled by Schumpeter therefore constitute one strand along which the influence of Knapp survived, though in a weak sense.

The second line along which Knapp's conceptual legacy was passed on started with the 1924 English translation by Bonar and Lucas. Although Keynes had already read the Staatliche Theorie in German as early as 1914 (Greitens 2022: 193), discussions about Knapp in the Anglophone community found fresh momentum when the translation was released, as testified by book reviews from that time on both sides of the Atlantic (Bonar 1922; Hawtrey 1925; Cannan 1925; Ingraham 1925; L 1926). Despite some positive comments, influential voices were at best dubious about the value of Knapp's theory, such as Edwin Cannan, professor of economic theory at the London School of Economics, who wrote that “this particular book was already long out of date when first published in German nine years before the war” (Cannan 1925: 212). But amid an overall mediocre reception, the discrete positive appraisals from Keynes and Abba P. Lerner (Trautwein 2003: 167), because of their notoriety, finally gave Knapp long-lasting recognition.28

Keynes's use of Knapp in the 1930 Treatise on Money is appreciative and limited at the same time. Appreciative because Knapp is the first author cited in the book, and the only one in the first chapter (Keynes 1930: 4). Limited because Knapp makes no other appearance in the rest of the two-volume book. According to Keynes, the “[full realization of] Knapp's Chartalism” corresponds to a situation established “for some four thousand years at least” (4), namely, states claiming the right to impose the denomination of contracts in an arbitrary money-of-account and the right to decide unilaterally what money thing must be used for settling the resulting money-of-account obligations. This view indeed transposes the two first chapters of The State Theory of Money presenting the principle of nominality of debts and the power of the state to proclaim what serves as means of payment. Keynes summarized this twofold idea in a famous metaphor: “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 claimed the right not only to enforce the dictionary but also to write the dictionary” (5). Whereas Schumpeter restricted his cartalism concept to the nominality of money, Keynes followed the early usage of making the monetary power of the state a defining element of chartalism. In a footnote, he further noted that “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” (6–7). Although only in a footnote (Lavoie 2022: 199), Keynes thereby accepted Knapp's legacy and supported what we called a taxes-define-money view: acceptance in tax payments as the defining criterion of money. Whether in Keynes's view monetary taxation is the method used by states to impose an instrument as money or a mere identification criterion for the theorist remains as ambiguous as the expression “claim the right to determine and declare” that he used to describe the state's monetary action in the main body of the text (Keynes 1930: 4).

The interpretation of Knapp formulated by Abba P. Lerner was more radical. Although he certainly read the Treatise on Money as he related in many ways to Keynes (Colander 1984), Lerner knew The State Theory of Money from the time he was a student at the London School of Economics, from 1929, where the book was subject to “cruel baiting and tearing to pieces,” especially by “Professor [Theodore] Gregory” (Lerner 1947: 312). His 1947 article in the American Economic Review, “Money as a Creature of the State,” in which he recalled this fact contains a concise exposition of his understanding of money as driven by taxes, together with his 1946 Encyclopaedia Britannica entry on money (Forstater 2006: 211). Money becomes so when its “general acceptability” is established (Lerner 1947: 313), and among different “historical methods,” general acceptability in the modern era can be established only “if the state is willing to accept the proposed money in payment of taxes and other obligations to itself”: “What this means is that whatever may have been the history of gold, at the present time, in a normally well-working economy, money is a creature of the state. Its general acceptability, which is its all-important attribute, stands or falls by its acceptability by the state” (313).29 By reminding readers of the name of Knapp and his “creature of the state” formula in the immediate postwar years and by endorsing a taxes-drive-money view, Lerner played a crucial role in legitimating Knapp's intellectual legacy.

Keynes and Lerner likely became major gateways to Knapp for later monetary economists due to their renown, comparatively greater than their German predecessor's. Hyman Minsky, whose former student Wray (1998: 38) emphasized that he acknowledged an intellectual debt to Knapp in private conversation, presumably came to know Knapp via Keynes or Lerner rather than through his doctoral adviser, Joseph A. Schumpeter, as he held a taxes-drive-money view (Minsky [1986] 2008: 258; Wray 2020: 7).

The parallel continuations of Knapp in Schumpeter's cartalism concept and in Keynes's and Lerner's writings saved him from total oblivion until the end of the twentieth century, undermining the rediscovery narrative. At that time, the birth of Modern Monetary Theory occurred at the crossroad of these two lines of continuation. More precisely, as related by Wray (2020: 2), discussions involving Mosler, Wray, Mitchell, Forstater, and Tcherneva, among others, started in January 1996 on the online Post-Keynesian Thought (PKT) discussion forum, where Mosler's “Soft Currency Economics” was presented to academic economists. Knapp and chartalism were absent from Mosler's seminal text and were not at first taken into consideration in the discussion (Tcherneva 1996). But an in-person conference was soon organized by Mosler in June in Bretton Woods, with the participation of Charles Goodhart. The latter was writing a draft about the forthcoming European Monetary Union, contending that the “Cartalist” tradition of thought (using the Schumpeterian spelling) provided arguments against such a supranational union. Finally published in 1998, Goodhart's “Two Concepts of Money” emphasized the primal role of taxes in cartalism, contrary to his 1989 book. As acknowledged by Wray (2014: 2), Goodhart's distinction between the “Chartalist [Cartalist]” and the “Metalist” approaches “usefully” helped emerging Modern Monetary Theory formulate an alternative, heterodox approach to money. As the first use of the adjective chartalist by a Modern Monetary Theory author dates back to Mosler (1997), who thanked Goodhart and Wray in the first footnote, chronological and textual evidence lead to the following conclusions:

  • The labeling of Mosler's initial taxes-drive-money idea as chartalism emerged from the 1996–97 discussions around “Soft Currency Economics,” in which the term is absent.

  • Goodhart presumably made the contribution of associating the taxes-drive-money view with Cartalism.

  • Wray, who had previous firsthand knowledge of The State Theory of Money, made the contribution of directly referring to Knapp's theory and to chartalism with its original spelling.

The general conclusion is that the birth of Modern Monetary Theory in the years 1995 to 1998 was not a rediscovery of Knapp from total oblivion and that Knapp's legacy did not play a crucial role in the formulation of the core ideas of Modern Monetary Theory. It nevertheless was a decisive moment in bringing together the two legacies through which Knapp was remembered in economics: that of Schumpeter, who had reduced his ideas to a single generic concept, and that of Keynes and Lerner, who had put forward his more precise idea that Modern Monetary Theory today calls the taxes-drive-money view.

Conclusion

Linking Modern Monetary Theory with Knapp's thought has previously been done in two ways: first, in books and articles by Modern Monetary Theory scholars, who highlighted their similarities with Knapp, perhaps to promote him as a prominent pioneer of their own theory; second, in critical articles, especially Rallo 2020, supporting the contrary thesis that Knapp held few theoretical views in common with Modern Monetary Theory. In this work, we showed that, despite fundamentally different policy views and epistemic projects, and despite terminology gaps that attributed a different meaning to the word chartalism from the meaning Knapp had in mind, a comparison of The State Theory of Money and Modern Monetary Theory writings reveals characteristic similarities: in particular the role of taxes in creating the demand for money, the views about the public-private hierarchy in the monetary system, and even Knapp's definition of means of payment, which had been hitherto overlooked by Modern Monetary Theory scholars.

Insofar as they share those essential views about money with Knapp, Modern Monetary Theory authors are thus justified in calling themselves “neochartalists,” even if Knapp would surely not have approved the use of the term he coined to advocate public-deficit-based macroeconomic policies. However, Knapp did not play a decisive role in the initial appearance of Modern Monetary Theory, his legacy rather being invoked ex post to show that the nascent theory could find support in an old tradition of thought known as chartalism.

The name Modern Monetary Theory appears in any case preferable to chartalism or neochartalism, for the theory is convergent with but not reducible to Knapp's State Theory of Money. First, as shown above, Modern Monetary Theory made a crucial addition to Knapp's taxes-drive-money view by formulating a taxes-only-drive-money view: when states designate as money receivable in tax payments a fiat currency over which they have monopoly of issuance, their need to collect taxes before spending vanishes, and the only function of taxes becomes making the fiat currency generally acceptable. That idea was absent from Knapp's thought and is part of the hard core of Modern Monetary Theory. Second, Modern Monetary Theory added to their shared understanding of money as a legal creature of the state a set of causal and quantifiable economic mechanisms that Knapp had been rightly accused in his time of neglecting from lack of interest. Ironically, and although their theory of money endogeneity, of the interest-rate-maintenance role of public debt securities, and of the aggregate-demand-management role of public deficits does not neglect substantial economic issues, Modern Monetary Theory proponents have faced comparably severe reactions in the academic community, their macroeconomic theory, especially regarding private-sector dynamics, being deemed either erroneous (Mankiw 2019) or incomplete (Guerrien 2020).

The international dimension of money, which goes beyond the point of this article and which seems to be a generally understudied aspect of Knapp's work, is a theoretical issue on which Modern Monetary Theory diverges from Knapp, as Rallo (2020: 787) discussed briefly. While Modern Monetary Theory advocates floating exchange rates between fiat currencies, Knapp acknowledged that in both theory and practice, metallic species were, and should remain, the basis of international monetary relations, the choice of metal for foreign exchange being the result of decentralized strategic decisions by states to foster foreign trade. Whether this contrast can be attributed to the monetary changes that occurred during the last century or to unnoticed divergences in the theory itself is a question worthy of further study.

I am thankful to the two anonymous referees and to Kevin D. Hoover for their thorough suggestions, to Laurent Le Maux, who first supervised this research, to Mathis Nicole-Desmau, Jonas Grangeray, Léo Vigny, Rudy Bouguelli, and Jonathan Marie for their insights, and to Ronald Mazzoleni for making G. F. Knapp's Staatliche Theorie des Geldes available in French. The University of Paris 1 Panthéon-Sorbonne and the University of Sorbonne Paris Nord made this research possible.

Notes

1.

We follow Knapp and his commentators in treating the terms pay-society, pay-community, and sometimes pay-group and pay-association as synonyms.

2.

Greitens’s (2022: 196) argument is that “Das Geld ist ein Geschöpf der Rechtsordnung” should have been translated as “Money is an entity of the legal order” instead of “Money is a creature of law” because the latter bears the idea that the state can create money at will by legal means. We disagree with Greitens’s argument that his preferred English translation of Knapp’s first sentence implies that the state can create money at will.

3.

The Treasury–central bank consolidation was not an explicit statement from the beginning, but it was brought to attention by commentators such as Lavoie (2013: 1) for whom many “surprising statements” by Modern Monetary Theory economists actually make sense “once one assumes the consolidation of the government sector and the central bank into a unique entity, the state.”

4.

In Wray’s (1998: 18) words, “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.”

5.

“The problem, [Knapp] says, is a ‘shoreless sea,’ and is best left to economics from which, therefore, we are to understand monetary theory can be safely detached” (Bonar 1922: 44).

6.

Liefmann, in his 1916 Economic Theory of Money, “considered Knapp’s theory juristic and historical and without substantive economic content” (Cowen and Kroszner 1992: 395).

7.

Ellis (1934: 15) proposed to clarify the notion in this way: “The validity of money is its valuableness as one,” which combines the properties of bearing value and circulating at par with respect to the unit of account.

8.

A possible reinterpretation is that Knapp’s theory and Modern Monetary Theory are extended discussions, in the field of monetary theory, about what Lakatos (1970) called a “hard core,” a set of untestable assumptions that is a normal feature of scientific theories. It would thus prove unjustified to dismiss theories as metaphysical on the ground that they are based on such hard-core assumptions and try to discuss them, as many of Knapp’s readers and Modern Monetary Theory commentators did.

9.

Lytric is a term coined by Knapp and it relates to means of payments.

10.

The confusion between normative and positive aspects of the Treasury–central bank consolidation comes from the epistemic status of “self-imposed constraints” (Grangeray 2024): in Modern Monetary Theory, self-imposed constraints against this consolidation such as the prohibition of central bank financing are considered as fictitious constraints that can safely be ignored and circumvented and therefore excluded from analysis as nonrelevant elements of reality.

11.

From the Greek words hyle meaning, in Knapp’s terminology, the material chosen to be freely convertible into money, and lepsis, the action of taking.

12.

The radical opposition between pensatory and chartal was not without difficulties. Knapp ([1905] 1924: 74) regarded as “inconsistent” the fact that “traces of a relapse into the pensatory system can be found long after the Chartal system is in force,” such as the depreciation of worn coins. He could state only that the inconsistency was to be blamed on the monetary authority itself: “Even kings were metallists when they took money, and chartalists when they issued it” (76).

13.

This quotation goes against Greitens’s (2022: 196) argument that by using the expression “Rechtsordnung” (legal order), Knapp wanted to clearly separate the concepts of state administration and law and to attribute a greater importance to the latter.

14.

Authylism is the use of a commodity means of payment with no nominal unit of account, and autometallism is authylism with a metallic commodity (Knapp [1905] 1924: 4–7). The giro payment makes material money unnecessary but keeps the reference to the nominal unit of account. Graeber (2011: 48) stressed that long-term permanence of the same abstract unit of account even with multiple changes of concrete money is a key aspect of chartalism.

15.

Greek roots were arguably better known in the beginning of the twentieth century and made Knapp’s neologisms clear: apo means “from,” epi means “toward,” para means “by” or “beside,” and an is the negative prefix. Centric, which refers to the state, can also be replaced by trapezic when speaking of a bank, as trapeza means “table” and “bank counter” in Greek.

16.

In fact, Modern Monetary Theory scholars also say that taxes are used for lowering aggregate demand, allowing public expenditure to be noninflationary. But strictly speaking, their point is that preexisting invoices are not needed by the state when it spends (there is no binding budget constraint for the money issuer).

17.

Desmedt and Piégay (2006: 125), contrary to Knapp, insist that states do not necessarily accept in tax payments money they issue, as was the case of Venice in the fifteenth century. The assignats issued under the French Revolution are another example of state-issued money refused in tax payments (Weber [1921] 2019: 285). One may think that this refusal is precisely why the assignats disappeared after a hyperinflationary crisis.

18.

The first four sentences of the quotation are from the 1924 translation; the last is from the 1905 original. The last sentence was not translated into English in the 1924 edition, although it appears in all the German editions, including the fourth edition. Hence we take it and translate it from the original German edition and from the French edition translated by Mazzoleni (Knapp [1905] 2018).

19.

We are thankful to an anonymous referee for bringing network effect and the subsequent possible reconciliation between Knapp and Menger to our attention.

20.

Both authors used assertive sentences that made their divergences easier to notice than their common ground: “Money has not been generated by law. In its origin it is a social, and not a state-institution” (Menger 1892: 255), as compared to Knapp’s ([1905] 1924: 1) “Money is a creature of law.”

21.

“Note that bank money can circulate (and indeed did circulate) even when it is not a state money; while acceptability in payment of taxes is a sufficient condition to give demand to a money, it is not a necessary condition” (Wray 1998: 13)

22.

This sentence was not satisfyingly translated in the 1924 English edition, as it was merged with the following one. As before, we base our translation on the original German edition and on the French translation by Mazzoleni (Knapp [1905] 2018). The term situational in the following quotation also comes from Mazzoleni’s translation of “eventuale” as “situationnelle” in French (106), whereas the English edition used “eventual,” which has since evolved in English.

23.

This quotation comes from the 1924 English translation, modified to make it closer to the original German version. The 1924 translation reads, “By this means the concept ‘means of payment’ can be defined. In a pay-group every transferable right to dispose of units of value is a means of payment, if the holder can by transfer set up in the central office a counter-claim which is at any rate eventual” (Knapp [1905] 1924: 155). The original German text reads, “Dadurch wird auch der Begriff des Zahlungsmittels definierbar: In einem Zahlverbande ist jede übertragbare Verfügung über Werteinheiten dann Zahlungsmittel, wenn der Inhaber durch Übertragung an die Zentralstelle eine mindestens eventuale Gegenforderung an diese Stelle begründen kann” (Knapp 1905: 143).

24.

It is harder to understand what kind of debt toward a central entity is considered in the case of an “autometallic” commodity money like gold bullion. Perhaps the answer is that the choice of the gold bullion as money is made by the state, i.e., a central entity, and not in a decentralized way.

25.

In German, praktisch bears the same ambiguity, meaning both “in practice” and “almost.”

26.

“Hitherto it was only the customers of the bank who cared to use this means of payment. But now the circle of users is indefinitely enlarged” (137).

27.

“I had never read or even heard of Lerner, Knapp, Innes, Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became known as ‘MMT’ entirely independently of prior economic thought. It came from my direct experience in actual monetary operations, much of which is also described in the book” (Mosler 2011).

28.

We could add Ellis’s name to the list, as his 1934 German Monetary Theory also recognized Knapp as a major figure in monetary thought. But the book pertains to history of economics and did not attempt to build a theory upon Knapp’s view.

29.

The same sentences from Lerner’s 1947 article were quoted early on by Modern Monetary Theory economists (Wray 1998: 36; Forstater 1999: 481). They are reiterated here for clarity.

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