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Review of Keynesian Studies Vol.2 Atsushi Naito

Nominality of : Theory of Money and

Atsushi Naito

Abstract

This paper focuses on the function of money that is emphasized by Keynes in his book A Treatise on Money (1930) and recently in post-Keynesian theory and modern Chartalism, or in other words . These theories consider the nominality of money as an important characteristic because the unit of account and the corresponding money as a substance could be anything, and this aspect highlights the nominal nature of money; however, although these theories are closely associated, they are different. The three objectives of this paper are to investigate the nominality of money common to both the theories, examine the relationship and differences between the two theories with a focus on Chartalism, and elucidate the significance and policy implications of Chartalism.

Keywords: Chartalism; Credit Money; Nominality of Money; Keynes JEL Classification Number: B22; B52; E42; E52; E62

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I. Introduction

Recent years have seen the development of Modern Monetary Theory or Chartalism and it now holds a certain prestige in the field. This theory primarily deals with money or ; however, in Post Keynesian , the endogenous money theory and theory of monetary circuit place the stress on money or credit money. Although Chartalism and the theory of credit money are clearly opposed to each other, there exists another axis of conflict in the field of monetary theory. According to the textbooks, this axis concerns the functions of money, such as means of exchange, means of account, and store of . Whereas the function of money as the means of exchange is stressed in Classical, Neoclassical, and Austrian economics, both Chartalism and credit money theory emphasize its function as the means of account. In particular, accentuates the real aspect of money and usually adopts the and the theory of money. However, the strand that stresses the means of account function focuses on the nominal aspect of money and is called nominalism－reflecting the view that the substance of money does not matter. This paper examines the conflict between nominalism, on the one hand, and the commodity theory of money or , on the other. Although the roles of money are considerably different in Chartalism and the theory of credit money, Keynes stressed in his A Treatise on Money that “all civilized money is, beyond the possibility of dispute, chartalist” (Keynes 1971, p.4); the subject of the work was credit money and it had already integrated credit money with state money. The aim of this paper is to consider the nominality of money―a foundation common to Chartalism and credit money theory—to contemplate the difference between these two theories, and deliberate on the method that can be used to unify credit money and state money. The remainder of this paper is structured as follows. In Section 2, we examine the nominal property of money, which is common to Chartalism and endogenous money theory. In Sections 3 and 4, we clarify the status of money in credit money theory and

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Chartalism, respectively. In Section 5, we study the relationship between credit money and state money and how money is also integrated in modern Chartalism. In Section 6, we present our conclusions.

II. The Nominal Aspect of Money

Considering the function of money that is emphasized is important because it affects the structure of monetary theory. Whereas the of the Classical, Neoclassical, and the stress the means of exchange, Keynes emphasized the means of in his General Theory.1 After World II, Keynesian and Neoclassical economics took opposing views on these two functions of money. Since the 1980s, the endogenous money theory or credit money theory has been revived and developed; thus, money as an account unit has attracted attention in research on the nature of money. Moreover, at the end of the 1990s Chartalism was resurrected, and this theory stresses account money. These modern theories of credit money and Chartalism adopt nominalism, which emphasizes the function of money as unit of account. Moreover, they are opposed by Metallism, which stresses the function of money as a means of exchange.

1. Characteristics of nominalism

Account money is considered to be the most important function of money in both credit money theory and Chartalism. Keynes actually started his Treatise on Money by stating at the outset that “[m]oney of account, … is the primary concept of a theory of money” (Keynes 1971, p.3). In the literature on Chartalism, “[m]odern monetary

1 In , stressed the function of money as means of exchange and attributed the origin of money to the difficulty of the dual coincidence of desire in Book 1, Chapter 4 of his of Nations (Smith 1997, pp.126-132). According to Ingham (2004, p.40) and Schumpeter (1954, pp.294, 297), Sir James Steuart, in the 18 th century, emphasized money as a means of account unit. 124

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economics uses money as the unit of account to pay for and services” (Mitchell and Muysken 2008, p.205). Thus, in Chartalism, the argument starts with account money. Money, as unit of account is designated as Yen, Dollar, , and so on; further, as a substance, money can take diverse forms, such as a precious , , paper , and currency. In this sense, money has a nominal existence; therefore, the emphasizing the function of money as unit of account is called nominalism. Before analyzing the nominal aspect of money, we will briefly examine the definition of money in both theories. In credit money theory, Keynes considered account money as a “primary concept” at the beginning of his Treatise and stated that “money of account comes into existence along with , which are contracts for deferred , and lists, which are offers of contracts for sale or purchase” (Keynes 1971, p.3). Thus, in credit money theory, money is introduced through . The Chartalistic definition of money is that “money is a creature of the state … The state defines money as that which it accepts at public pay offices (mainly in payment of )” (Wray 1998, p.18). In Chartalism, money is a means to pay taxes. Account money has four important features.2 First, in credit money theory, money is defined as “the means of discharging a debt” (Hawtrey 1919, p.15), whereas in Chartalism, “the modern state … chooses ‘that which is necessary to pay ’ ” (Wray 1998, p.4). That is, money is a means of paying taxes and is defined as a means of payment. Considering that taxes are a type of debt levied by the state, the two definitions seem substantially the same. Second, the most important characteristic of money is the aforementioned nominality or arbitrariness. Keynes established a distinction between account money and “money itself” or “money proper,” the “delivery of which will discharge the contract or the debt” (Keynes 1971, p.5). Money, as a substance that is an actual means of payment, is discretionarily and arbitrarily determined and can be anything that a

2 Whether or not so-called is money is dubious, but it is itself a unit of account and genuinely has a nominal existence. Additionally, virtual currency already functions, at the very least, as means of store of value to some extent, as indicated by its similarity to . 125

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state designates or its society universally accepts. Third, although account money itself is nominal and arbitrary, continuity is necessary when it is actually used in the settling of debts (Hawtrey 1919, p.3, Keynes 1971, p.4). Continuity is necessary because there is a case of carryover of settlement or one of the settlement not being complete during a certain period. The possibility exists that an economic unit has a balance of debts or at the end of a certain period, such as a day in the case of debt settlements. When this balance is carried over to the next day, the account money must be used that day. In order to use the account unit stably and continuously, the presence of society at least, or practically the state, has to be assumed. Fourth, account money was originally a unit of expression of debt and used as a unit expressing price. Credits are received or liabilities incurred in the transaction of , or while paying taxes, and account money is introduced as a unit that expresses the magnitude of credits or debts. This account money simultaneously expresses the magnitude of goods and services traded, that is, the of goods and services. The account money theory differs from the commodity money theory on this point. In commodity money theory, despite money being defined as a means of exchange, it arguably functions as a unit of account. In this case, this account unit amounts merely to a unit expressing prices.

2. Nominalism and Metallism

Nominalism is opposed to Metallism or the commodity money theory in terms of the way they define the nature of money. Commodity money theory or Metallism places the stress on money as a means of exchange and is adopted by some Classical, Neoclassical, and Austrian economists. Metallism stresses the relationship between money and, in particular, the real value of (precious) ; thus, it is a type of commodity money theory. Stated briefly, the theory asserts that money is realized by evolving from . In the Neoclassical argument, money is seen as transaction costs and emerges as an element that resolves the difficulty of the double 126

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. Metallism is usually considered a type of commodity money theory because the latter theory argues that an object with real value, such as a with high acceptability, is selected as money when it evolves into money. In contrast, nominalism treats the value of money as nominal and denies the monetary link with real value; nominalism is opposed to Metallism and the commodity money theory.3 This opposition to the commodity money theory covers not only the sphere of the nature of money, but also monetary theory in its entirety. In commodity money theory, a commodity evolves into money to eliminate the difficulty of the double coincidence of wants, and money is defined as a means of exchange (Menger 1892). Because commodity money theory emphasizes the similarity between money and a commodity, it tends to be related to the quantity theory of money, which states that the price of money is determined in the same manner as that of a commodity by matching supply and . However, quantity theory is irreconcilable with credit money theory and cannot explain credit money. Commodity money theory regards credit money as sharing most of the circulating money as an irregular object, contends the link with real value, that is, the , and, finally, emphasizes the neutrality that does not affect the real because it considers money only as a means of exchange (Fontana and Venturino 2003).4

3. Relationship between credit money and state money: Keynes’s attempt at integration

As previously mentioned, in his Treatise, Keynes started his argument from account

3 Historically, the precious metal that functions as a means of store of value eventually becomes money. However, according to Keynes’s Treatise, account money is wholly nominal, and it should be said that a precious metal, such as gold, which functions as a means of store of value, is chosen for money as a substance that is the actual means of payment. 4 The commodity theory of money, which is the object of criticism in this paper, is a Neoclassical and Austrian theory; the views of Marx and Marxian economists are not treated here because whether or not these criticisms are applicable is, in itself, a major question. 127

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money and observed that “all civilized money is, beyond the possibility of dispute, chartalist” (Keynes 1971, p.4). Thus Keynes integrated credit money and state money; however, how he unified them is not particularly known of the way he combined them. So, let us look more closely into the argument put in the Treatise. Keynes defined money as account money and stated that “money of account comes into existence along with debts, which are contracts for deferred payment, and price lists, which are offers of contracts for sale and purchase” (Keynes 1971, p.3). In this way, Keynes connected the function of the unit of account with credit money. Keynes then went on to introduce “money itself,” which is “that by delivery of which debt contracts and price contracts are discharged, and in the shape of which a store of general is held,” and it “derives its character from its relationship to the money of account” (Keynes 1971, p.3). This “money itself” or “money proper” is money as a substance, and the “distinction between money and money of account” is “that the money of account is the description or title and the money is the thing which answers to the description” (Keynes 1971, p.3). Before analyzing money in detail, Keynes adopted Chartalistic arguments. For example, “it is a peculiar characteristic of money contracts that it is the State or community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money of account” (Keynes 1971, p.4). According to him, the state decides the unit of account and money as a substantive means of payment, and that money requires, at least, a context of the society or the state. Subsequently, Keynes argued that the “acknowledgements of debt” and “money proper” stem from account money (Keynes 1971, p.5). “Acknowledgements of debt” is a deposit in a ; further, he introduces the concept of “bank money,” which “is simply an acknowledgement of a private debt, expressed in the money of account” (Keynes 1971, p.5). For Keynes, the relationship between credit money and state money is simple. “We thus have side by side State money or money proper and bank money or acknowledgements of debt” (Keynes 1971, p.5); this indicates the coexistence structure for credit money and state money. 128

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In this way, Keynes integrated credit money theory and Chartalism. Certainly, the state sets the account unit, and this account unit is used in credit money that is essentially account money and has a nominal existence. Having elucidated the structure of money, Keynes classified it in minute detail. Some interesting points in his classification of money emerge on observing the relationship between the Treatise and The General Theory of Employment, , and Money; however, we will not pursue this line of thought here. First, the coexistence structure of credit money and state money is explained, but there is no deeper analysis. Second, the macroeconomic theory in the Treatise is insufficiently detailed and is not clearly based on credit money or state money. In the case of The General Theory, the function of money as a means of store of value is emphasized, and theory on the nature of money, except money as a means of store of value, retreats into the background. The state management of money is also discussed in , but the macroeconomic theory in The General Theory is not exactly Chartalism. Therefore, Keynes actually attempted to integrate credit money and state money, but was not successful. We will go on to examine the credit money theory and modern Chartalism.

III. Theory of Credit Money

Modern credit money theory or endogenous theory was established in the 1980s, but its origin can be traced back to the interwar period. Keynes’s Treatise on Money is one of the outcomes, but there were some other contemporary writings, too. 5 Hawtrey developed credit money theory in his Currency and Credit; in particular, there is an intelligible explanation of the logical origin of money. Systematic studies on endogenous money theory were published in the 1980s, and this theory has been developed as a consistent macroeconomic framework.6 We first examine the definition

5 On the early 20th-century literature on the theory of money and credit, see Realfonzo (1998). 6 For endogenous money supply theory or credit money theory, see Moore (1988), Wray (1990), Rochon (1999), and Graziani (2003). 129

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of credit money and investigate the role of money in the macroeconomic framework.

1. Logical origin of money

The origin of money is a controversial topic, and the historical origin of money is remarkably complicated. In this paper, we confine our attention to the logical origin of money. In credit money theory, money is defined as a “means of payment of debt” because its treatment of the origin of money does not start from , and the credit/liability relationship is considered as the basic relationship in a bilateral transaction. According to Hawtrey’s explanation of the logical origin of money, a bilateral transaction of goods or services sees a credit transaction being executed, but not simultaneously transacted. In this case, whereas a credit for the buyer of goods occurs vis-à-vis the seller of goods, a debt for the seller occurs vis-à-vis the buyer of goods. Normally, innumerable transactions of this type occur, and the credit/liability relation recurs countless times because the buyer of goods is also concurrently a seller of goods. There are, simultaneously, credits and debts in an economic unit, but some method in offsetting or settling these credits/liabilities is necessary. This method is subsequently discussed in detail but first a common expressing unit for offsetting or settlement is needed. The unit in the bilateral credit/debt relation is respectively defined on the spot, and comparison and settlement of credits and debts for a bilateral transaction and other bilateral transactions are impossible unless a common unit exists. A unit of expressing or account unit for debt that is needed is account money. In this way, although money is introduced as a nominal unit of account, it only aggregates and offsets bilateral liabilities. These bilateral debts are solely the debts of the buyer, while no universal acceptability exists for the seller. For smooth settlement of accounts the need is for highly acceptable third-party debts. The entity that issues these third-party debts is normally a bank. A bank’s issuance of debt normally occurs not through direct purchase of goods and services by the bank, but through bank lending. Bank lending consists of two transactions. In the first, a borrower receives a amount, but this is debt for the borrower and credit for the bank. In the second, 130

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the bank deposits simultaneously received by the bank are treated as a debt in the borrower’s account on the ; these are debts for the bank and (credit) for the borrower. These deposits are received when the borrower transacts with other economic units and circulate as money. The deposits are called credit money or deposit currency (Hawtrey 1919, pp.1-9).

2. Advent of the in credit money theory

As previously mentioned, create deposits through bank lending, and these deposits are used as money. The transactions among clients who use the same bank are completed through account transfers. However, when they use different banks, the situation is not so simple. For example, in the case of two banks, if one bank opens an account with the other bank, fund transfers are possible. When there are multiple banks, an institution that conducts settlements at one place facilitates smooth transfer of funds. This institution is called a central bank. The settlement method uses the debts that central banks issue. The banks open their respective accounts with the central bank, and transfer funds among themselves using central bank deposits that are created as soon as banks borrow from the central bank (Rochon and Rossi 2004). In this case, the central bank offers a function similar to that provided by commercial banks; the difference is that its clients are banks, and the central bank is considered the “bank of banks.” The function of the central bank is to supply the means of settlement, as well as for commercial banks. This central bank lending is executed if there is a shortfall in a bank’s funds during settlement; however, depending on the circumstances, the central bank plays the role of “” and makes loans to banks to prevent spread of the liquidity crunch throughout the . Moreover, because credit money is simultaneously generated with loans, such money is supplied according to the . This also applies to the central bank, and the reserves that the central bank supplies meet the demand for central bank lending. Therefore, the reserve and credit money are endogenously supplied, and the central 131

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bank has difficulty in directly controlling the volume of reserves or deposit currency; thus, it indirectly controls the volume through the -term .

3. The macroeconomic system in credit money theory

Given that plays a central role, the macroeconomic theory of credit money is basically Keynesian; however, the function of money in a macroeconomic system is illustrated in detail in the Franco-Italian .7 Let us take a brief look at the monetary circulation process. In this process, money is created by bank lending and ultimately vanishes through reflux to the bank. This process starts from firms’ borrowing to make , and this borrowing creates deposits of equal value. These deposits are disbursed, and the workers receive them. The worker is also a and purchases goods and services that the firm produces. The firm repays the bank from the proceeds of the commodities produced, and repaid deposits reflux and disappear. This circulation is called the monetary circuit.

IV. Money in Chartalism

Knapp (1905) is known for Chartalism; however, as mentioned earlier, Keynes introduced Chartalism in his Treatise and, contemporaneously, Mitchell-Innes developed a Chartalistic line of argument.8 These arguments were mainly ignored after World War II; however, at the end of the 1990s, Chartalism was resurrected. Wray’s Understanding Modern Money (1998) represents a systematic literature and Goodhart

7 The theory of monetary circuit represents a variety of endogenous money theory that has made inroads in France and Italy. For details of this theory, see Deleplace and Nell (1996), Rochon (1999), and Graziani (2003). 8 Mitchell-Innes developed credit money theory and Chartalistic arguments in the times of Keynes, and Keynes wrote a review article. Innes’s article is collected in Wray (2004), along with a brief biography. However, in his Treatise, Keynes mentions Knapp, but does not refer to Innes. After World War II, Lerner (1947) also came with some Chartalistic arguments. 132

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(1998) criticized the adoption of the Euro from the Chartalist position. Subsequently, Wray used the term Modern Monetary Theory and developed it.9 In this section, we examine the role of money in Chartalism and investigate the macroeconomic theory of Chartalism.

1. Role of money in Chartalism

The characteristics of money in Chartalism are as follows. First, issue of money is enacted by the state and, in this sense, Chartalism represents a state theory of money. Second, as previously mentioned, money is nominal and the “sovereign government alone has the power to determine which money of account it will recognize for official accounts. … Further, modern sovereign governments alone are invested with the power to issue the currency denominated in its money of account” (Wray 2015, pp.43, 44). Third, “the sovereign government imposes tax liabilities in its money of account, and decides how these liabilities can be paid. … Finally, the sovereign government also decides how it will make own ” (Wray 2015, p.44). The last statement indicates that the state decides the means of tax and fiscal payments. In Chartalism, the state determines money of account and money as substance.

2. Macroeconomic theory of Chartalism

In credit money theory, money originates from credit/liability relations and circulates in the economy. In Chartalism, the state certainly specifies account money and money as substance; however, whether or not the state money circulates in the economy is another matter, to be discussed. If the state has the power to securely collect taxes,

9 Modern Chartalism, which began with Wray (1998), and was subsequently developed by Goodhart (1998), is collected in Bell and Nell (2003). Wray’s (1998) contribution is theoretical and could be viewed as developing intrinsically from endogenous money supply theory. Goodhart’s (1998) work appeared in the context of adoption of the Euro in 1999. Wray (2015) and Wray, Mitchell, and Watts (2017) are textbooks of Modern Monetary Theory, and Ehnts (2017) analyzed the sovereign debt problem in the euro area. 133

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state money is used for tax payments, willingly receive state money in the form of government expenditure. Therefore, state money is used in transactions between the state and taxpayers; however, the possibility exists that state money is not utilized in private transactions because the and the seller of goods and services to the government are not always the same person. However, if the dimensions of the government ― the amount of tax payments or the volume of government expenditures ― are sufficiently large, a taxpayer’s demand for state money is high and state money is willingly received. This is the reason for circulating state money. Bank money circulates in the monetary circuit, and state money also has its locus in the macroeconomy. This circuit is illustrated as the process that “taxes drive money” (Wray 2015, p.50). This circuit starts with government expenditures for goods and services, and the seller of goods or services receives state money. Taxpayers in one way or another acquire state money and make tax payments. Therefore, another form of monetary circulation is the circuit through which the state disburses state money as government expenditure and state money refluxes through tax payments 10. The volume of state money is, at the very least, no less than the volume of taxation for the following reason. In the case where only state money exists, and if monetary are positive, tax fall short of the volume of monetary savings when the state money issued equals the volume of taxation. Therefore, the state endogenously supplies state money according to the willingness of the public to save. The government expenditure that the state has to make equal is not only the volume of taxation but also at least the public’s monetary savings to collect the volume of taxation. Therefore, the money disbursed by the government depends on the volume of monetary savings.11 This phenomenon can be explained in by the

10 Two other monetary circuits, or methods of money supply, exist. The first is that of foreign inflows and the second is a peculiar circuit in financial －the financial circuit representing the activity of money in the and financial . The financial circulation appears in Keynes’s Treatise on Money (Keynes 1971, p.217). See also Fumagalli and Lucarelli (2010). 11 If the government attributes supreme priority to sound , the economy will be deflationary. In an actual economy, taxes are set at a fixed rate, rather than a fixed amount. In this case, if the monetary saving rate is high, decreases; this leads to a decline in and 134

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so-called IS balance, which is expressed as:

S - I = (G - T) +NX

Here, S denotes private savings; I denotes private ; G denotes government expenditure; T denotes taxes; and NX denotes exports or the balance surplus. This formula indicates that a surplus of private savings (S - I) equals the budget deficit (G - T) plus net exports. In the case of a closed economy, a surplus of private savings or private net savings equals a budget deficit. In the private sector, if the propensity to save is high, a government sector deficit is necessary unless it is offset through exports.

3. Central bank and policy in Chartalism

In Chartalism, the central bank has some features that differ from those specified in credit money theory. First, the bank plays the role of “bank of the government.” The central banks offer an account of the revenues and expenditures of government funds. 12 Second, central banks implement monetary policy by controlling short-term interest rates ― something that they also perform under the credit money theory. Because most of the money that actually circulates in the macroeconomy is credit money and the reserve is the central bank’s debt, the money supply is endogenous. Central banks set the target short-term interest rate, and, to achieve this, use operations and government bonds. Specifically, if the government operates to the effect that expenditure, capital investment and consumption increase in the private sector, the proceeds reflux to commercial banks, and the banks have . If the excess

income, and, as a result, total taxes decline. To maintain the amount of taxes, the government expenditure must be raised. 12 In the U S, before the establishment of the Bank, no central bank as bank of the government existed and assuming so is not necessarily logical. However, in this paper, we develop the argument assuming these conditions because, at present, the central bank usually plays the simultaneous roles of “the bank of the government” and “the bank of banks.” 135

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reserves remain, the interbank interest rate falls. To maintain the target short-term rate, the central bank can sell bonds and absorb excess funds. Conversely, if the interest rate increases, the central bank can supply money through bond buying operations (Wray, 2015, p.89). In the case of ultra-low interest rates, the remarkably large buy operations are called “.”13 Next, we examine government bonds. In Chartalism, the budget deficit is a necessary and normal condition because the public’s desired monetary savings are usually positive. If a is pursued, the macroeconomic situation will be deflationary. In this case, if savings increase and taxes are constant, consumption decreases, and both production and income decline. A budget deficit means the supply of an equal amount of money and, logically, the state does not have to borrow from the private sector or issue public debt; bonds are an important means of conducting monetary policy in Chartalism. Because the government differs from the private sector and no prior financing is necessary, the government can incur fiscal expenditure without issuing national bonds. The state is also able to execute direct underwriting of bonds by the central bank or buy the bonds; therefore, issuing government securities is not always necessary. The direct underwriting of bonds by the central bank is often criticized for causing ; however, the result is the same even in the case of private underwriting if the buying operation occurs. 14 In this case, government securities are used to play other significant roles in financial markets, rather than as a means to raise funds. Bonds are significant for several reasons. First, sovereign bonds have the highest credit rating, indicating its central place in the . Second, bonds are important as a means of monetary policy ― the object of open market operations. In

13 Open market operations affect the short-term interest rate, and “[i]f the central bank wants to manipulate -term interest rates, it does so via quantitative easing (QE). … If entrepreneurs perceive a widespread lack of effective demand … then bringing down long-term interest rates by means of QE will be without effect” (Ehnts 2017, pp.114-8). The side effect of quantitative easing is a general increase in the prices of financial assets. 14 Whether bond purchases by central banks cause inflation is not certain. In recent years, after the world , massive quantitative easing policies were enacted in the developed countries and severe inflation did not occur; in Japan, the is stable. 136

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particular, as previously mentioned, bonds are an essential way for central banks to maintain interest rate levels. Third, when the government issues bonds, the interest costs are higher than in the case of ordinary fiscal expenditure. However, for the private sector, bonds are a way of earning interest income, whereas demand deposits carry no or remarkably low rates of interest. Because bond is the lowest among securities, holding bonds has merit. Moreover, “in a closed economy, the only source of net financial assets is the government” (Wray 2015, p.12). Therefore, national bonds are external assets.15

4. Scheme and

Chartalism not only affirms the importance of , but also insists on more active fiscal policy, and the basis for this is Lerner’s . 16 According to Wray, the “first principle” is that “if domestic income is too low, government needs to spend more (relative to taxes). … if there is it means is too low (or taxes are too high)”. The second is that “if the domestic interest rate is too high, it means government needs to provide more ‘money’, in the form of , to lower the interest rate” (Wray 2015, p.199). The basic concept is the same as that in Chartalism. The relationship between active fiscal policy and inflation is an issue in Chartalism, and its approach to inflation merits some consideration. On the point that active fiscal policy could cause inflation or depending on circumstances, it should first be noted that “only countries with fixed exchange rates or other promise to deliver foreign currency or gold … seem to have and currency crises. And that always seems to come down to imprudent expansion of these IOUs relative to ability to actually deliver the foreign currency or gold” (Wray 2015, p.258). Second, as for the

15 Securities, such as corporate bonds and stocks in the private sector, offset each other because these securities are credits/liabilities inside the private sector. Therefore, external assets are only those public bonds issued by the government sector or foreign securities issued by the foreign sector. 16 For the arguments on functional finance, see Lerner (1943) and Nell and Forstater (2003). 137

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relationship between budget deficit and inflation, “with high inflation, tax will tend to fall behind government spending, producing a deficit” (Wray 2015, p.259). Thus, fiscal deficit is the result of fierce inflation, rather than the cause. Third, it is argued that “a common cause of hyperinflation is some kind of supply constraint on ” (Wray 2015, p.262). Fourth, emphasis is placed on the point that a high interest rate policy increases the fiscal deficit (Wray 2015, p.263). Under Chartalism, as stated earlier, in the case of excessive private savings, except when there are large net exports, large-scale government expenditure is usually necessary and an active fiscal policy is inevitable. The details of this policy vary, but in the post-Keynesian literature enhancement of beneficial infrastructure and a job guarantee policy that employs the unemployed are advocated. In recent years, Job Guarantee policy has in particular been proposed in Chartalism, and we will go on to examine it. Under the Job Guarantee policy or Employer of Last Resort policy, the government employs all the unemployed. Diverse methods are conceivable, but the government employs all the unemployed people at the legal minimum or a level near it is a usual assumption. This policy was originally and separately advocated in the US and Australia, but Wray associates it with Chartalism. 17 The relationship to Chartalism lies, first, as already mentioned, in the fact that the fiscal policy affects the price level.18 Considering that the weight of the government is fairly considerable in an actual economy, the government is not a price-taker; rather, it has monopolistic power and is in a position to decide purchase prices. However, a difficulty similar to that in or the problem of distorted can occur when the purchase prices of multiple goods are set; therefore, it is desirable to set the purchase price of one particular good or service19. If the minimum wage is

17 The Job Guarantee policy was advocated almost concurrently in the US and Australia. Important texts on it are Wray (1998, 2015), Mitchell and Muysken (2008), and Murray and Forstater (2013a, 2013b, 2017). 18 The so-called fiscal theory of price level (FTPL) also reaches similar conclusion, but the logic used in it is considerably different. See Sims (1994). 19 If the gold price is set, the gold standard applies and price stability is theoretically possible. Murray and Forstater (2017) also states that “Keynes’s model is not just formally expressed in wage units －it 138

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determined and the unemployed are actually employed at this wage level, the entire price level is affected. Second, it has significance as a type of buffer stock policy. In orthodox economics, both the Non-Accelerating Inflation Rate of Unemployment (NAIRU) approach and policy assume a discipline or coordination through unemployment. This means that the price level is usually managed by using a , which captures the negative relationship between the inflation rate and the unemployment rate. For example, the unemployment rate is low when the inflation rate is high; further, if a tight policy is implemented, the inflation rate drops, but the unemployment rate rises. In this case, the number of unemployed fluctuates, adjusting to the movement of the price level and functions as a buffer stock; in the Job Guarantee Policy, the number of workers who are employed under it fluctuates. Because the workers employed under this policy labor at minimum wage or at a level close to it, the number of workers employed under the Job Guarantee scheme decreases if activity improves and employment increases in other private sectors that have higher than minimum . In this sense, under the Job Guarantee program, the workers employed function as a buffer stock. With both the NAIRU approach and Job Guarantee program, price stability is achieved, but the unemployment rates are necessarily different. With the NAIRU approach, the unemployment rate could be considerably high, depending on the circumstances; under the Job Guarantee policy, almost is achieved.

V. Relationship between Credit Money and State Money: The Hierarchy of Money

In the actual economy, credit money and state money coexist and function, but their relationship is not clear. In this section, we first examine the difference between credit

is on a labour standard” (p.v); further, they regard the workers employed under the Job Guarantee policy as being equivalent to reserves under the gold standard. 139

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money and state money. Second, we investigate the “hierarchy of money” or the “pyramid of debts” as defining the relationship between credit money and state money. Third, we also consider the differences in macroeconomic systems and policies in credit money theory and Chartalism.

1. Differences and commonalities between credit money and state money

Credit money theory and Chartalism share an emphasis on the nominal aspects of money and the significance of account money, besides the definition of money as a means of payment. However, differences exist between credit money and state money. First, credit money is defined as a means of debt payment, whereas state money is a means of tax payment. As previously mentioned, however, because tax is a liability that is unilaterally set by the state, it is a debt for the taxpayer; therefore, credit money and state money are both means of debt payment, and this is their common characteristic.20 Second, pragmatic guarantee of the nominality of money is the task of the state and, in credit money theory too, the state has a similar task, but by considering the continuity of an account unit. The difference between Chartalism and credit money theory is that in credit money theory, the consent of society is at least necessary for monetary circulation, whereas the state is originally assumed in Chartalism. Third, on money as substance the two theories differ slightly. In credit money theory, money as substance in a pure credit economy is not necessary, and it is even sufficient that a system exists that records the amount of credit and liability or “the financial system as electronic scoreboard” (Wray, 2015, p. 57). 21 In Chartalism, in the case of tax payments, money as a substance is historically necessary and is not

20 In certain fields other than economics, particularly, anthropology, some arguments that link the origin of money with debt have been developed in recent years. See Aglietta and Orlean (1998) and Graeber (2011). 21 The “value of fiat currency will depend on expectations of the future existence of the current government, and the prospective treatment of that currency by a successor government” (Goodhart 1998, p.424). In Chartalism, the value of a currency is related to future confidence in the government. 140

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only a simple record of credit and liability; instead, its material or symbolic existence is supposed. As previously stated, several differences exist between credit money theory and Chartalism, but they share important characteristics. First, both theories adopt nominalism to describe the nature of money. Second, state money and credit money are thought to have an origin, but both have basically equal value and the same account unit.22 Third, both theories depict the macroeconomy as a monetary circuit. In these monetary and tax circuits, the principle of effective demand and endogeneity of money are important theoretical features. Moreover, in an actual economy, these two circuits coexist, but are integrated in that the bank deposit is used as a means of tax payment regarding the state money.

2. The hierarchy of money or the pyramid of debts

Credit money and state money not only coexist, but also have a certain relationship with each other. This relationship is called the “hierarchy of money” (Bell 2001, p.149) or the “pyramid of debts” (Wray 2015, p.78) in Chartalism. 23 This structure consists of many layers, but here we investigate a simplified three-layer system.24 At the bottom are debts that are issued by agents other than banks; for example, a bank loan for and firms. Although this debt itself can be resold, the final settlement is normally conducted through bank deposits, that is, bank debt as third-party debt.25 The

22 Chartalistic money was established quite recently; before the classic gold standard system was suspended after World War I broke out, fiat money was introduced in an emergency (Guttmann 2003, p.147). This point is interesting with respect to the arguments in Carl Schmitt’s Political Theology (1922), which indicates the relation between state and the state of exception, because, needless to say, monetary sovereignty is part of state sovereignty. 23 Innes (1913, 1914) came up with Chartalistic arguments; however, his original examination was of the framework of credit money theory. The subject of Wray (1990) is also endogenous money theory, and modern Chartalism appears in the debate on credit money theory. 24 Keynes does not seem to formulate a hierarchical system, but he conceived of financial assets as spectrum of liquidity. 25 Although credits held by banks and other financial institutions have low liquidity, transfers of credits are possible. In fact, housing mortgages are resold and securitized under the assumption that the 141

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middle layer is credit money or bank deposits. As previously described, the bank deposit, which is a third-party debt, is used as money; however, if a transfer of funds is not completed in a bank, another measure is necessary. In this case, other third-party debt is used for interbank settlements, and this debt is ; further, the reserve is supplied by the central bank or central bank deposits. This is the topmost layer of the pyramid. A reserve or a central bank deposit is a central bank’s debt and third-party debt for banks. The structure of the system is such that third-party debt is necessary if the settlement of one layer is not completed within the layer. 26 The characteristic of this pyramid of debts or hierarchy of money is that, first, “there is a hierarchical arrangement whereby liabilities issued by those higher in the pyramid are generally more acceptable. … Second, the liabilities at each level typically leverage the liabilities at the higher levels (Wray 2015, p.79). Therefore, the lower layer of debts is quantitatively larger than the higher ones. In this system, the reserve, as central bank debt, finally functions as a means of settlement, and this debt is state debt. exists in the form of state money, and functions as a means of settlement in the non-bank sector because it is third-party debt that has high creditworthiness. In credit money theory, the central bank does not logically need to be a part of the government. In the hierarchy of money, a higher layer needs debts issued by the to have higher creditworthiness than a lower layer. Consequently, the debts of the state are used as the most creditworthy agent, and the central bank is integrated with the government.

3. Differences in the macroeconomic system

In this section, we consider the difference between credit money theory and Chartalism from not only a theoretical point of view, but also in terms of policy. First, regarding the nature of money, the role of the state is clearly located within the framework of

assets are received as . 26 The structure wherein the settlement of debt needs third-party debt in one layer is similar to the one mentioned in the arguments of Aglietta and Orlean (1982). 142

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credit money. Credit money theoretically and historically supposes only the existence of society, but in the modern , the state has various functions and Chartalism is a theory that can explain this point.27 The role of the central bank and national bonds are clarified. Second, concerning monetary policy, in both credit money theory and Chartalism the short-term interest rate policy is the main instrument; however, it is not always effective, especially during a depression. However, in Chartalism the effectiveness of the monetary policy as a whole is rather negative. Third, the validity of fiscal policy is generally approved in the post Keynesian tradition. Although active fiscal policy is advocated in Chartalism, an unlimited budget deficit is not proposed, and the inflation owing to limited supply capacity is not confirmed. In Chartalism, the fact that the policy scope in a country with key currency or a floating is wider than in those with a fixed exchange rate is significantly underlined. 28 Fourth, the Job Guarantee policy is important in Chartalism in that it has the role of controlling the price level, but logically, it is not necessary in this theory.

VI. Conclusions

In this study, we investigate monetary theories that emphasize the nominal aspect of money. The three main conclusions are as follows. First, nominalism is a perspective that stresses the account unit as a function of money. This perspective regards money as having a genuine nominal existence; further, credit money theory and Chartalism both adopt nominalism. We examine the nominality of money that is common to both

27 Although we avoid going into the in depth in this paper, it is worth noting that the credit money system has historically developed independently of the state to some extent. Further, Wray (1998) and Ingham (2004) mention the history of credit money system independently of the state to some degree, but Wray (1998) stresses the relationship between money and state following a Chartalistic line. 28 Criticism has been advanced to the effect that in the actual economy, even the policy of a key currency country is of limited use owing to the international financial system, especially capital flows. For example, see Epstein (2019). 143

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theories. Second, we consider the macroeconomic theories of credit money theory and Chartalism, and clarify that both theories are part of the Keynesian tradition, which prescribes effective demand and a short-term interest rate policy; however, their macroeconomic frameworks are slightly different. Third, although both theories emphasize the nominal aspect of money, the money on which both theories focus differs. Credit money theory centers on bank money, and Chartalism deals with state money; these two monies actually coexist in the economy. We elucidate the relationship between credit money and state money in the structure of the pyramid of debts or the hierarchy of money in Chartalism. Credit money is theoretically integrated into Chartalism; further, both state money and credit money are unified in the actual system in which the central bank’s debt － also the liability of the state － functions as a means of final settlement.

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