Review of Keynesian Studies Vol.2 Atsushi Naito Nominality of Money: Theory of Credit Money and Chartalism Atsushi Naito Abstract This paper focuses on the unit of account function of money that is emphasized by Keynes in his book A Treatise on Money (1930) and recently in post-Keynesian endogenous money theory and modern Chartalism, or in other words Modern Monetary Theory. 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 122 Review of Keynesian Studies Vol.2 Atsushi Naito 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 state money or fiat money; however, in Post Keynesian economics, the endogenous money theory and theory of monetary circuit place the stress on bank 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 value. 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, Neoclassical economics accentuates the real aspect of money and usually adopts the quantity theory of money and the commodity 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 Metallism, 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 123 Review of Keynesian Studies Vol.2 Atsushi Naito 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 economists of the Classical, Neoclassical, and the Austrian school stress the means of exchange, Keynes emphasized the means of store of value in his General Theory.1 After World War II, Keynesian and Neoclassical economics took opposing views on these two functions of money. Since the 1980s, the endogenous money supply 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 Classical economics, Adam Smith 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 Wealth 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 Review of Keynesian Studies Vol.2 Atsushi Naito economics uses money as the unit of account to pay for goods 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, Euro, and so on; further, as a substance, money can take diverse forms, such as a precious metal, commodity money, paper currency, and deposit currency. In this sense, money has a nominal existence; therefore, the position 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 debts, which are contracts for deferred payment, and price lists, which are offers of contracts for sale or purchase” (Keynes 1971, p.3). Thus, in credit money theory, money is introduced through debt. 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 taxes)” (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 tax’ ” (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 virtual currency 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 gold. 125 Review of Keynesian Studies Vol.2 Atsushi Naito 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 credits 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 goods and services, 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 prices 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) metals; thus, it is a type of commodity money theory.