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In macroeconomics , chartalism is a theory of money which argues that money originated with states' attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt,  and that fiat currency has value in exchange because of sovereign power to levy taxes on economic activity payable in the currency they issue. Georg Friedrich Knapp , a German economist , coined the term "chartalism" in his State Theory of Money , which was published in German in and translated into English in The name derives from the Latin charta , in the sense of a token or ticket.
He argued the state could create pure paper money and make it exchangeable by recognising it as legal tender , with the criterion for the money of a state being "that which is accepted at the public pay offices". Constantina Katsari has argued that principles from both metallism and chartalism were reflected in the monetary system introduced by Augustus , which was used in the eastern provinces of the Roman Empire , from the early 1st century to the late 3rd century AD.
When Knapp was writing, the prevailing view of money was that it had evolved from systems of barter to become a medium of exchange because it represented a durable commodity which had some use value. However, as modern chartalist economists such as Randall Wray and Mathew Forstater have pointed out, chartalist insights into tax-driven paper money can be found in the earlier writings of many classical economists,   for instance Adam Smith , who observed in The Wealth of Nations:.
A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend altogether on the will of the prince.
Forstater also finds support for the concept of tax-driven money, under certain institutional conditions, in the work of Jean-Baptiste Say , J. Alfred Mitchell-Innes , writing in , argued that money existed not as a medium of exchange but as a standard of deferred payment , with government money being debt the government could reclaim by taxation.
Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. He has to acquire his portion of the debt from some holder of a coin or certificate or other form of government money, and present it to the Treasury in liquidation of his legal debt.
He has to redeem or cancel that portion of the debt Knapp and "Chartalism" were referenced by John Maynard Keynes in the opening pages of his Treatise on Money  and appear to have influenced Keynesian ideas on the role of the state in the economy. Economists Warren Mosler , L. Randall Wray , Stephanie Kelton , and Bill Mitchell are largely responsible for reviving Chartalism as an explanation of money creation ; Wray refers to this revived formulation as Neo-Chartalism.
Scott Fullwiler has added detailed technical analysis of the banking and monetary systems . Rodger Malcolm Mitchell's book Free Money  describes in layman's terms the essence of Chartalism. Some contemporary proponents, such as Wray, situate Chartalism within post-Keynesian economics , while Chartalism has been proposed as an alternative or complementary theory to monetary circuit theory , both being forms of endogenous money , i. In the complementary view, Chartalism explains the "vertical" government-to-private and vice versa interactions, while circuit theory is a model of the "horizontal" private-to-private interactions.
Hyman Minsky seemed to incorporate a Chartalist approach to money creation in his Stabilizing an Unstable Economy ,  while Basil Moore , in his book Horizontalists and Verticalists ,  delineates the differences between bank money and state money. From Wikipedia, the free encyclopedia. The First Years.