Modern Monetary Theory is a monetary standard in which government-issued tokens are used as the unit of money. In such a system, fiat money is created by government spending. Taxation is employed to reclaim the money and control the total amount of fiat money in existence. Reclaiming most of this issued money via taxation is essential to maintaining its value in exchange.
Modern Monetary Theory states that under a fiat money system, net currency is created by government through deficit spending. Because the issued currency is not tied to or backed by a commodity, currency can only be created when the government spends. Government may, or may not, ask for that currency back in taxes. The demand to hold and acquire this government issued currency is driven by taxes levied by the state – which typically can only be paid in the state-issued fiat currency.
The theory was developed by economist G.F. Knapp into the 1920s, with important contributions by Alfred Mitchell-Innes also. It was influential on the 1930 Treatise on Money by John Maynard Keynes – Knapp and Chartalism are cited approvingly on its opening pages.Chartalism experienced a revival under Abba P. Lerner, and has a number of modern proponents, who largely identify as post-Keynesian economists.
Many proponents of chartalism argue that a fiat system is preferable to a commodity money system, particularly because it allows for government deficit spending for fiscal stimulus in ways not possible under a commodity money system..
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