DEFINITION of Chartalism
Chartalism is a non-mainstream theory of money that emphasizes the impact of government policies and activities on the value of money. The early-20th-century German economist Georg Friedrich Knapp first developed the theory of chartalism, which defines money as a unit of account with value that is determined by what the government will accept as payment for tax obligations. In other words, chartalism states that money does not have intrinsic value, but is given value by the government.
BREAKING DOWN Chartalism
In contrast, the theory of metallism defines money as a commodity with intrinsic value that makes it widely accepted as a medium of exchange (precious metals such as gold). The term "chartalism" comes from the Latin word charta, which means ticket or token – items that may be accepted as payment, but which do not have intrinsic value. Today proponents of chartalism are most likely to adhere to Modern Monetary Theory (MMT).
In his time, governments of developed countries were on the gold standard (metalists) and that was what gave currency its value. One could go to a Federal Reserve Bank, at least in theory, and demand gold for paper currency. Today the gold standard is long gone and all currency is in esssence fiat money -- it has value because the goverment issues it and decrees that it is legal tender for all debts public and private.
So it's up to individual governments to maintain their currency through various means including controlling the money supply, taxes, interest rates, as well as encouraging investment and private enterprise.
Bitcoin and Chartalism
The rise of virtual currencies such as Bitcoin would confound proponents of chartalism. It's issued in a free and open marketplace, has no connection to any government, and there's no law that says anyone must accept it. Yet it has value and people are willing to trade and accept virtual currencies.
Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.
There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite its not being legal tender, Bitcoin charts high on popularity, and has triggered the launch of other virtual currencies collectively referred to as Altcoins.