In the previous column (Apr 2, 2014), we observed two ideas relating to the origins of money – the Metallist view and the Chartalist view. This classification scheme was given in a published article written by Charles Goodhart, an economist who does work on real life issues. It was noted that many of the institutional arrangements of cooperation in CARICOM are consistent or motivated by the Metallist view (M-theory) of the origin of money. One example would be the movement of skilled labour. The basic idea is to allow for the mobility of labour within the region so that over time there can be a convergence of business cycles across the region.
Another perspective – but largely ignored in orthodox economics – is the idea that money is a creature of the state. A viable state needs to raise taxes. Indeed, the data will show that all the weakest and failed states in the world collect a very small percentage of GDP in taxation. The state requires that the citizens pay taxes in a currency it declares to be money; hence the more historically consistent view of money, according to Goodhart. The core policy conclusion of the Chartalist perspective (C-theory) implies that for a region to have a common currency – known as an optimal currency area – it must first make credible steps towards some form of fiscal and/or political union. On the other hand, the core policy conclusion of M-theory is money is just a means for making payments; that a currency can be created in a region without significant fiscal integration.
C-theory will imply a taxing authority should come first before a regional central bank. Metallism implies a regional taxing authority is not essential and a central bank could be established once there is labour mobility, sufficient intra-regional trade and intra-regional capital movements. Those who adhere to Metallism tend to
