The Philosophy of Money in MMT: Justifying State Credit Money Theory via the Dialectic of Credit Money

この記事は約21分で読めます。

Introduction

In this article, I will develop a complete philosophical justification for the monetary theory of Modern Monetary Theory (MMT). This is deployed through a theoretical framework I call the “Dialectic of Credit Money.” It provides a fundamental logical-historical justification for MMT, positioning MMT’s “State Credit Money Theory” as the terminus of the logical development and historical evolution of the mechanism known as credit money.

What is the “Dialectic of Credit Money”?

The distinct feature of the “dialectic” method is the coincidence of the logical and historical perspectives. G.W.F. Hegel, who perfected modern dialectics, narrated the world itself as the unfolding of the “World Spirit.” He viewed the way a discussion or spirit unfolds logically (an entity faces its negation, negates that negation to overcome it, and develops into a higher form) as the way the world itself unfolds historically. Thus, in dialectics, logical development and historical evolution coincide. This conviction allowed Hegel to declare in the preface to his Philosophy of Right: “What is rational is actual and what is actual is rational.”

While I do not intend to narrate the entire development of the natural world through dialectics, I believe it is justified to use this framework to discuss history—essentially woven by human spirit—and human-made tools and institutions like money and banks.

The “Dialectic of Credit Money” perceives the nature of credit money as follows: “Credit money faces a weakness that negates its own existence, but in order to negate that negation and overcome it, it develops into a higher form.” The tentative final form of this morphological development is MMT’s State Credit Money Theory.

Outline of this Article

The argument is divided into four stages:

1. The First Form: Analyzing the primordial form of credit money and identifying its fundamental dynamic: the tension with commodity money. Credit money exists in a paradox where its value fundamentally depends on an external “object” (commodity money) while simultaneously needing to be independent of it. This dependence is the weakness that negates credit money, acting as the driving force of the dialectical process.
2. The Second Form (Bank Money): Analyzing banks as devices that liberate the primordial form of credit money from its dependence on external objects. Banks grant credit money a more stable independence, enabling credit creation. Conversely, credit creation is a unique operation that grants independence to credit money by “squaring” it (credit money based on credit money).
3. The Third Form (Central Bank System): Analyzing the dual banking system of commercial and central banks. While banks functioned as devices to give credit money independence, the excluded “external objects” eventually counterattack (e.g., liquidity crises, bank runs). To overcome this dependence, the bank itself is “squared,” creating a “bank of banks”—the Central Bank.
4. The Fourth Form (State Credit Money Regime): Analyzing the MMT regime (managed currency system). The final remnant of the external object’s dominion—the Gold Standard—is abandoned due to its deflationary bias hindering economic development. This marks the final collapse of the external object’s power. Replacing gold is, in a very precise sense, taxation. The foundation of the State Credit Money Regime is the Tax-Driven Monetary Theory (Chartalism); it is, so to speak, a “Tax Standard System.”

By walking through these stages, we philosophically justify the modern State Credit Money Regime as the logical-historical arrival point. Here, we stand on the same ground as Hegel when he declared the identity of the rational and the actual.

---

Section 1: The First Form of Credit Money：
The Tension between Dependence on and Independence from External Objects

Credit money is defined as a specific type of IOU (debt certificate) that is: 1) Unfulfilled, 2) Transferable and circulating, and 3) A certificate of debt.

The Critique of Commodity Money Theory Typically, Commodity Money Theory is contrasted with Credit Money Theory. The former posits that money originated from barter, where a valuable commodity (like gold or rice) became a medium of exchange to overcome the inconvenience of barter (“double coincidence of wants”). While MMT often dismisses Commodity Money Theory as false, my view differs.

I view credit money as the “child” of commodity money. Initially dependent on its parent (commodity money), credit money enters a rebellious phase, confronts the parent, and eventually overcomes it. This drama of “patricide” and achieving complete independence is the “Dialectic of Credit Money.”

Analysis of the Primordial Form In the primordial scene of credit money, unlike the immediate settlement of barter, there is a time lag. If I want a wild boar but have nothing to exchange, I issue an IOU: “I owe you one salmon (to be caught in autumn).” If my creditworthiness is accepted, this IOU can circulate as a means of payment. However, the value of this credit money relies on the “object” (salmon) promised. It depends on the external object. Yet, for it to function as money, it must remain unfulfilled—separate from the object. If the debt is fulfilled (the salmon is delivered), the IOU is destroyed, and the money vanishes. Thus, credit money exists only in the tension between dependence on the external object (for value) and independence from it (to circulate).

---

Section 2: The Second Form of Credit Money：
Banks as Devices to Liberate Credit Money from Objects

Banks are devices that resolve the weakness of the first form (dependence on objects) by liberating credit money.

Origins: Goldsmiths and Bank Notes The origin of modern banknotes lies with goldsmiths. People deposited gold for safekeeping and received a “deposit receipt.” These receipts began to circulate as money. Here, the receipt is a liability of the goldsmith. While structurally identical to the first form (dependent on gold), the high creditworthiness of the goldsmith allows for wider circulation.

Discounting Bills and Clearing Systems Banks further advanced independence through bill discounting and clearing systems. Banks accept private IOUs (bills) as assets and issue their own IOUs (bank deposits) as liabilities. Settlements between individuals are then handled by offsetting balances on the bank’s books without moving physical objects (gold). When banks developed inter-bank clearing systems, bank money (deposits) became safer and more convenient than cash (gold). People began to prefer bank money, making redemption for gold rare. This achieved a decisive independence from physical objects.

Credit Creation as “Squaring” Credit Money This independence enables Credit Creation. Banks accept a borrower’s IOU (weak credit money) as an asset and issue bank deposits (strong credit money) as a liability. This is an exchange of credit money, upgrading its liquidity (“liquidity transformation”). In this sense, bank money is “credit money based on credit money”—credit money squared. Through this operation, credit money proliferates without being strictly bound by the amount of physical base money (gold), seemingly achieving independence.

---

Section 3: The Third Form of Credit Money：
The Counterattack of External Objects and the Establishment of Central Banks

Liquidity Crises and Bank Runs However, the excluded “object” plots a counterattack. Because banks engage in credit creation (issuing liabilities exceeding their cash reserves), they are vulnerable. If doubts arise about a bank’s ability to pay, people rush to convert deposits back into cash (gold). This is a bank run. The bank, aiming for profit, naturally expands credit creation, maintaining a precarious balance. When an economic boom turns out to be a bubble, loans become bad debts, triggering a liquidity crisis. The bank cannot meet the demand for cash and defaults. The “object” (gold) forcibly reasserts its necessity, bringing death to the credit money.

The “Squaring” of the Bank Itself: The Central Bank To overcome this negation, the bank itself is “squared.” A “Bank of Banks”—the Central Bank—is established. The Central Bank functions as a meta-bank. It issues “Central Bank Money” (cash and reserve deposits), which replaces gold as the “cash” for commercial banks. When commercial banks face a liquidity crisis, the Central Bank acts as the “Lender of Last Resort,” supplying Central Bank Money by accepting the commercial banks’ assets (loans/bonds). Through this dual banking system, the “external object” that threatened the bank is pushed further out. For the private economy, “cash” is no longer gold, but Central Bank Money.

---

Section 4: The Fourth Form of Credit Money：
The Sunset of the Gold Standard and the Establishment of the MMT Regime

The End of the Gold Standard: Credit Money’s “Independence Day” Under the Central Bank system, gold still remained as the “cash” for the Central Bank (the Gold Standard). The supply of money was ultimately constrained by the quantity of gold. This constraint proved fatal during the Great Depression (1929). The Gold Standard imposed a deflationary bias. Amidst a shortage of demand, governments were forced into austerity to protect gold reserves, worsening the depression. This led to the rise of fascism and World War II. The final remnant of the “object” was removed on August 15, 1971 (the Nixon Shock), when the convertibility of the US dollar to gold was suspended. This was the “Independence Day” for credit money.

The Establishment of the MMT Regime: A “Tax Standard” With gold gone, what supports the independent credit money system? Central Bank Money (the peak of the hierarchy) has two main functions for its holders (private banks/government):

1. Settling inter-bank transactions (internal to the system).
2. Paying Taxes (connection to the outside).

The only remaining channel connecting the credit money system to the “outside” is the obligation to pay taxes. The system is no longer anchored to a physical object (gold) but to the State. This leads us to the State Credit Money Theory(Chartalism). The validity of money is grounded in the state’s power to levy taxes. The state does not need “objects” (gold) to issue money; it issues money first, and then collects it via taxes (“Spending First”). Thus, the dialectical process concludes with the MMT regime: a system where money is purely a creature of the state (and the law), liberated from the fetters of physical commodities.

---

Conclusion

The Consequences of the Dialectic of Credit Money

1. Relationship between Commodity and Credit Money: Credit money is not the opposite of commodity money but its dialectical development (the child that commits patricide).
2. Response to Critics: Critics argue that “Credit Money Theory” (money as private debt) and “State Money Theory” (money as a state creature) are incompatible. The dialectic shows they are stages in a single developmental process. The private credit system (banks), through its inherent instability, necessitates the state/central bank system to survive.
3. Completion of Hegel’s Philosophy: This theory complements Hegel’s Philosophy of Right by integrating a modern central banking system, potentially avoiding the path to imperialism and war caused by deflation/demand deficiency (which Hegel foresaw but could not solve).
4. A Path Different from Marx: While Marx’s “Dialectic of Commodity Money” (Das Kapital) points toward the end of capitalism, the “Dialectic of Credit Money” suggests a path where capitalism can sustain itself through the state’s management of aggregate demand (MMT), allowing for a “consumption society” rather than a collapse into communism.

“What is rational is actual.” The MMT regime is the rational outcome of history’s struggle to liberate human economic potential from the constraints of physical objects.

---

Translated by: AI Staff, “21st Century Political Economy” Research Institute