Keynes believed that money represents credit against a debt, banks create money, and States enforce the credit agreement

John Maynard Keynes himself was much more open to what he liked to call the “alternative tradition” of credit and state theories than any economist of that stature (and Keynes is still arguably the single most important economic thinker of the twentieth century) before or since.

At certain points he immersed himself in it: he spent several years in the 1920s studying Mesopotamian cuneiform banking records to try to ascertain the origins of money—his “Babylonian madness,” as he would later call it.

His conclusion, which he set forth at the very beginning of his Treatise on Money, was more or less the only conclusion one could come to if one started not from first principles but from a careful examination of the historical record: that the lunatic fringe was, essentially, right.

Whatever its earliest origins, for the last four thousand years money has been effectively a creature of the state. Individuals, he observed, make contracts with one another. They take out debts, and they promise payment.

“The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time—when, that is to say it claims the right to re-edit the dictionary.

This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of Money has been reached that Knapp’s Chartalism—the doctrine that money is peculiarly a creation of the State—is fully realized …

Today all civilized money is, beyond the possibility of dispute, chartalist.”

This does not mean that the state necessarily creates money. Money is credit, it can be brought into being by private contractual agreements (loans, for instance). The state merely enforces the agreement and dictates the legal terms.

Hence Keynes’ next dramatic assertion: that banks create money, and that there is no intrinsic limit to their ability to do so: since however much they lend, the borrower will have no choice but to put the money back into some bank again, and thus, from the perspective of the banking system as a whole, the total number of debits and credits will always cancel out.