Today is the anniversary of Augusto Graziani death. Graziani was one of the most eminent Italian economists of the Nineteenth century. He is the founding father of the macro-monetary approach named the (Italian) Theory of Monetary Circuit (TMC). Although it may seem simple and intuitive, the TMC is in fact quite complex. This is the reason it has been subject to many misunderstandings, which have weakened its original purpose. My short annotations below aim at shedding light on some key points of the TMC.

What Augusto Graziani’s TMC taught me

A monetary economy of production, or capitalist economy, is necessarily made up of three social classes: firms (or industrial capitalists), wage-earners (or workers), and banks (or financial capitalists).

Money is a triangular social relationship where the liabilities of a third party, the bank, are accepted as means of payment between two parties (a firm vs a worker, or a firm vs another firm).

Firms need an initial finance to start the overall process of production and exchange.

This finance is credit money that is created ex nihilo by the banking system. No previously-accumulated savings or loanable funds are necessary (in other words, loans generate deposits, not vice versa).

New money is created when banks credit firms’ account, whereas money is destroyed when firms cancel out their debt vis a vis the banks.

The ex ante initial finance must cover necessarily firms’ production plans (that is, the production of both consumer and capital goods), although the ex post or residual amount of (new) loans is the share of investment which is not covered by internal funds and/or new issues.

The funds the firms get by issuing securities on the financial markets are one of the ways the wage-earners hold their savings. Logically, this liquidity follows the creation of bank money and cannot replace it – being one of the channels of the final finance that firms obtain at the end of the circuit instead.

Analogously, consumer credit must be logically placed at the end, not at the beginning, of the circuit – being just another final finance channel for the firms.

Wage-earners’ hoarding goes brings about an increase of firms’ debt vis a vis the banking sector.

Firms and workers can only bargain the nominal wage rate, while its real level is defined ex post by the consumer goods price level (which is determined, in turn, by firms’ autonomous decisions or plans).

Under the reproduction equilibrium, changes in the level of aggregate demand do not necessarily affect the level and composition of output, the employment level and the real wage rate (distribution), as these variables are eventually determined by the firms’ autonomous decisions.

As a result, ceteris paribus loose fiscal policies and tranfers affect real income distribution within the wage-earners’ class (e.g. transferring income from the employed to the unemployed), whereas they do not affect income distribution between different social classes.

One the one hand, the price level reflects the costs of production and the class struggle; on the other hand, inflation is one of the ways firms impose their production plans to the workers (forced saving).

An increase of the policy rate is inflationary if the firms are not willing to reduce their costing margin.

The purchase of labour-power is the only external exchange for the firms sector. As a result, the appropriation of the product of the the surplus labour (that is, the share of the overall working day exceeding the necessary labour time) is the source of profit for them, whereas the exchange of capital goods is just a zero-sum game.

Government spending and net export help firms monetise their profits, and pay the interests to the banks.

What Augusto Graziani’s TMC did not teach me (i.e. what it does not mean)

It does NOT hold that no other social sub-class or group exists, apart from those mentioned above.

It does NOT hold that an individual firm cannot fund its activity through other channels, besides bank loans.

It does NOT hold that banks can never act as intermediaries in the savings market.

It does NOT hold that investment is never funded by bank credit.

It does NOT hold that bank money (deposits) is the only form of money, and financial markets play no role.

It does NOT hold that consumer credit must be assumed away.

It does NOT hold that the nominal wage has no impact whatsoever on distribution.

It does NOT hold that changes in aggregate demand always affect, or never affect, output, employment and distribution (as the final impact depends on firms’ autonomous decisions or plans).

It does NOT hold that expansionary fiscal policies and transfers are never, or always, effective (as the final impact depends on firms’ autonomous decisions or plans).

It does NOT hold that inflation is always positive, or negative, for the workers.

It does NOT hold that an increase in the policy rate is always inflationary or deflationary (as the final impact depends on firms’ autonomous decisions or plans).

It does NOT hold that the traditional rendition of the Marxian theory of surplus-value as surplus-labour is correct as it is, or it must be necessarily rejected.

It does NOT hold that, if there is neither government spending nor net export, firms cannot make any (real) profit and pay an interest to banks.

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4 thoughts on “The Theory of Monetary Circuit: Everything I know About It (More or Less)

  1. What would you say is the difference, if anzy, between the the (Italian) Theory of Monetary Circuit approach to firms’ financing of investment and Kalecki’ and Stenidl’s Principle of Increasing risk?

    In both theories firms’ issuance of securities comes at the end, kind of a validation of investment, to refinance investment not covered by internal funds. I would say that the main difference is the emphasis on the ex ante initial finance where the the (Italian) Theory of Monetary Circuit emphasis the role of loans created ex nihilo.


    PS: By the way, I would be interested to know the material you use for your Macro and Theories of value courses.

    1. Hi Ayoze, thanks for your comment. I agree with you. The Italian TMC resembles the Kaleckian view of money. In fact, Graziani frequently mentions Kalecki in his works. The key feature of the TMC approach is that it is focused on the process of creation, circulation and destruction of bank money during “normal times”. The initial finance to firms’ production plans is the trigger (hence the crucial phase) of the monetary process of production and exchange. I can share my modules’ material with you through Google Drive or One Drive.

      1. Thanks for replying.

        Kalecki emphasis the role of past saving and current profits as the way of financing investment. I believe that the reason why he did that was to demystify the entrepreneurial dogma that everyone can become a capitalist starting with zero capital -a la Silicon Valley myth. I think, a part from this, both theories are actually the same. But in his writings about Kalecki, Toporowski (which I at the same time don’t think he is wrong) always stresses that investment is always financed with past saving and current profits. I wonder if that difference in initial finance actually matters that much ’cause I think the conclusions drawn from both theories are pretty much the same.

        Here my gmail:

        1. The point is that the TMC is at the maximum level of abstraction and aggregation. If we consider the firms as an aggregated and consolidated sector, and we use a single-period model, and we rule out the crisis, then the firms must always finance their production plans through bank credit (initial finance). The purchase of capital goods is always funded ex post through saving, be it voluntary (purchase of shares and corporate bonds) or involuntary saving (forced saving, that is, extra-profit due to the higher price of consumer goods). While Kalecki’s view is largely coherent with Graziani’s, and vice versa, the former sometimes works at a lower level of abstraction and aggregation, e.g. considering the actual investment behaviour of the firms taken as individual agents.

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