Notes on Augusto Graziani’s great theory of the monetary circuit

I met Augusto Graziani only once. This was in 1994 during a three-day conference at the University of Bergamo organised by Riccardo Bellofiore. The conference’s subject was the third volume of Marx’s Capital on the occasion of its centenary appearance. (Much of Parts Four and Five of this unfinished work are on the interconnection of production capitals and financial capitals.) At that time, hélas, I had not yet studied Graziani’s work.

Graziani’s theory of the monetary circuit shares with all other great insights in the history of thought, that once the general idea is grasped, its core is rather simple. Below I indicate its two key points.

The first key point is that for the macroeconomic understanding of a capitalist economy it is crucial to see the money-creating banks as separate entities from other enterprises. (I add, that within the capitalist economic domain, these constitute a ‘separation-in-unity’: production enterprises cannot exist without banks, and banks cannot exist without production enterprises.) New money comes into existence when non-banking enterprises make a payment via their bank. “At that moment, in one and the same act, money is created, the borrower becomes a debtor to the bank and the agent receiving a payment becomes the creditor of the same bank.” (Graziani 1990.) When the non-banking enterprises repay their debt to the bank, the money initially created is cancelled.

The second key point is that for the non-bank production enterprises in the aggregate – and abstracting from the state sector – the only money requirement is that for the purchase of labour-power, i.e. for the wage bill. Workers may spend the wage either to purchase consumer goods, or to purchase financial assets. In each case this may be used to cancel the production enterprises’ debt to banks – as mentioned at the end of the previous paragraph. The same applies for the expenditure of banks with the production enterprises.

For their credit to production enterprise banks will usually require a collateral. The previous two key points are based on the assumption that the production and sales plans of production enterprises are fulfilled. In case they (partly) fail in this respect, the bank may sell the collateral. Even if the two key point above are in hindsight simple, Graziani’s theory includes more complicated cases, such as the one mentioned in the current paragraph – and its effects.

Great theory is not only characterised by a simple core, but also by its encompassing a heuristic for the development and understanding of intricacies. This certainly also applies to Graziani’s theory of the monetary circuit.

Augusto Graziani’s theory of the monetary circuit had an enormous impact on my thinking about monetary theory. The major work in which I applied his theory is in my Marx-inspired 2019 book The unity of the capitalist economy and state, published by Brill. Most explicitly in its ch.3 on the Finance of enterprises, the sections on the ‘Pre-validating finance by banks’ and on the ‘Ex-post substitution for the pre-validating finance by banks’ (pp. 140-167).

I am immensely grateful to Graziani for his influence on my thinking about monetary matters.

(April 2024)

Geert Reuten

Geert Reuten

Associate guest researcher at the University of Amsterdam’s School of Economics