Being a failed banker gives an unusual perspective on monetary theory, in particular on the monetary ideas of Augusto Graziani (1933-2014). By ‘failed banker’, I do not mean the ruined financier of popular legend, the Saccard or John Gabriel Borkman, the collapse of whose Ponzi schemes was so memorably analysed by Émile Zola and Henrik Ibsen. I mean a more humble, but questioning, economist whose career as a banker ended prematurely, but not before taking advantage of opportunities to observe directly the conduct of financial transactions.
There, in the books of the banking system are inscribed the credit entries that make up today nearly all of what economists nowadays call macroeconomics: Gross domestic product or national income, categories of expenditure such as consumption, investment, government spending, the different classes of income, profits, wages and rent, and even the margin between production sold and produced (the change in inventories) that signals changes in economic activity. Economic exchanges effected by non-bank means, i.e., through the use of notes and coins, are still highly visible, but negligible by comparison with bank payments. Most economists treat credit money as if it were a more elaborate edition of notes and coins. Augusto Graziani was a rare economist who explored the part that credit plays in the economy far beyond the part that it has in textbooks as tokens issued by governments to facilitate payments.
This link between macroeconomics and credit was well-known to economists before the 1950s, when the dominant school of macroeconomics was the monetary business cycle. In that analysis, credit and the rate of interest played a key role, and every exchange was understood to be made with money. However, with the so-called ‘neo-classical synthesis’ of Keynesian demand theory and the old neo-classical price theory, macroeconomics came to be a system in which particular macroeconomic variables of aggregate production, income and expenditure were considered as being determined by other macroeconomic variables. Aggregate supply was equal to aggregate demand, and monetary or credit exchanges were confined, for analytical purposes, to a separate monetary system, whose disequilibrium was responsible for ‘macroeconomic’ pathologies like inflation or unemployment. But the basics of economic growth, employment and price theory could be taught and understood in ‘real’ terms without money coming into the analysis. This abstraction reaches its peak with the New Neo-Classical Synthesis that guides monetary policy today, in which central banks are supposed to manage employment and inflation, with money invisibly serving solely as the oil in the economic mechanism.
Augusto Graziani is important because he stood out against this demonetization of macroeconomic analysis. Starting with the monetary business cycle, as enunciated by Keynes in his Treatise on Money, Graziani incorporated the insights of Marx, Schumpeter and Keynes’s later writings to show the economic process as the circulation of money through the economy.
After I left banking, I started a career as a university teacher at what was then South Bank Polytechnic. A senior colleague there, Grazia Ietto-Gillies, passed on to me Graziani’s essay ‘The Theory of the Monetary Circuit’, published in 1989 in the series Thames Papers in Political Economy. I had already started work on my biography of Kalecki. But I realised soon enough a major weakness in my work, namely my own superficial understanding of macroeconomics and monetary economics. Some of this deficiency was made up by my discussions with the distinguished Italian-Australian political economist, Joseph Halevi, who indicated to me his own high regard for the monetary theory of Graziani. Later I was to meet another remarkable Italian political economist Riccardo Bellofiore, who had studied with Graziani, and whose disagreements with me over the interpretation of Graziani’s theory were to be a major inspiration in my mature work on monetary economics.
In between my formative discussions with Halevi and Bellofiore came Victoria Chick (1936-2023). Chick lived conveniently close to me in north London and, through the 1990s and the first decade of this century, in personal conversations, and long weekly, and sometimes twice-weekly, telephone conversations, Chick introduced me to Keynes’s ideas, monetary economics, and much else besides. Her view of Graziani’s monetary economics was very different to that of Halevi and Bellofiore. She considered that Graziani’s view of Keynes was a travesty of what Keynes was really about.
To some extent, the source of the difference with Graziani was much the same as one would get in interpreting any theorist as prolific as Keynes, and as prone to changing his mind. Chick read and re-read Keynes’s General Theory in an effort to draw from it a consistent analysis of how the capitalist economy works. This is despite the fact that at least two of the key ideas underlying Keynes’s macroeconomic thinking at the time (the determination of profit by the level of investment; and the idea that inadequate investment, rather than underconsumption, is the cause of unemployment in a market capitalist economy) are not advanced explicitly in the General Theory but are found elsewhere in his writings. By contrast with Chick, Graziani found those two ideas in the writings on either side of the General Theory, in the Treatise and the later writings on the rate of interest.
But a mere difference of emphasis on different writings and phases of the evolution of Keynes’s writings could not explain the extreme to which Chick took her dislike of Graziani’s monetary theory and the growing interest in it. At one point she told me that she had gone as far as to appeal to Meghnad Desai to ‘do something about it’ to put a stop to the discussion of this Italian strand of what is now the ‘circuit theory of money’.
Her essential point was that Graziani presented a theory of production whose starting point was bank lending to capitalists to allow them to buy labour for production (‘initial finance’ as it is called by followers of Graziani). This implied, according to Chick, that all production required bank borrowing. In her view this could not be the case because modern production is continuous, so that business receives revenue today from the sale of yesterday’s production and this sales revenue covers at least some of the costs of today’s production. Therefore capitalists only need to borrow from banks the money required to pay the costs of current production that is in excess of previous production; in other words, only the increase of production requires additional borrowing.
I could see Chick’s point of view. But what I had read of banking in Kalecki’s macroeconomics resonated more with my own experience of banking. The amount of bank credit in the economy is a stock, while income and production are flows. In the course of production and sale bank credit does not just come into existence, through bank advances, and disappear on sale of production and repayment of loans. Once costs are recouped from the sale of production, bank credit is used to buy new inputs for production. In fact, the stock of bank borrowing or credit will generally adjust to the needs of production through an increase in the turnover of existing bank credit, or an extension of the maturity of bank loans. In other words, I told Chick, even new production may not need new borrowing.
This bank finance scepticism placed me at the other extreme from Graziani, whose theory implies that all production may need new bank credit, with Chick in between arguing that new bank finance is required for increases in production.
The disagreement between them culminated in an ill-tempered exchange at a Post-Keynesian conference on the outskirts of Paris. Graziani moved on to preparing his Federico Caffè on ‘The Monetary Theory of Production’ which elaborated his circuit theory of money to incorporate various options to extend the maturity of bank loans to the creation of bonds and even equity. There was much there that I could agree with. But the starting point of his analysis in a state in which capitalists have no money is wholly at odds with Kalecki’s seminal observation that the condition for being a capitalist was not an entrepreneurial disposition, but the ownership of money capital.
After Graziani died, I organised a special memorial seminar in his honour. This was attended by Chick, although she did not speak (neither did I, although I chaired the discussion). Chick had not been reconciled to Graziani’s theory. But she recognised its influence among Keynesians. Even before Graziani had published his Caffè Lectures, she allowed into her festschrift a fine article by Halevi and Rédouane Taouil on the ‘Circuit Approach’ to monetary theory.
After the memorial seminar I wrote up my critical observations on Graziani’s theory, to the accompaniment of a strong defence of that theory from Riccardo Bellofiore. Over the years, I have come to accept his view that the purpose of Graziani’s starting assumption that capitalists have no money is not empirical but logical. It is in the analysis to show how bank credit comes into production and distribution in a capitalist economy. But problems with the theory remain.
Ten years after his death I remain in awe of a monetary economist who took banking and finance seriously enough to develop a macroeconomics based on bank credit, a vision of the ‘pure credit’ economy that had been suggested, but never detailed, a century ago by Knut Wicksell and Dennis Robertson. In contrast to macroeconomists today who use economic data to show what we already know, Graziani used the ideas of the monetary economists of the past to show original insights into monetary circulation. For this he deserves his place among the great economists of our time as one who has something new to say to our bankers.
