The monetary circuit theory explains the flow of money and credit in the economy, describing how money is created and destroyed through banking transactions and its impact on production, profits, and distribution.
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[...] As a residual, saving cannot exist as a fund available for investment. Investment is therefore never limited by a shortage of saving. To summarize, the circuit theory posits that investment governs saving, the share of profits in national income being the main regulator. This results in a hierarchy between categories of agents, as businesses decide, through investment, the level of wages, profits, and employment, and once this is validated by the banking system, households have no other choice but to adapt to it. 4. [...]
[...] They are businesses seeking to make profits from the sale of their key product: credit. Fourth stage : the creation of revenue streams and the principle of flow It is the payment of money to workers that allows money to circulate and the circuit to exist. If there are no workers to pay, then money cannot circulate or exist. Last stage: monetary reflux, creation of profits and destruction of money Companies therefore try to "recapture" their expenses by selling their products in monetary values. [...]
[...] This process of flow and reflux is the very essence of the monetary circuit. It is another of the dynamic aspects of the model, which focuses on the sequence between the creation of money and its destruction, as well as on the related distinction between initial financing, in which credit finances investment, and final financing, in which savings partly replace short-term credit financing with longer-term financing. This flow of money is endogenous in that it is the result of the credit needed by companies to realize their production plans. [...]
[...] It is only at this point that it can be partly saved. The money initially created by the credit granted to businesses is recovered in the form of sales, but if a part of the income is saved by households, businesses do not recover the total amount of money they borrowed and cannot therefore fully repay the loans they received. The remaining balance with households and businesses at the end of the period implies a net debt of businesses towards households (financial savings) and towards banks (the amount of savings that households keep in liquid deposits). [...]
[...] These purchases and sales are monetary flows carried out by hierarchical agents. 2. Phases and sectors in the circuit The monetary circuit is therefore based on a division of society into classes, by a hierarchy of specific macroeconomic agents linked to each other by flows. This system consists of six poles or economic agents: commercial banks, enterprises and households, the central bank, the State and the Rest of the World. This division of society between the different groups helps to understand the role of income distribution played by money. [...]
