Godley and Graziani: Stock-flow Consistent Monetary Circuits

  • Gennaro Zezza
Part of the Levy Institute Advanced Research in Economic Policy book series (LAREP)


As a student of Augusto Graziani, I learned about the Monetary Theory of Production in his lectures back in 1984. At the time, many researchers in the Department of Economics in Naples were involved in developing this line of research, under the strong influence of Graziani. I clearly remember some of the puzzles in a monetary circuit that Graziani showed us with very simple models. The simplest puzzle refers to a very simple economy, where firms need to borrow before production takes place, to pay for wages and other production costs. Banks are eager to provide loans, say in the form of overdraft deposit accounts: Graziani clearly showed us how loans create deposits, and not the other way round as mainstream scholars were teaching us, since the loan comes into existence only when firms actually use their overdraft facility to pay wages, which we can assume are immediately deposited in a bank. Any loan generates a deposit somewhere – possibly in the same bank – for the same amount, unless wage earners choose to keep their income in cash form. When a loan is made, money is created, and when the loan is paid back, as firms sell their goods to wage earners, money gets destroyed. The puzzle arises if firms have to pay interest on the loan: in the best case scenario, where firms have recovered from sales all the money they have paid out in wages, and the initial amount of newly created money gets entirely destroyed, where do firms get the cash to pay for interest? And how can they possibly get a monetary profit?


Financial Asset Interest Payment Wage Earner Bank Deposit Wage Bill 
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