The key distinction from mainstream economictheories of money creation is that circuitism holds that money is created endogenously by the banking sector, rather than exogenously by the government through central bank lending: that is, the economy creates money itself, rather than money being provided by some outside agent. These theoretical differences lead to a number of different consequences and policy prescriptions; circuitism rejects, among other things, the money multiplier based on reserve requirements, arguing that money is created by banks lending, which only then pulls in reserves from the central bank, rather than by re-lending money pushed in by the central bank. The money multiplier arises instead from capital adequacy ratios, i.e. the ratio of its capital to its risk-weighted assets.
Circuitist model
Circuitism is easily understood in terms of familiar bank accounts and debit card or credit card transactions: bank deposits are just an entry in a bank account book, and a purchase subtracts money from the buyer's account with the bank, and adds it to the seller's account with the bank.
Transactions
As with other monetary theories, circuitism distinguishes between hard money – money that is exchangeable at a given rate for some commodity, such as gold – and credit money. The theory considers credit money created by commercial banks as primary, rather than derived from central bank money – credit money drives the monetary system. While it does not claim that all money is credit money – historically money has often been a commodity, or exchangeable for such – basic models begin by only considering credit money, adding other types of money later. In circuitism, a monetary transaction – buying a loaf of bread, in exchange for dollars, for instance – is not a bilateral transaction as in a barter economy, but is rather a tripartite transaction between buyer, seller, and bank. Rather than a buyer handing over a physical good in exchange for their purchase, instead there is a debit to their account at a bank, and a corresponding credit to the seller's account. This is precisely what happens in credit card or debit card transactions, and in the circuitist account, this is how all credit money transactions occur. For example, if one purchases a loaf of bread with fiat money bills, it may appear that one is purchasing the bread in exchange for the commodity of "dollar bills", but circuitism argues that one is instead simply transferring a credit, here with the issuing central bank: as the bills are not backed by anything, they are ultimately just a physical record of a credit with the central bank, not a commodity.
Monetary creation
In circuitism, as in other theories of credit money, credit money is created by a loan being extended. Crucially, this loan need not be backed by any central bank money: the money is created from the promise embodied in the loan, not from the lending or relending of central bank money: credit is prior to reserves. When the loan is repaid, with interest, the credit money of the loan is destroyed, but reserves are created – the profit from the loan. Another explanation of the interest, in a simple, non-growth model is the interest enjoyed by the bank is from the spending of interest income of the bank in previous circuit. The same simple model applies for profit as well, in a simple model of non-growth non-modern-bank model composed only by entrepreneurs and the employed workers, entrepreneurs's spending on profit on previous circuit will compose the profit this group enjoy in new circuit. The failure of monetary policy during depressions – central banks give money to commercial banks, but the commercial banks do not lend it out – is referred to as "pushing on a string", and is cited by circuitists in favor of their model: credit money is pulled out by loans being made, not pushed out by central banks printing money and giving it to commercial banks to lend.
History
Circuitism was developed by French and Italian economists after World War II; it was officially presented by Augusto Graziani in, following an earlier outline in. The notion and terminology of a money circuit dates at least to 1903, when amateur economist Nicholas Johannsen wrote Der Kreislauf des Geldes und Mechanismus des Sozial-Lebens, under the pseudonym J.J.O. Lahn. In the interwar period, German and Austrian economists studied monetary circuits, under the term ''. Today, the main defenders of the theory of the monetary circuit can be found in the work of Riccardo Realfonzo, Giuseppe Fontana and Riccardo Bellofiore in Italy; and in Canada, in the work of Marc Lavoie, Louis-Philippe Rochon and Mario Seccareccia.
Modeling difficulties
While the verbal description of circuitism has attracted interest, it has proven difficult to model mathematically. Initial efforts to model the monetary circuit proved problematic, with models exhibiting a number of unexpected and undesired properties – money disappearing immediately, for instance. These problem go by such names as:
