Monetary Circuit Theory

Monetary circuit theory, or circuitism, is a heterodox school of monetary economics holding that money is created endogenously by commercial banks extending credit rather than exogenously by a central bank or government adding to a fixed money stock. In the circuitist account, a bank loan to a firm creates a deposit and sets a monetary circuit in motion: the firm spends the loan on wages and inputs, that spending becomes income for workers and suppliers, and the circuit closes as the firm's revenue lets it repay the loan and extinguish the credit that created the deposit in the first place. This view rejects the conventional money-multiplier model, in which banks are said to lend out a multiple of reserves supplied by the central bank, arguing instead that loans create deposits first and that credit is prior to reserves rather than the reverse. The modern school took shape from postwar French and Italian monetary theory and was formalized as circuitism by Augusto Graziani in 1989, with later contributors including Marc Lavoie and Riccardo Realfonzo extending it. The theory shares its endogenous-money starting point with post-Keynesian economics more broadly. This description is adapted from Wikipedia contributors under CC BY-SA 4.0; changes were made. https://creativecommons.org/licenses/by-sa/4.0/