Monetary Circuit Theory and the Role of Banks in the Monetization of Profits

Abstract

Using the tools of the monetary circuit the paradox of profits on how the firm sector as a whole can realize profits is addressed. The thesis innovates with the banking system facing the same profit paradox as firms and how it can be overcome. Observing the microeconomics of the monetary circuit and introducing overlapping circuits of different lengths the paradox of profits is solved. It is the banking systems‘ role in providing accommodative credit putting new money into circulation that allows profits to be realized. After a firm takes a loan the newly created money flows through other firms creating profits on the way, therefore an emphasis on the velocity of money is taken. Other studies emphasizing the velocity are therefore confirmed. The aggregation of different types of microeconomic monetary flows results in the national accounts as an ex post notion. The result is that the components of the national accounts should not be interpreted as restricting each other, they rather move in line. It is found that stock-flow consistent modelling provides a sound basis for displaying the banking systems‘ role in enabling profits.