The Monetary Theory Of Production And The Modern Money Theory A Critical Assessment

Please cite the paper as:
Guglielmo Forges Davanzati, (2018), The Monetary Theory Of Production And The Modern Money Theory A Critical Assessment, World Economics Association (WEA) Conferences, No. 2 2018, The 2008 Economic Crisis Ten Years On, 15th October to 30th November, 2018


The monetary theory of production and the modern money theory represent the two main heterodox approaches to the endogenous money view. In both cases, it is emphasised that the banking sector can create money ex-nihilo, i.e. without a previous collection of savings. In both cases, money is not conceived as neutral and, contrary to the mainstream view, inflation does not arise from excess money supply. The basic difference between these two approaches lies in the treatment of the central bank and the role of the Government. While in the first case, money creation can be generated via transactions inside the banking sector (which implies that money supply on the part of the central bank and public spending are not necessary to produce credit money), in the second case, credit money is generated by public spending on the condition that the central bank and the Government act as a consolidated sector. This paper aims at providing a critical assessment of these approaches, emphasising some controversial issues that are present in both.

Recent comments



  • Arturo Hermann says:

    I appreciate your presentation and will provide just a few remarks aimed at fostering a debate on these issues. So, regarding your paper my question is: the literature on monetary circuit rightly underscores the central monetary character of our economies. This implies that money plays a central role in all stages of economic processes, and, in particular, in providing new purchasing power to firms in order to set in motion their activities.
    In this respect, an aspect deserving more attention pertains to the role of new credit in creating effective demand. For instance, only through new loans can a firm afford, here and now, investment expenses necessary to start production. And, in the sphere of consumption, only through new loans can a consumer afford to buy, here and now, some expensive durables (for instance, new cars).
    These processes, by triggering the well-known multiplier-accelerator effects, will promote in most cases a substantial increase of GDP.
    In such dynamics, a paramount role is played by the time and degree of debt repayment.
    In fact, it is clear that the magnitude of increase of effective demand will be different if, say, one million euros of credit creation will be repaid (and in what degree and at what interest rate) in one, five, ten, twenty or fifty years.
    Considering that the ratio of private debt/GDP has registered a many-fold increase over the latest decades across virtually all OECD countries, this points to the importance of length and imperfection of debt repayment in maintaining effective demand. Of course, this way of maintaining effective demand can create other problems, especially if it is accompanied by a widespread financialisation of the economy.
    Another relevant aspect relates to the overall policies of banking system (including central banks). For instance, it will make a difference whether debt repayments would help to provide new loans to innovative firms, or instead be employed in speculative ventures.

  • guglielmo forges davanzati says:

    Thanks for your comment. As regards to the first issue, one can consider Steve Keen’s view that, in a circuitist theoretical framework, aggregate demand is Y=C+I+DD, where DD is the variation of private debt (both for consumption and production).
    I agree that the timing of the reimbursement of debt is a crucial issue and I will consider this point for the final draft of this paper.