Godley and Graziani: Stock-Flow-Consistent Monetary Circuits Gennaro Zezza *+ University of Cassino, Italy, and Levy Economics Institute, U.S. April 2011 Abstract In this paper we discuss some issues in the Monetary Theory of Production à la Graziani, such as the “paradox of profits”, in the light of the stock-flow-consistent approach pioneered by Wynne Godley, to resolve some apparent inconsistencies and show the common features of the two post-Keynesian approaches. Keywords: monetary theory of production, circuit theory, stock-flow-consistency, Godley, Graziani Jel-codes: E12, E44, E52, B50 Introduction and motivation As a student of Augusto Graziani, I learned about the Monetary Theory of Production back in his lectures in 1984. At the time, many researchers in the Department of Economics in Napoli 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 to existence only when firms actually use their overdraft facility to pay wages, say, which we can assume that 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 paid out in wages, and the initial amount of newly created money gets entirely destroyed, where do firms get * Dipartimento di Scienze Economiche, Via S.Angelo Loc. Folcara, Cassino (FR) 03043 Italy. Email: zezza@unicas.it. The author gratefully acknowledges financial support from MIUR. + I am indebted to several people for discussion of these issues over the years. Most notably Anwar Shaikh, Augusto Graziani, Marc Lavoie, Marcello Messori and Alberto Zazzaro. I also wish to thank participants at a seminar at Université Paris Nord for comments, and Jamel Saadoui in particular. Any remaining errors are my responsibility.