Money in a Sequence Economy

This chapter considers how the money that is prevalently used in all economies (i.e., demand deposits issued by commercial banks) is injected in an economy with time as an essential factor and illustrates the approach derived from monetary circuit theory to analyze the integrated functions of banking and finance in a monetary production economy. The chapter employs a micro-founded, circuit-sequenced model of a decentralized economy, integrating production, exchange, and investment through money creation, with funds allocated by banks and non-bank financial intermediaries. The analysis focuses on the unique function of banks as money creators, the dynamics of saving and investment, and the mechanisms through which finance can disrupt the circuit process. Furthermore, the chapter explores how the circuit approach offers insights into economic and financial structural changes. It extends the model to illustrate how circuit theory explains the pivotal role of banks in contemporary “financialized” economies, where financial activities significantly overshadow traditional production. This topic has been of personal interest since my college days, highlighting the interconnectedness of banking and finance in a monetary production economy.