The theory considers credit money created by commercial banks as primary (at least in modern economies), rather than derived from central bank money – credit money drives
the monetary system.
These theoretical differences lead to a number of different consequences and policy prescriptions; circuitism rejects, among other things, the money multiplier based on reserve
requirements, arguing that money is created by banks lending, which only then pulls in reserves from the central bank, rather than by re-lending money pushed in by the central bank.
For example, if one purchases a loaf of bread with fiat money bills, it may appear that one is purchasing the bread in exchange for the commodity of “dollar bills”, but circuitism
argues that one is instead simply transferring a credit, here with the issuing central bank: as the bills are not backed by anything, they are ultimately just a physical record of a credit with the central bank, not a commodity.
In 2014, economist Richard Werner conducted an empirical study to determine if, in the process of issuing a loan, banks create new money or transfer money from another account.
Contrast with mainstream theory The key distinction from mainstream economic theories of money creation is that circuitism holds that money is created endogenously by the
banking sector, rather than exogenously by the government through central bank lending: that is, the economy creates money itself (endogenously), rather than money being provided by some outside agent (exogenously).
While it does not claim that all money is credit money – historically money has often been a commodity, or exchangeable for such – basic models begin by only considering credit
money, adding other types of money later.
The failure of monetary policy during depressions – central banks give money to commercial banks, but the commercial banks do not lend it out – is referred to as “pushing
on a string”, and is cited by circuitists in favor of their model: credit money is pulled out by loans being made, not pushed out by central banks printing money and giving it to commercial banks to lend.
Crucially, this loan need not (in principle) be backed by any central bank money: the money is created from the promise (credit) embodied in the loan, not from the lending
or relending of central bank money: credit is prior to reserves.
Monetary creation In circuitism, as in other theories of credit money, credit money is created by a loan being extended.
Transactions As with other monetary theories, circuitism distinguishes between hard money – money that is exchangeable at a given rate for some commodity, such as gold
– and credit money.
 It holds that money is created endogenously by the banking sector, rather than exogenously by central bank lending; it is a theory of endogenous money.
These problem go by such names as: • Losses in Circuit • Destruction of Money • Dilemma of profit A comprehensive model of the total monetary circuit, which is free from the
above difficulties, was presented recently by Pokrovskii et al.
The study involved taking out a loan with a cooperating bank and monitoring their internal records to determine if the bank transfers the funds from other accounts within
or outside the bank, or whether they are newly created.
[‘Zazzaro, Alberto (April 2002), “How Heterodox is the Heterodoxy of the Monetary Circuit Theory? The Nature of Money and the Microeconomy of the Circuit”, Working Papers
2. ^ “The Myth of the Money Multiplier”. Money: What it is, how it works. Archived
from the original on 2012-02-14. Retrieved 2012-01-21.
3. ^ Realfonzo, Riccardo, Money and Banking. Theory and Debate, p. Money and Banking. Theory and Debate, Edward Elgar, Cheltenham (UK) and Northampton (USA), 1998
4. ^ Werner, Richard A. (2014-12-01).
“Can banks individually create money out of nothing? — The theories and the empirical evidence”. International Review of Financial Analysis. 36: 1–19. doi:10.1016/j.irfa.2014.07.015. ISSN 1057-5219.
5. ^ Aréna, Richard; Graziani, Augusto; Salvadori,
Neri, Money, credit, and the role of the state, p. p. 137
6. ^ Pokrovskii, V. N.; Schinckus, Ch. (2016). “An elementary model of money circulation”. Physica A: Statistical Mechanics and Its Applications. 463: 111–122. doi:10.1016/j.physa.2016.07.006.
Schinckus, Ch.; Altuckov, Yu. A.; Pokrovskii, V. N. (2017). “Empirical justification of the elementary model of money circulation”. Physica A: Statistical Mechanics and Its Applications. 493: 228–238. doi:10.1016/j.physa.2017.10.054.