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The aim of the paper is to revisit and possibly extend the theory of the monetary circuit in the light of the recent developments in productive and financial structures of western economies, which have been termed ‘financialisation’. We focus particularly on Augusto Graziani (2003)’s rendition of the theory of monetary circuit, whose purpose is to explore the process of creation, circulation and destruction of money in a monetary economy of production during normal times. We unveil and question some common misperceptions concerning both the historical nature of the monetary circuit and the functional distinction carried out by Graziani. We argue that the identification of economic agents is made by the main functions they play in the economic system. In other words, it is not an exogenously-given socio-political identity that defines agents’ own functions in the monetary circuit. Rather, it is the agents’ specific set of functions that define their own socio-political identity. Banks are banks because they get the circuit started, by providing firms with the initial finance they need to fund their business plans. Firms are firms because they carry out the production, thanks to the access to bank credit in the initial stage of the circuit. Households are households because they can neither create monetary means nor borrow to fund the production process. Rather, they can only offer labour services to firms and decide how to spend their income. Finally, financial intermediaries are financial intermediaries because they allow firms to collect savings from households, that is, to get the final finance they need to pay back their bank debt. During the last three decades, the functioning of the economic system has been altered by the increasing dominance of finance markets, agents and motives. This transformation represents a challenge for the theory of the monetary circuit. We take on this challenge, focusing particularly on the growing expansion of the so-called ‘shadow banking system’. We endorse a recent classification proposed by the Financial Stability Board (2015), which is based on the economic functions played by non-bank financial intermediaries, rather than on the standard taxonomy of the single institutions. This new approach shows a noteworthy resemblance or consistency with Graziani (2003)’s methodology.

Theory of Monetary Circuit, Financial Intermediaries, Shadow Banking System