The credit theory of money: the monetary circuit approach
In this regard, the TMC sheds light, among other things, on the historical origin of money. In accordance with Innes (1913) and Heinsohn and Steiger (1984), there can be private debt and credit contracts before the existence of money. This is because money emerges both causally and historically as a result of prior debt and credit relations. Money appears when a community (usually through the legal apparatus of the state) bestows the characteristic of being a legal title to a share of present and future wealth on debts issued by a specific agent. Money has, therefore, a pure ‘extrinsic’ value (Wray, 1998) that is generated by money’s role in the industrial circulation.1 In the ‘efflux’ phase (to use Tooke’s original expression) of monetary circulation, debts are issued to allow private firms (as well as the state) to start the production process via the credits granted
to them by the issuing banks. These debts are then extinguished or cancelled when firms (and the state) reimburse the creditor banks by acquiring enough of the bank debt in circulation. In the case of firms, this occurs through the sale of commodities in the product market and/or securities in the financial market, and, in the case of the state, taxes and/or government securities. This is what could be described as the ‘reflux’ phase of the monetary circuit. Credit money, as a rule, is thus created only to be destroyed in the circulatory process and not to be held.