A 1908 Diagram of the Monetary Circuit

Another  interesting historical precursor for Monetary Circuit Theory

I knew a very small amount about Johannssen from Graziani quoting him as the originator of the theory of the ‘monetary circuit’, and because Keynes cited him (under his pename of J. J. O. Lahn) as an influence, but hadn’t looked further as he seemed only to have written in German.  However looking at his entry in Sawyers biographies of dissenting economists there is reference to a self published book from 1908 which has been digitised e also published a pamphlet in 1928 just before he died predicting the great depression which sadly being privately printed and circulated I can find no trace of.

His 1908 contains a remarkable diagram of the monetary circuit and sets out is theory that depressions are caused by what today we would call lack of effective demand.

He uses the term ‘impair investments’ by which he means investment in assets rather than production.  He called ‘impair savings’ savings used to purchase such assets and attempted to show that this led to a discrepancy between ex ante planned investment and ex ante planned investment.  Ruhl in his profile of Johannsen in sawyers biographical dictionary points out that as these could be treated as disavings there is no conflict with the keynsian investment=savings identity.  This then led to a ‘multiplying  principle’ of growth or contraction.

From as early as 1878 he included bank credit in his definition of investment (page 155) adding to demand additional to savings.

He also described the panic of 1907  on page 154 through banks creating credit for assets not production, though his language is inconsistent on this throughout the book.  If he had grasped the point that loan repayments were claims on future savings he would have squared his circuit.  There is no link in his diagram between 18. Funds created by credit, and future anticipated income. (the NPV of money=NPV of goods produced=income point we set out in an earluer post)

His theory is full of holes and lack of mathematical sophistication, no theory of interest  or rent for example, no model of how abnks work, he also fails to cite anyone even those such as Tooke who seem to have influenced him, im sure a point which made him lose influence as an autodidact from the academic community of his time, but the basic insights are there.