Credit Money and Its Circulation; The Return OF Investment

There exists a real – but not fully appreciated – pure surplus circuit of circulation of A to B to C to D back round to A to B to C etc.; i.e. pure surplus receipts (sourced in the form of credit, savings, or retained operations income), to pure surplus outlays, to pure surplus incomes, to pure surplus expenditures, back to pure surplus receipts, and so on… . The occurrence of the prior functional flow conditions the occurrence of its following functional flow.  This flow is internal to a circuit, or rather constitutes the circuit.

Pure surplus income is the monetary correlate of the production and installation of additional capital equipment.  You don’t have income  – whether borrowed or saved  –  to invest on expansionary machines in the surplus circuit if you spend all your income on peanut butter, cold cuts, clothing, smartphones, and other entertainment. As income circulating repetitively round after round in the surplus circuit, pure surplus income is continually returning to investors as a group for reinvestment in each subsequent period in whatever expansionary investments remain beneficial.  This always current circulatory returning to the investors group of current aggregate sums of investment monies (pure surplus income) constitutes the macrodynamic rate of return– as conceptually distinct from the bookkeeper’s rate of “profit” or “net cash flow” on a past project after initial installment until ultimate dismantling. One is an aggregate current velocity (i.e. quantitative rate with respect to time); the other is a ratio of the current period’s cash flow upon an historic investment.[1]

In our analysis, the financial analyst’s ROI is of negligible interest (to us, though not to him). Our interest is in the concomitance and equilibrium of aggregate current functional flows of money within and between the circuits constituting the whole process.  Our inquiry is a general inquiry proceeding on a more general plane to terminate in a more general conclusion.

In this website’s ideal logistic-growth model, the accumulation (total Q”) of capital has the general shape of an S-curve; the instantaneous velocity (dQ”/dt) of the accumulation begins, increases (therefore d2Q”/dt2), peaks, decreases, and returns to zero as the accumulation homes in on the maximum-carryable asymptote; the acceleration (d2Q”/dt2) is positive, reaches an inflection point, turns negative and finally returns to zero.

Unless one has a clear understanding of the interrelation of pure-surplus production and income with other production and income, pure surplus income’s ideal trajectory within a model, such as  our ideal logistic-growth model or Lonergan’s ideal pure cycle, cannot be understood.

Now it is true that our culture cannot be accused of mistaken ideas on pure surplus income as it has been defined in this essay; for on that precise topic it has no ideas whatever. [CWL 15:153]

This pure surplus income is quite an interesting object.  When vis greater than zero, it is a rate of income over and above all current requirements for the standard of living, since that is provided by I’, and as well over and above all real maintenance and replacement expenditure, since that is provided by (1-v)I”.  Thus one may identify (current) pure surplus income as the aggregate rate of (current) return (of current) capital investment: [CWL 15, 146]

And lo and behold, since it is an explanatory conjugate of the functioning intrinsic to the economic process, current pure surplus income is defined by its functional relation to other explanatory conjugates in the mathematical expression representing the round-and-round of the process.[2]

In that mathematical expression pure surplus income is understood as a macrodynamic circular returning; and its rate  – whether considered as instantaneous or as a periodic difference  –  is the macrodynamic rate of circular returning.

Because pure surplus income is contained, but veiled in, accounting categories such as sales revenues, interest income, retained earnings, and dividends, economists and entrepreneurs fail to intellectually transcend their accounting categories and can’t properly understand the flow of pure surplus income for what it is.  Yet they do have a sense or inkling that something special and good is going on, until it’s not going on.

entrepreneurs consider that they are having tolerable success when they are not merely “making a living,” no matter how high their standard of living, and not merely obtaining sufficient receipts to purchase all the equipment necessary to overcome obsolescence, but also receiving an additional sum of income which is profit in their strong sense of the term.[ CWL 15, 146]

In the surplus-expansion phase (the “surplus expansion phase” where dQ”/Q” > dQ’/Q,  both > 0), the secondary rhythms are widening and deepening themselves. … Hence in the surplus-expansion phase the surplus ratio S[3]is increasing. Surplus activity, surplus expenditure, and net surplus income are becoming greater and greater.  To make a large profit is, in the general case, not a matter of brilliant enterprise.  It is inevitable. …In the basic-expansion phase, where dQ”/Q” < dQ’/Q,  both > 0, the surplus rhythms are widening and deepening the basic rhythms. … S is some proper fraction, but it is decreasing.  No matter how intelligent and efficient traders may be, S cannot but be decreasing; for with surplus expenditure decreasing, net surplus income cannot but follow suit. … In the static phase, S is zero.   The industrial structure is not becoming bigger.  In the aggregate, there is no surplus income.  When the whole motive force of economic activity is based on the anticipation of profits (in entrepreneurs’ strong sense of the term), this variation in net surplus income will be projected resonantly throughout the whole economic field.  The increasing surplus ratio S of the capitalist phase heralds the bright dawn of a boom.  The decreasing surplus ratio of the materialist phase overclouds the heavens and foretells a hurricane.  The zero surplus ratio of the static phase is the most incomprehensible of mysteries, for what can be done when there is no net surplus income?[4][CWL 21, 51-52]

For an expansion of the economic process, the Central Bank and the commercial banking system expand the money supply to enable the expansion of transactions.  This is normally accomplished by issuing credit, not by draining money from the basic circuit into the surplus circuit. This incremental money will circulate repetitively, initially as a capital-expenditure outlay, then becoming pure surplus income becoming more capital expansion outlay, again becoming another round of pure surplus income period after period.  The production of new and better capital each period is a functional flow; and it is subject to acceleration, deceleration, and tapering.  In a distorted case, it may be excessive (a “bubble-boom”, i.e. production of more machines than the process needs and/or faster than the system can digest) and then contractionary (to effect a systematically necessary, corrective “recession-slump”).  In any case, in an economy initially running smoothly at full current capacity, an expansion of production initially requires credit for investment in new capital, and, in this aspect as income over and above that needed for a standard of living, we call these circulating investable funds “pure surplus income.”[5]

This pure surplus income is quite an interesting object.  When vis greater than zero, it is a rate of income over and above all current requirements for the standard of living, since that is provided by I’, and as well over and above all real maintenance and replacement expenditure, since that is provided by (1-v)I”.  Thus one may identify (current) pure surplus income as the aggregate rate of (current) return (of current) capital investment: [CWL 15, 146]

Since this monetary correlative of capital expansion a.) is not spent on a standard of living and, therefore, is not basic income and, identically, a macroeconomic cost as we have defined it, and b.) is not ordinary surplus income to be spent on repair and maintenance of existing capital, it is pure surplus income.

Pure surplus income, while it exists, is money in someone’s bank account until it flows in an electronic debit-credit flash.  Thus expansionary investment outlay as a Use has pure surplus income AKA systematic macroeconomic “profit” as its Source.[6]

This incremental-to-the-system fiat money is dedicated initially then repeatedly to an accumulation of new investment, and then, when marginal productivity declines and favorable prospects for new investment diminish, this money gradually becomes necessary for payments dedicated to repair and maintenance of the large accumulations of capital over several years.  That is, it is used initially exclusively as pure surplus income, but gradually more and more of this money morphs into ordinary surplus income.  The new money remains in the system as part of the permanently enlarged money supply for a permanently enlarged system of production and payments.

The new money’s circular return, period after period, within the surplus functioning is, in the aggregate, a pure surplus return to entrepreneurs in the aggregate, period after period.  It is a repetitive circular functioning whose aspects of income, investment and ownership are manifested in the repetitive building up of an accumulation of static wealth.

Normatively, expansionary money should not leak out of the surplus circuit and become productively-idle, bloating the pricing[7] in the secondary markets for previously-issued stocks and bonds.  Rather it should normatively keep circulating in its proper operative circuit, instead of resting productively idle.

Also, as we have noted elsewhere, the resultant ownership of the accumulation of capital equipment constitutes static wealth, however static wealth does not, in and of itself, constitute income.  Ownership is mere ownership evidenced by the title and deed; it is distinct from income. However, ownership usually conveys the right and authority to demand dividend income as a distinct form of “rental payments”.  This interest or dividends down the road would constitute basic income, ordinary surplus income, or pure surplus income, depending upon the decision of the recipient. And, normatively, the recipients’ decisions for equilibrium and continuity should conform to the requirements of the phase of the cycle for basic expenditures, ordinary surplus expenditures, and pure surplus expenditures.

Note, first, that an original amount of money can function as purchase money period after period generating multiples of itself as pure surplus income period after period.  This multiplication as pure surplus income is not a phantom multiplication any more than the new resultant capital produced and installed period after period is phantom capital; ownership of the new capital is being cumulatively achieved and the accumulating new capital equipment will have an accumulating value determined by its productive functionality.

However, any capital expansion is finite within a system conditioned by finite population, finite materials, boundaried propensities to consume, technically boundaried productivity, and inevitable depreciation.  As the expansion slows and the requirements for repair and maintenance of the accumulated capital mount, pure surplus income in the succeeding periods will diminish to zeroThe halcyon days will come to an end.

Note, second, that, in the aggregate, the amount of new money required in the determinate expansion will be determined by the requirements for increased initial and transitional payments of the expansion’s turnover magnitudes and turnover frequencies.

Note, third: In any double-entry system of bookkeeping, debits equal credits.  What is borrowed is owed.  What is loaned out by Smith to Jones is simultaneously receivable by Smith from Jones. Thus one party’s Loan Receivable is another party’s Loan Payable.  We may think of the (central and commercial) bankers and entrepreneurs as a collective, so that, accountingwise, an original infusion of $100 is a debit-receivable on the books of the lending, money-creating (central and commercial) banks and a credit-payable on the books of the entrepreneurs of the collective; it then, functionwise, becomes pure surplus income of the collective and is received and reloaned by individuals repetitively etc; so that in all future periods the repeating expenditures of $100 per period remain as financed by the original infusion of $100.  Thus, the net amount of the Loan Receivable and the Loan Payable of the collective is always $100.  Functionwise, we may think of individual producing units of the entrepreneurial group enjoying pure surplus income and lending to others in a series of instances, so that total Loans Receivable and total Loans Payable mount up serially to a higher number. However, in this latter case also, the Loans Receivable and Loans Payable offset each other and finally net to the original $100.  In a long-term expansion, the same money can recirculate each period, but wealth continues to accumulate each period as machines are produced and installed.

More efficient machinery, since it produces more per period and per person, is worth more than the older, less efficient, capital equipment.  Thus, previously-successful, risk-taking entrepreneurs and doers have to write down the money value of, i.e. suffer a loss of, static wealth on the older equipment which has been replaced. The stagecoach is replaced by the train. Schooners have been dismantled and replaced by freighters.  One or two steam shovels go into a museum while the rest are replaced by the diesel-fueled excavator.  Inefficient printing presses go to the scrap heap.  Balance-sheet, net-worth empires continually vanish as others come alive in a creative-destructive economy.

To be sure, an individual risk-taker possessing static wealth may opportunely cash in by selling his equipment to another individual within the redistributive function.  But, in this mere exchange of title,  the seller’s inflow is the purchaser’s outflow, and the net flow of money in the aggregate of cash-in cash-out swaps is zero. Therefore, in the aggregate, mere exchanges of title to ownership are not operative productive acts.  A swap of one million shares of General Motors has a net cash flow of zero (except for the broker’s services).  And a big exchange of one million shares of General Motors does not produce a single car.  The money staying within the redistributive exchange does no work!  The asset’s negotiability means only that one owner may outwit another.

It is a mistake to think of the new money in the aggregate as being borrowed, spent, recaptured, and used to pay down the loan.  That would amount to a spike of the money supply and of investment followed by an equal collapse of the money supply and ongoing investment.  In contrast, we are specifying a permanent expansion or enlargement of the economic activities of producing new capital, satisfying higher repair and maintenance activity, and producing more consumer goods, requiring a permanently-enlarged money supply based on original investment loans and working-capital loans.

Following the capital expansion, there would be two financing requirements: one for repair and maintenance of the new capital equipment as it deteriorates with use, and a second for adequate working-capital money to finance the circle of production and purchase of increased consumer goods.  Thus the costsof this increased production of consumer goods would include the costs of repair and maintenance (c”O” = p”a”Q”)[8], as well as the wages, salaries, interest and materials in the consumer-goods production cycle (c’O’ = p’a’Q’)[9].   Thus the seller of consumer goods would price these goods so as to at least cover his operating and maintenance burden.

The overall financial benefit to an investor-owner in a capital-expansion project may be subdivided or stratified or arranged more or less continuously into layers of ownership whose value and income would be related to the estimated amount of risk assumed in the project.  At the bottom might be a layer of bonds enjoying a relatively low rate of interest because strongly secured by collateral, and, at the top, a potentially high gain or loss in wealth and dividends accruing to investors in risky equities and claims on risky equities.

However, the continuity of the process in the ultimate static phase after complete gestation of the newer, more efficient process and the reduction of pure surplus income to zero, would require each recipient of interest or dividend income in all strata to direct all this income to a.) his own standard of living (including legitimate government services received), no matter how high, b.) government and transfer payments or, c.) philanthropic donations to uplift the culture and the material resources of the community.

[1]which may be expressed in the form of a comparison of present values.


[2]See CWL 3, 79-82/102-105; and 434-39/460-63

[3]The symbol Swas changed to vin CWL 15, as in f = vw  CWL 15, 148

[4]The cynic would say sarcastically, “The following can be done: Destroy lending standards and cause a housing bubble.”

[5]Ftnt re psi

[6]There is a sense in which one may speak of the fraction of basic outlay that moves to basic income as the “costs” of basic production.  It is true that that sense is not at all an accountant’s sense of costs; for it would include among costs the standard of living of those who receive dividends but would not include the element of pure surplus in the salaries of managers; worse it would not include replacement costs, nor the part of maintenance that is purchased at the surplus final market………..But however remote from the accountant’s meaning of the term “costs,” it remains that there is an aggregate and functional sense in which the fraction…….is an index of costs.  For the greater the fraction that basic income is of total income (or total outlay), the less the remainder which constitutes the aggregate possibility of profit.  But what limits profit may be termed costs.  Hence we propose ….to speak of c’O’ and c”O” as costs of production, having warned the reader that the costs in question are aggregate and functional costs…. CWL 15 156-57


[7]thus simultaneously reducing the purchasing power within the specific secondary markets

[8]CWL 15, 157

[9]CWL 15, 157