Profit Realisation and the Necessity of Credit Expansion: A Stock–Flow Consistent Analysis of the Monetary Gap

Farzad Javidanrad
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Farzad Javidanrad: University of Warwick

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: Why can aggregate profit be persistently realised in monetary production economies despite the apparent insufficiency of the initial money supply? Existing explanations have attributed this problem to a variety of institutional mechanisms, including bank credit, capitalist expenditure, government deficits, financial innovation, and foreign trade. This paper argues that these explanations identify different manifestations of a deeper structural phenomenon without explaining its underlying cause. Building on the Credit-Debt Reproduction Mechanism (CDRM), the paper demonstrates that, in debt based monetary production economies, the endogenous reproduction of financial claims systematically exceeds the reproduction of the means of monetary settlement. Consequently, the realisation of aggregate profit in monetary form requires a recurrent source of exogenous purchasing power. The argument is developed in three stages. First, a historical analysis shows that debt remissions, usury restrictions, monetary debasement, and successive monetary innovations can be interpreted as institutional responses to a recurring shortage of circulating liquidity. Second, a formal mathematical model establishes the necessary relationship between profit realisation, debt accumulation, and monetary scarcity. Third, a stock-flow consistent model and dynamic simulations demonstrate that, in the absence of sufficient public-sector monetary injections, the monetary gap expands cumulatively, whereas appropriate fiscal recycling of purchasing power stabilises the system. The paper concludes that the recurrent need for monetary accommodation is not a market imperfection but an endogenous property of debt-based monetary production, offering a unified theoretical explanation for a wide range of historical and contemporary monetary phenomena JEL codes: N1, E4, E5, B5, C6

Date: 2026
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