Monday, August 26, 2013

Real Bills Docrtine -- Part 1

What Is the Real Bills Doctrine?
Thomas Allen

[Note: This discussion and those that follow on the real bills doctrine assumes the true gold-coin standard accompanied by a decentralized competitive banking system without special privileges.]

    Antal Fekete describes a real bill as follows:
A real bill is a bill of exchange drawn by the producer (the drawer of the bill) on the distributor (the acceptor of the bill) specifying the kind, quality and quantity of merchandise shipped by the former to the latter, and specifying the sum (the face value of the bill) and the date on which the bill is payable (the maturity date of the bill, in any event, not more than 91 days after the date of billing). In order to be valid, the bill has to be accepted by the acceptor, by writing across its face and over his signature “I accept.”[1]
    Nelson Hultberg describes real bills as “temporary bills of exchange that appear simultaneously with goods that are being produced to aid such goods in further transportation along the production/consumption chain. These bills of exchange then go out of existence once the goods have cleared the market.”[2] Real bills are clearing instruments because they allow time for merchandise to be sold to the ultimate customer.

    The heart of the real bills doctrine is the real bill of exchange. A real bill of exchange (a real bill) is drawn on real goods that are ready to be sold (sitting on the retailer’s shelf) or are on the way to the retailer to be sold. A real bill of exchange is a self-liquidating, short-term credit instrument. It is self-liquidating in that when the consumer buys the product, the consumer provides the money for the seller to use to pay the bill. It is short-term in that the bill has to be paid off in 91 days or less.

    When the retailer accepts the bill of exchange, a real bill or commercial money has been created. Now the supplier can use the bill to pay his creditors or sell it to a bank or an investor. If a bank buys the bill, it converts the bill to bank notes or checkbook money.

    For example, when a supplier sells his goods to a retailer, the retailer usually does not pay for the merchandise then. Instead, the suppler draws a bill of exchange (a real bill) on the retailer to pay within 91 days. When the retailer accepts the bill, commercial money has been created. The supplier can now use this bill to pay the manufacturer. He can sell it to an investor or a bank. If the supplier needs money immediately to pay his employees and utility bills, he sells the bill to a bank at a discount. The bill becomes the property of the bank, and the retailer pays the amount due at maturity to the bank. If he sells it to a bank, the bank converts it to bank notes or checkbook money. A bank never creates money; it only converts one form of money (commercial money) to another form (bank notes and checkbook money). In effect, the bank has converted the bill into conveniently denominated money recognized and accepted in the community.

    When people buy the products represented by the bill, the retailer pays the holder of the bill. When the bill is paid off, it ceases to exist. If a bank has bought the bill and has converted it to bank notes or checkbook money, that bank money is removed from circulation and cancelled when the bill is paid. Thus, the money created when the retailer accepts the bill goes out of existence when the retailer pays off the bill.

    Banks do not create any money. Banks merely convert it from one form (real bills or commercial money) to another (bank notes and checkable deposits) as they do when they put gold coins in their vaults and issue gold certificates in place of the coins. All money creation is left directly in the hands of the people. Although credit is involved, no borrowing or lending is involved in the creation of this money.

End Notes
1. Antal E. Fekete, “Monetary Economics 101: The Real Bills Doctrine of Adam Smith,” Lecture 2, July 8, 2002, http//www.shoemakerconsulting.com/GoldisFreedom/PVFfiles/ lecture101-2pvf.htm, Sept. 12, 2007.

2. Nelson Hultberg, “Cranks in the Gold Community,” July 11, 2005, http://www.finacialsense.com/editorials/hultberg/2005/0711.htm, July 12, 2005.

[This article first appeared in The Gold Standard, Issue #5, 15 May 2011.]

Copyright © 2011 by Thomas Coley Allen.

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