Are Real Bills Real Money?
Thomas Allen
Rothbard, Mises, and most other economists of the Austrian school claim that real bills of exchange are not money in the true sense, i.e., they are not true money substitutes. “The endorsement of the bill is in fact not a final payment; it liberates the debtor to a limited degree only. If the bill is not paid, then his liability revived in a greater degree than before.”[1]
A bill of exchange is similar to a check except that one private individual draws it on another private individual rather than himself, or, more correctly, the bank that holds his checking account. Checkbook money, which most economists recognize as money in the true sense, has the same feature as bills of exchange. If the person who signs the check fails to honor it after the endorser cashes or deposits it at a bank, the bank comes after the endorser to refund the money. If the check bounces, the liability of the debtor, i.e., the signer, is “revived in a greater degree than before.” The two differ only in degree.
Bills of exchange are a spontaneous creation of markets to facilitate the movement of goods. Under the real bills doctrine, a real bill of exchange is created when the retailer (drawee or acceptor) accepts a bill exchange drawn by the supplier (drawer). When the retailer accepts the bill, he creates commercial money. The bill now functions as money similar to the way that a check functions as money. Commercial money can be, and frequently is or was, used to pay debt and buy goods. It serves as a highly marketable store of value until it matures. As a store of value, it is superior to a check because its value increases daily. Moreover, it is usually more liquid than a check. Whereas a check seldom passes through more than one or two hands before it is returned for payment in gold, a bill may pass through several hands before payment in gold. Like a check, it can be used as a medium of exchange. However, its use as a medium of exchange is limited because bills are written in irregular amounts and generally for large sums. Commercial money (real bills of exchanges) is money in the same sense that bank money (banknotes and checkbook money) is money.
Unlike checks, bills of exchange often circulate especially in the arena of foreign exchange involving different currencies.
Although bills of exchange are used as money, their use is cumbersome. Banknotes come in convent denominations and are more versatile. They can easily convert bills of exchange into smaller pieces. Unlike bills, which have expiration dates, banknotes do not. Banknotes can circulate indefinitely. People accept banknotes more readily than commercial money, i.e., bills of exchange. Therefore, bills are usually sold to banks and converted into bank money, banknotes and checkbook money, which functions as money in the sense that most people generally accept bank money as a final payment.
End Notes
1. Ludwig von Mises, Theory of Money and Credit, new ed., tr. H.E. Batson (Irvington-on-Hudson, New York: The Foundation for Economic Education, Inc., 1971), p. 285.
[This article first appeared in The Gold Standard, issue #6, 15 June 2011.]
Copyright © 2011 by Thomas Coley Allen.
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