Real Bills Doctrine -- Part 4

Should Bills of Exchange Be Allowed as Money?

Thomas Allen

    One argument against the real bills doctrine is that a bill of exchange is credit, and such credit should not be used as money. Most people presenting this argument do not object to all types of credit being used as money. They accept some types of credit money, but object to other types of credit money.

    Under the true gold standard, only full-bodied coins are true money. All other purchasing media are types of credit money.

    Most who present this argument against the real bills doctrine seem to accept the use of token coins. Token coins are needed to buy low-valued items like a box of matches, which is worth less than a speck of gold. Token coins are a form of credit that functions as money.

    Most seem to allow the use of checks and gold certificates. Checks and gold certificates are forms of credit that function as money. A check is an order to a bank to transfer gold from one account to another or to transfer gold from an account to cash in gold coins. A gold certificate is essentially a warehouse receipt for gold and can be converted to gold at any time.

    However, they object to using bills of exchange as money. A bill of exchange is a spontaneously market-generated form of credit money that some call commercial money. So why discriminate against this type of credit money? Commercial money is more like gold than other forms of credit money in that it is a spontaneous market creation. To prevent the use of bills of exchange as money requires using political forces to overrule a natural market function.


[This article first appeared in The Gold Standard, issue #8, 15 August 2011.]

Copyright © 2011 by Thomas Coley Allen.

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Real Bills Doctrine -- Part 3

Can Credit Instruments Function as Money?

Thomas Allen

    Some opponents of the real bills doctrine claim that credit instruments are not money and presumably cannot be used as money.

    Mises defines money as “the thing which serves as the generally accepted and commonly used medium of exchange.”[1] According to his definition, anything that a community accepts and uses as a medium of exchange, i.e., a purchasing medium, is money.

    His definition does not preclude banknotes, gold certificates, and checkbook money as money. All are credit instruments. All promise to pay in gold in the future. Moreover, all are used as media of exchange. All are used to pay debt.

    A real bill of exchange is no different. It can be, and has been, used as a medium of exchange. It can be used to pay debts. Like bank notes, gold certificates, and checkbook money, it promises payment in gold in the future. The major difference between the bill and the others is that the bill promises payment in gold by a specified date. The others do not; they just promise payment in gold when demanded.

    As for debt being used as money, the irredeemable federal reserve note, which is a credit instrument and debt, has been used as money since 1933. Granted, it is poor-quality money that cannot extinguish debt. All it can do is discharge debt by transferring it to another. Nevertheless, it has functioned as a medium of exchange since 1933.

    Under the gold standard, the only true money is gold. It is the only money that is not another’s obligation. All other forms of money (bank notes, certificates, checkbook money, real bills, and token coins) are representative money. They represent something besides themselves. They represent that something is due. That something is gold. As such, they are all credit money and debt instruments. Real bills do not differ functionally from bank notes, checkbook money, or certificates. The difference between all these forms of money is technical.

End Notes
1. Ludwig von Mises, Human Action: A Treatise on Economics (3rd revised edition. Chicago, Illinois: Henry Regnery Company, 1963), p. 401.

[This article first appeared in The Gold Standard, issue #7, 15 July 2011.]

Copyright © 2011 by Thomas Coley Allen.

More articles on money.