Monday, April 28, 2014

Real Bils Doctine -- Part 10

Is the Real Bills Doctrine Another John Law Scheme?
Thomas Allen

    Opponents of the real bills doctrine cite John Law’s monetary scheme and claim that it is what the supporters of the real bills doctrine seek. Law wrote “. . . trade depends on money: a greater quantity employs more people than a lesser . . . nor can more people be set to work without money to circulate so as to pay wages of a greater number. . . .” Law sought to increase trade, production, and employment by increasing the money supply. Under Law’s system, money growth precedes production growth. New money enters the economy before new goods do.

    Under the real bills doctrine, the opposite is true. Production growth precedes money growth. Real bills can come into existence only after newly produced goods are being shipped to be sold. Only after production has occurred does commercial money, real bills of exchange, come into existence. Bills can only be converted into bank money after they exist. Consequently, new goods enter the economy before new money does.

    Law’s system rests on the premise that increasing the quantity of money makes a country wealthy. Furthermore, to make a country wealthy, increasing the quantity of money is necessary.

    The real bills doctrine rejects this premise. Under the real bills doctrine, increasing productivity, not money, leads to increase wealth. Real bills merely facilitate the movement of goods produced. It allows more goods to be produced because it paves the way for the movement of goods without tying up savings needed for production. Production creates wealth.

    With Law’s system, bank money come first. Thus, it can become a highly inflationary system. Bank money under his system had no direct relationship with production.

    With the real bills doctrine, the opposite is true. Production growth precedes money growth. A direct relationship exists between production and the growth of money. Bank money can never grow faster than new goods entering the markets.

    Moreover, under the real bills doctrine, credit money is continuously being converted into gold. With Law’s system, conversion was infrequent.

    Real bills are self-liquidating within 91 days. Therefore, bank money into which they have been converted liquidates at the same time. Any bank money that is not canceled is now representing the gold used to pay the bill. That is, any bank notes or checkbook money not used to pay a bill becomes fully backed by gold when the bill is paid. Law’s system lacked this feature. His credit money was not self-liquidating.

[This article first appeared in The Gold Standard, issue #14, 15 February 2012.]

Copyright © 2011 by Thomas Coley Allen.

More articles on money.