Wednesday, February 3, 2016

Bank Notes and the Real Bills Doctrine

Bank Notes and the Real Bills Doctrine
Thomas Allen

    Under the real bills doctrine, bank notes are not fully backed by gold under the gold standard. They represent the items on a real bill of exchange that has been converted into bank notes.
    As Moutein notes, a real bill of exchange is commercial money, which can be used to discharge debt. As such when a bank buys a bill with bank notes it is converting one form of money, commercial money, into another form of money, bank notes. The same process happens when a person deposits a gold coin in his checking account. The bank converts the gold coin into checkbook money.
    Proponents of 100-percent gold standard claim that bank notes are, or should be, receipts for gold. Bank notes are, or should be, certificates backed 100 percent by gold.
    Although bank notes can be redeemed in gold under the gold standard, it is not specifically a receipt for gold. It is a coupon, so to speak, that can be redeemed in whatever is being offered in the market. However, it is not a coupon for a specific item. Like a gold certificate, it is a general coupon. That is, it is redeemable in whatever is being offered for sale in the markets. Gold is only among the many products available in the markets into which a bank note can be redeemed. A gold certificate is a warehouse receipt for gold that can be redeemed for other things being offered in the markets.
    Like gold certificates, bank notes are either canceled against other forms of credit money (other bank notes, gold certificates, and checkbook money) or is converted to gold and canceled.

Copyright © 2014 by Thomas Coley Allen.

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