Esther -- Part 3

Problems with the Story

Thomas Allen

    The story occurs during the reign of Xerxes I (486-465 B.C.), who is called Ahasuerus in Esther. No historical records show that Xerxes ever had a queen named Esther or a Jewish queen. Moreover, Xerxes’s marriage to Esther would have been contrary to the law. According to Persian law, the king could only marry a wife belonging to one of the seven great Persian families.[25] (Likewise, Ahasuerus’s marriage to Vashti, if Vashti were her real name, would also have been illegal. Vashti is an Elamite name.) Between the seventh year and twelfth year of Xerxes’s reign (2:16; 3:7), when Esther is supposed to be his queen, his queen is Amestris, the daughter of a Persian general, Otanes.[26] Furthermore, at that time for a Jewess to marry voluntarily a Gentile was unthinkable.

    No historical record shows Haman, Mordecai, or Vashti. That a Persian king would appoint a foreigner to be his prime minister, grand vizier, is highly unlikely. Haman is an Agagite (3:1, 10), i.e., an Amalekite (Agags were kings of Amalek, Israel’s bitter enemy). Mordecai, of coarse, is a Jew.

    Neither Ezra nor Nehemiah mentions them. Sirach, who wrote about 180 B.C., does not include Esther, who supposedly saved the Jewish people, or Mordecai among the Hebrew notables (Sir. chap. 44-49).

    Moreover, no historical record shows a massacre in Susa. A lack of any historical record independent of the Bible does not mean that the event described in the Bible did not happen as described.

    Another conflict in the book is Ahasuerus (Xerxes) ordering Vashti to appear before his party unveiled. Such an act was contrary to custom and Persian law.[27] (If Vashti were a real person, violating the custom and law accounts for her refusal to obey the king.) Some scholars doubt such custom and believe that the king’s command was not improper.[28]

    The explanation commonly offered to all these violations of Persian laws and customs is that the king just ignored them. If true, why did he not ignore the Persian law against rescinding a royal decree? If he were in the habit of ignoring Persian law, why did he not merely revoke the decree that authorized Haman to kill the Jews and take their property?

    Esther did ask him to revoke it (8:5). Was she saying one thing with her lips and another with her body language? Did her body language say do not revoke the decree instead grant us Jews the right of revenge? If so, the king obeyed her body language instead of her lips.

    Many scholars believe that the kings of Persia could revoke their decrees. Historical evidence does not support Persian royal decrees being irrevocable.[29]

    A major problem with Esther is its lack of any religious substance. It does not mention God. No direct reference is made to worship. Although it alludes to fasting (4:16) and the “cry” of the people (9:31), they appear to have no religious connection.

    To explain away Esther’s lack of religious content, Martin offers, “A possible explanation is that the book was written at a time when the mention of the name or religion of the God of Israel was either unwise or dangerous or both.”[30] A problem with this excuse is that believing God would sanction such cowardice is difficult. Daniel, Shadrach, Meshach, and Abednego did not shy away from mentioning the God of Israel although it meant their lives. For the most part the Persians were friendly enough with the Jews to allow them to rebuild the Temple and to rebuild the walls of Jerusalem.

    C. Pfeiffer rejects Martin’s excuse and quotes Edward Young to explain away the lack of religious substance. Young writes:

 . . . since these Jews were no longer in the theocratic line, so to speak, the Name of the Covenant God is not associated with them. The Book of Esther, then, serves the purpose of showing how Divine Providence overrules all things; even in a distant, far country, God’s people are yet in His hands. But since they are in this distant, far country, and not in the land of Promise, His Name is not mentioned.[31]

Nehemiah and Malachi came after Esther if the earlier date is correct, and they are filled with religious substance. Moreover, why would God excuse “His people” ignoring Him when they are not around Jerusalem? Abraham, Joseph, and Moses did not ignore Him when they were in Egypt. Jacob did not stop worshiping God when he went to a far country. David did not stop worshiping Him when he entered a foreign country. Living in a foreign country is no excuse. However, the Jews in Esther show no reverence to God. Like Martin’s excuse, Young’s excuse is extremely poor.

    Their peculiar laws (3:8) seem to be the only thing that distinguished the Jews from the Gentile in the story. However, they quickly abandon their peculiar laws when it suits their purpose (2:9). Thus, Esther can easily conceal that she is a Jewess (2:10).

    While Mordecai convinces Esther to conceal that she is a Jewess and causes her to violate Jewish laws, he practically boasts of being a Jew. (To conceal her Jewishness, Esther would have to eat unclean foods and bow to the king, who was considered a deity — thus, violating the first commandment.) Yet Mordecai risks exposing her as a Jewess by his daily visits and inquiries (2:11).

    The moral height of the book is Esther’s resolve to risk her life by going to the king and pleading for her people (5:1-8). However, if she believes Mordecai’s argument, she has everything to gain and nothing to lose. He claims that if Haman’s decree were executed, she would be killed (4:13). Apparently, Mordecai convinces her that Haman would not make an exception for the queen, and the king would allow her execution. Moreover, if she does not intervene to save the Jews, someone else will (4:14). Therefore, if she does not act, she will not receive the glory. She does not ask why she should risk her life to intercede for the Jews if they will be saved without her intercession.

Endnotes
 25. Fausset, p. 213.

26. Davis, Westminster, p. 172. Fausset, p. 213. Paton, p. 230.

27. Fausset, p. 213.

28. Archibald Duff, “Esther,” in A Commentary on the Bible, ed. Arthur S. Peake and A.J. Grieve (New York, New York: Thomas Nelson & Sons, n.d.), p. 337.

29. Richardson, pp. 233-234.

30. Martin, p. 919.

31. C. Pfeiffer, p. 447.

Copyright © 2011 by Thomas Coley Allen.

Part 4 Part 2

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Ester -- Part 2

The Story

Thomas Allen

[Editor's note: Footnotes in original are omitted.]

    Esther is a Jewess of the tribe of Benjamin. Her Jewish name is Hadassah (2:7).

    Mordecai is also of the tribe of Benjamin (2:5). He is Esther’s foster father and cousin (2:7, 15). As he is closely connected with the harem (2:11, 19, 21), he may have been a eunuch gatekeeper.[15] After learning of a conspiracy to kill the king, he warns the king through Esther and thus saves the king’s life (2:21-23).

    Ahasuerus, the king of Persia, who is Xerxes, deposes his queen Vashti for refusing to reveal her beauty to the revelers at his royal feast (1:10-19). Vashti is disposed in 482 B.C.[16] or 483 B.C.[17]

    Then the king orders that the fairest virgins of the land be presented to him. From them he selects his new queen (2:1-4). Esther is among those presented, and Ahasuerus picks her (2:8-18). She becomes queen of Persia in 478 B.C.[18] or 479 B.C.[19] He does not know that she is a Jewess (2:10, 20).

    Mordecai offends Haman, the prime minister (or grand vizier), by not bowing or paying homage to him (3:2). Haman seeks the king’s permission to kill all Jews because of Mordecai’s irreverence. The king grants permission to Haman to kill them and seize their property (3:4-15). To obtain this decree, Haman offers the king a bribe of 10,000 talents (3:9), which according to some, the king refuses, but according to others, he accepts. Ahasuerus grants this decree in the twelfth year of his reign (3:10-11), five years after his marriage to Esther.

    Mordecai urges Esther to intercede with the king for her people (4:7-9). Uninvited, Esther enters the king’s presence (5:1-2). She requests that the king and Haman attend a banquet, a drinking-feast, that she prepares (5:4). At the banquet she invites the king and Haman to meet the next day for another feast when she promises to reveal her request (5:7). (Between the two feasts, the king orders Haman to honor Mordecai. Mordecai is honored for earlier exposing a plot to assassinate the king [ch. 6].) As the second feast begins, she informs the king of Haman’s plot to kill the Jews and pleads for her people. Because she is a Jewess, Haman will kill her (7:3-6).

    After recovering from this shocking news, Ahasuerus orders Haman hung on the gallows that he had built for Mordecai (7:9-10). Then he gives Mordecai Haman’s post of prime minister and Esther Haman’s wealth, who in turn gives it to Mordecai (8:1,2).

    Although Esther asks the king to rescind Haman’s decree (8:5), he does not because it is irrevocable. Instead he authorized Mordecai to issue a decree in the king’s name allowing the Jews to do whatever Mordecai deems appropriate (8:8). Mordecai grants permission to the Jews to destroy, slay, and cause to perish all the people who would assault them, including women and children (8:11). (Mordecai’s decree goes beyond merely self-defense. It authorizes preempted strikes and allows Jews to initiate action [8:11, 9:2, 13].) The language of Mordecai’s decree (8:11) is almost identical to the language of Haman’s decree (3:13).

    Moreover, Mordecai’s decree allows the Jews to take the property of their victims (8:11). However, they do not take the spoils (9:10, 15, 16). This decree pleases the Jews so much that they have a feast to celebrate the upcoming slaughter (8:17).

    Apparently, the Persians do not interfere with the Jewish slaughter of the Gentiles since the victims are not Persians. To the contrary, Persians aid the Jews in their massacre because they feared Mordecai and the Jews (9:3). For fear of the Jews, many became Jews (8:17). These events occur in 473 B.C.[20] or 474 B.C.[21]

    On the day that Haman had set for the roundup and execution of the Jews, the Jews in turned slaughter Haman’s family and many others. The killing lasted two days. According to the story, 800 were killed in Shushan, Susa, and 75,000 were killed in the provinces (9:6, 15, 16).

    To commemorate this great Jewish victory over the Gentiles, the Jews establish the feast of Purim (9:20-32). It is on the fourteenth and fifteenth of Adar (February and March). Purim is a day of “feasting and joy, and of sending portions to one another, and gifts to the poor” (9:22).

    According to Paton, the book is completely void of noble characters:

    Xerxes is a sensual despot. E[sther], for the chance of winning wealth and power, takes her place in the herd of maidens who become concubines of the king. She wins her victories not by skill or by character, but by her beauty. She conceals her origin, is relentless toward a fallen enemy (7:8-10), secures not merely that the Jews escape from danger, but that they fall upon their enemies, slay their wives and children, and plunder their property (8:11, 9:2-10). Not satisfied with this slaughter, she asks that Haman’s ten sons may be hanged, and that the Jews may be allowed another day for killing their enemies in Susa (9:13-15). The only redeeming traits in her character are her loyalty to her people, and her bravery in attempting to save them (4:16). Mordecai sacrifices his cousin to advance his interests, advises her to conceal her religion, displays wanton insolence in his refusal to bow to Haman, and helps E[sther] in carrying out her schemes of vengeance. All this the author narrates with interest and approval. He gloats over the wealth and the triumph of his heroes, and is oblivious to their moral shortcomings.[22]

    Conversely, Fausset sees Esther as a highly noble character although humanly flawed:

    E[sther]’s own character is in the main attractive: dutiful to her adoptive father, and regardful of his counsels though a queen; having faith in the high destiny of her nation, and believing with Mordecai than even “if she held peace at the crisis deliverance would arise to the Jews from another place" and that providentially she had “come to the kingdom for such a time as this” (iv. 14); brave, yet not foolhardy, but fully conscious of her peril, not having received the king’s call for 30 days, with pious preparation seeking aid from above in her patriotic venture; “obtaining favour in the sight of all them that looked upon her” (ii. 15). At the same time Scripture does not hide from us the fact of her not being above the vindictiveness of the age and the country, in her requesting that Haman’s ten sons should be hanged, and a second day given the Jews to take vengeance on the enemies who had sought to kill them.[23]

    Quoting McCurdy, Unger also describes Esther as a highly noble woman:

    The character of Esther, as she appears in the Bible, is that of a woman of deep piety, faith, courage, patriotism, and caution, combined with resolution; a dutiful daughter to her adopted father, docile and obedient to his counsels, and anxious to share the king’s favor with him for the good of the Jewish people. That she was a virtuous woman, and, as far as her situation made it possible, a good wife to the king, her continued influence over him for so long a time warrants us to infer. There must have been a singular charm in her aspect and manners since she obtained favor in the sight of all that looked upon her (Esth. 2:15).[24]

    Whereas, Fausset acknowledges Esther’s flaws, Unger does not. Whereas Fausset downplays her attributes of being a conniving, lying, deceiving, vengeful, manipulative, irreligious woman, Unger ignores them.

Endnotes
15. Merrill F. Unger, Unger’s Bible Handbook: An Essential Guide to Understanding the Bible (Chicago, Illinois: Moody Press, 1966), p. 265.

16. Henry H. Halley, Halley’s Bible Handbook: An Abbreviated Bible Commentary (Grand Rapids, Michigan: Zondervan Publishing House, 1965), p. 238.

17. How, p. 305. Unger, Handbook, p. 264.

18. Halley, p. 237. Unger, Dictionary, p. 325.

19. Pfeiffer and Harrison, p. 449.

20. Halley, p. 237. Pfeiffer and Harrison, p. 455.

21. Pfeiffer and Harrison, p. 455.

22. Paton, pp. 231-232.

23. A.R Fausset, Fausset’s Bible Dictionary (Grand Rapids, Michigan: Zondervan Publishing House, 1949), p. 214.

24. Unger, Dictionary, p. 325.

Copyright © 2011 by Thomas Coley Allen.

Part 1 Part 3

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Esther -- Part 1

Fact or Fiction
Thomas Allen

 
[Editor's note: Footnotes in original are omitted.]

    What is the purpose of the book of Esther? It never mentions God. It lacks religious content. Unlike all the other books of the Old Testament, man instead of God is credited with deliverance. It is man-centered instead of God-centered. Neither Jesus nor any of the writers of the New Testament quote it or even allude to it. Consequently, its purpose is not religious. Is its purpose to show the courageous acts of a young Jewish woman to save the Jewish people? Does it serve as justification for Purim? Or does it have another purpose? Did God have it placed in the Bible as a warning? Is it a warning to Christians about the Pharisees and Pharisaism, which are now called Jews and Judaism?

    Esther is the only book of the Old Testament not yet found in the Dead Sea Scrolls.[1] The early Church fathers did not consider Esther canonical. Even the Jews rejected it as authoritative until the first century A.D.,[2] but now they give it special honor. (Esther has always been popular with the common Jews. Because of its popularity, the rabbis canonized it.) After the Jews accepted Esther as canonical, the Christian church followed and accepted it in 397 A.D.[3] However, not all notable Christians have cared for Esther. About Esther, Martin Luther said, “I am so hostile to this book that I wish it did not exist; for it Judaizes too much and has too much heathen naughtiness.”[4]

    Some consider Esther historical fiction or historical romance. Among them are Clarke, Duff, Jones, Miller and Miller, Paton, and Richardson. Others consider Ester actual history. Among them are Fausset, Halley, Martin, C. Pfeiffer, and Unger. People who adhere to this interpretation generally believe that Esther is describing a real historical event. Whether Esther is real history or historical fiction is irrelevant to the conclusion drawn in this article.

    When Esther was written is disputed. Paton believes that it was written in the first century B.C.[5] Demaray,[6] C. Pfeiffer,[7] Smith,[8] and Unger,[9] place its writing in the fourth century B.C., probably early in the reign of Artaxerxes Longimanus (465-425 B.C.). Clarke[10], R. Pfeiffer,[11] and Richardson[12] believe that it was written in the second century during the Maccabean period. Davis places it in the third century B.C. during the Greek period.[13]

    The events described in Esther occurred about 40 years after the Temple was rebuilt and took place between the third and twelfth year of Xerxes’s reign. They most likely happened between 485 and 470 B.C.[14]

Endnotes
1. Donald E. Demaray, Cowman Handbook of the Bible (Los Angeles, California: 1964), p. 91.

2. John C.H. How,“Esther,” in A New Commentary on Holy Scripture, ed. Charles Gore, Henry Leighton Goudge, and Alfred Guillaume (New York, New York: The MacMillan Company, 1928), p. 304. Lewis Leary Paton, “Esther (Person and Book),” in A New Standard Dictionary , ed. Melancthon W. Jacobus, Edward E. Nourse, and Andrew C. Zenos (New York, New York: Funk & Wagnalls Co., 1926), p. 231.

3. How, p. 304.

4. Madeleine S. Miller and J. Lane Miller, Harper’s Bible Dictionary, 6th ed. (New York, New York: Harper & Brothers, Publishers, 1959), p. 174. Paton, p. 232. H. Neil Richardson, “The Book of Esther,” in The Interpreter’s One-Volume Commentary on the Bible, ed. Charles M. Laymon (Nashville, Tennessee: Abingdon Press, 1971), p. 233.

5. Paton, p. 229.

6. Demaray, p. 91.

7. Charles F. Pfeiffer and Everett F. Harrison, ed., The Wycliffe Bible Commentary (Chicago, Illinois: 1962), p. 447.

8. William Smith, A Dictionary of the Bible, ed. F.N. Peloubet and M.A. Peloubet (Nashville, Tennessee: Thomas Nelson Publishers, 1979), p. 182.
 
9. Merrill F. Unger, Unger’s Bible Dictionary, 3rd ed. (Chicago, Illinois: Moody Press, 1960), p. 326.

10. W.K. Lowther Clarke, Concise Bible Commentary (New York, New York: The MacMillan Company, 1953), p. 93.

11. Robert H. Pfeiffer,“Esther,” in The Abingdon Bible Commentary, ed. Frederick Carl Eiselen, Edwin Lewis, and David G. Downey (New York, New York: Abingdon-Cokesbury Press, 1929), p. 477.

 12. Richardson, p. 232.

13. John D. Davis, The Westminster Dictionary of the Bible, Rev. by Henry Snyder Gehman (Philadelphia, Pennsylvania: 1944), p. 172.

14. William C. Martin, The Layman’s Bible Encyclopedia, (Nashville, Tennessee: The Southwest Company, 1964), p. 918.

Copyright © 2011 by Thomas Coley Allen.

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Real Bills Doctrine -- Part 12

Does Fractionalization Occur Under the Real Bills Doctrine?

Thomas Allen

    Under the real bills doctrine with sound decentralized banking, fractional reserve banking as such does not exist. Fractional reserve banking exists when a bank creates money out of nothing or allows multiple parties to use the same money simultaneously. The former occurs when banks add to the money supply by creating money out of nothing but computer data entries or the printing press. The latter occurs when banks lend demand deposits (current accounts or checking accounts) or use them as reserves for loans. Neither occurs under the real bills doctrine.

    Specie (gold or silver) or commercial money (real bills) backs all credit money (bank notes and checkbook money) that a bank “creates” (more correctly, converts). The specie and commercial money remains out of circulation. No one has use of it while the bank money representing that specie or commercial money is in circulation or available for use. Thus, if specie or commercial money maturing into specie backs all banknotes and demand deposits, fractional reserve banking as such does not exist.

    The following example illustrates that the real bills doctrine does not require the fractionalization of gold. A retailer accepts a bill of exchange from a wholesaler for 100,000 dwt. (pennyweight) of gold. To pay his supplier, the wholesaler discounts the bill to his supplier for 98,000 dwt. of gold (assuming the quarterly market discount rate is 2 percent). In turn, the supplier pays the manufacturer 98,000 dwt. with this bill. Then the manufacturer pays the 98,000 dwt. that he owes the raw material supplier with this bill. The raw material supplier keeps the bill to maturity. Thus, the retailer pays the 100,000 dwt. due on the bill at maturity to the raw material supplier.

    Has gold been fractionalized? No. As this example shows, 294,000 dwt. of gold are moved, but only 100,000 dwt. of physical gold are moved, which is the final payment that extinguishes the bill. The bill of exchange or commercial money has economized the movement of gold. It enables 100,000 dwt. of physical gold to do the work of 294,000 dwt. of gold, yet it has not fractionalized the gold.

    Now let’s look at the same example, but with banks getting involved. Instead of the wholesaler using the bill to pay his supplier, he sells the bill to a bank. In return, the bank buys the bill with bank money (banknotes or checkbook money). To simplify the example, the wholesaler has the bank credit his checking account with 98,000 dwt. of gold. Has the bank created new money? No, it has converted commercial credit money (the bill of exchange) to bank credit money (checkbook money). Now, the wholesaler writes his supplier a check for 98,000 dwt. to pay his debt to the supplier. That is the wholesaler transfers 98,000 dwt. of gold to the supplier via the check. The supplier deposits the check in his checking account, and the bank credits the supplier’s account with 98,000 dwt. of gold. Has this bank created money? No, it has not. The example continues with the supplier paying the manufacturer with a 98,000-dwt check, who deposits the check in his checking account. Again 98,000 dwt. of gold has been transferred via check; this time it is from the supplier to the manufacturer. In turn, the manufacturer pays the raw material supplier with a 98,000-dwt check who likewise deposits the check. Has 392,000 dwt. of new money been created? No, the checks are merely transferring gold from one account to another. The retailer ends up covering all these checks with the 100,000 dwt. of gold that he pays the wholesaler’s bank when the bill matures. Again, the gold is not fractionalized. The intervening credit money enables a small amount of gold to do the work of a great deal of gold.

    In both examples, the need for gold to change hands has been reduced from four times to one: from the retailer to the raw material supplier in the first instance and to the bank in the second case. Fractionalization has not occurred.

    Has this process created any new money? If this process has created any money, the retailer has created it when he accepted the bill of exchange. If the wholesaler sells the bill of exchange to a bank, the bank does not create any new money. It merely converts commercial credit money (the bill of exchange) to bank credit money (banknotes and checkbook money). The bank has not created any new credit money. It has merely changed the form of credit money. It has sliced the bill of exchange into small and more easily used pieces.

    Moreover, the real bills doctrine does not involve borrowing or lending as Professor Fekete has explained. As no lending is involved, banks are not lending demand deposits or using them as reserves for loans. Since banks are not creating money or lending money under the real bills doctrine, fractional reserve banking as such does not occur under the real bills doctrine.

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

Copyright © 2011 by Thomas Coley Allen.

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Real Bills Doctrine -- Part 11

Do Real Bills Eliminate the Need for Savings?

Thomas Allen

    Real bills of exchange do not eliminate the need for savings as some opponents assert that proponents claim. They are not intended to do so. The function of savings and the function of real bills are entirely two different things.

    Savings are necessary to provide resources for the expansion of farms, mines, and factories. As productivity precedes real bills, savings must come before any real bills are generated.

    Once items are produced and on their way to the final consumer, then real bills come into being. Their purpose is to facilitate the movement of goods from their origin to their final destination.

    Real bills free up savings so that more savings are available for production. They do this by eliminating the need for borrowing savings to distribute goods.

    Real bills cannot and do not replace savings. They are not a substitute for savings. Since real bills make the distribution of goods more efficient and less costly, they are not a form of savings.

    When an economy operates on the real bills doctrine, it expands and prospers. Without the real bills doctrine, it stagnates because savings must be withdrawn from production to fund distribution. Because it frees up savings for production, the real bills doctrine leads to an increasing standard of living. It eliminates the need for savings to fund the distribution of goods. Thus, it makes more savings available for the production of wealth, which leads to a higher standard of living. Moreover, the real bills doctrine may actually increase savings. As more wealth is created, more resources become available for savings.

    When the real bills doctrine is abandoned, the standard of living suffers. It is lower because the production of wealth is lower. The production of wealth is lower because savings that would have gone into production must be diverted to the distribution of consumer goods.

    Real bills do not eliminate the need for savings. On the contrary, they lead to an increase in savings.

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

Copyright © 2011 by Thomas Coley Allen.

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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 comes 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.

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The Real Bills Doctrine --- Part 8

Does Discount Rate Control Money Supply?

Thomas Allen

    One criticism of the real bills doctrine is that supporters claim that the state of business determines the number of bills, and, therefore, the number of bills is independent of bank policies. On the contrary, according to these opponents, the amount lent depends on the discount rate. Banks decide how many bills to discount by the discount rate that they set. A lower discount rate results in banks discounting more bills.

    First, banks do not discount bills by lending; they buy bills at a discount. The two actions are entirely different. Second, banks may propose a discount rate, but markets decide the discount rate. A bank that sets a below-market rate would not earn an adequate return. If it sets a rate too high, it would not do any business.

    True, a lower discount rate normally results in more bills being sold to banks and thus more banknotes and checkbook money being placed in circulation. However, a higher discount rate does not reduce money in circulation. A real bill is commercial money. It can and does, or did, circulate and function as money until it matures. The quantity of commercial money available for discounting determines the discount rate. More commercial money leads to lower discount rates. More productivity results in more commercial money. More consumption causes more productivity. Thus, the discount rate depends on consumption and not banks and savings.

    With commercial money in circulation, the economy can function without banks. Banks merely improve the efficiency of the monetary system. With banknotes, they divide commercial money into small uniform pieces that are more easily spent. Also, more people will accept banknotes in payment than bills of exchange because the creditworthiness of a bank is easier to judge.

    Under the real bills doctrine, banks do not decide the amount of credit money in circulation. Productivity and consumption decide. Whenever a merchant signs a bill of exchange accepting it, credit money as commercial money is created. Thus, as more goods are produced, commercial money increases. As fewer goods are produced, commercial money decreases. All banks decide is how much commercial money to convert to bank credit, banknotes and checkbook money. (In today’s economy, most would be converted to checkbook money.)

    In summary, the discount rate depends on the supply of commercial money, real bills of exchange. However, it does not control the supply. Quite the contrary, the supply of commercial money controls the discount rate. Productivity and consumption control the quantity of commercial money. Therefore, productivity and consumption instead of banks fix the discount rate.

[This article first appeared in The Gold Standard, issue #12, 15 December 2011.]

Copyright © 2011 by Thomas Coley Allen.

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