Free Banking Theory versus the Real Bills Doctrine

Free banking, real bills doctrine, monetary policy
Rochester Chamber of Commerce booklet, 1904

free banking, real bills doctrine, monetary policyThe “real-bills doctrine” was roundly rejected by postwar monetary theorists of both the Chicagoan and the Austrian perspectives (Lloyd Mints 1945, Ludwig von Mises 1949).  But George Selgin (1989) was right to warn us that “it would be a mistake to think of the real-bills doctrine as a ‘dead horse’” because “dead horses of economic theory have a habit of suddenly springing back to life again.”

In recent years no less prominent an economist than Thomas Sargent (2011) has declared that in the debate over alternative monetary regimes, “The real bills doctrine is alive and well today.”  Most recently the leading young Spanish economist Juan Ramón Rallo of the OMMA business school and the Juan de Mariana Institute in Madrid has defended propositions that he identifies with the real-bills doctrine.  Rallo draws on the writings of Antal Fekete, who has been advancing what he calls “Adam Smith’s real bills doctrine” for more than 20 years.  I had the pleasure of an on-stage dialogue with Professor Rallo in Madrid this summer, where we discussed aspects of the doctrine.  Fortunately, what Rallo actually defends is mostly free of the shortcomings of the usual versions of the real-bills doctrine.

To begin, let’s identify what is a real bill.  To use a common example, a miller sells $1000 worth of flour to a baker and presents a bill for $1000 with payment due in 90 days.  The baker endorses the bill, pledging to pay $1000 in 90 days.  He plans to pay out of income to be made by producing and selling bread from the flour.  The miller need not wait 90 days to get paid but can immediately sell the endorsed bill to a bank (one that considers the baker a good credit risk) at its present discounted value, say $980.  The bill is “real” in being “backed” by tangible goods in process.  Thus real bills are short-term commercial IOUs that finance goods through stages of production.  High-quality real bills are low in default risk and liquid (have a thick secondary market with small bid-ask spreads).

It is crucial to distinguish between two different doctrines that refer to real bills.

(1) The first real-bills doctrine is a norm for money issuing.  It says that a banking system will automatically issue the right (equilibrium) quantity of monetary liabilities (banknotes and checkable deposits), and will not over-issue no matter what quantity it issues, if it always issues in exchange for real bills offered to it, and never in exchange for other assets (government bonds, ordinary loans).  In some versions it doesn’t matter whether the system is dominated by a central bank or whether it is on a gold standard.  Thus the British anti-Bullionists claimed that the Bank of England could not have over-issued while off gold 1797-1819 because the Bank only discounted real bills, a claim endorsed by John Fullarton of the Banking School in the 1840s.  The Federal Reserve proclaimed a similar doctrine in the 1920s.  A monetary policy guide is clearly what Sargent (2011) has in mind when he contrasts the real-bills doctrine to the quantity theory of money.  (As David Laidler (1984) showed, however, what Sargent and Wallace (1982) enunciated wasn’t the traditional money-issuing real-bills doctrine.  Neither is the position that Sargent (2011) defends.)

The errors of the monetary policy doctrine are well known.  (a) It wrongly takes the nominal quantity demanded of a particular type of credit as a reliable guide to the nominal quantity of money the public wants to hold.  Not only are these quantities different but, as Henry Thornton noted back in 1802, a central bank can increase the quantity of credit demanded simply by supplying more money, which lowers its discount rate and raises the price level.  (b) It wrongly takes the quality of bank assets acquired as a reliable governor of the quantity of monetary liabilities issued.  (c) It makes redeemability of bank liabilities (in gold or otherwise) an inessential “fifth wheel” in the process that determines the quantity of money.

The money-issuing norm is what critics of fractional-reserve banking have in mind when they assert (Hülsmann 1996, p. 20) that modern free banking theorists “are nothing but modern advocates of the real-bills doctrine” or (Baeriswyl 2014, p. 13) that our theory “repeats basically the same error as the real bills doctrine.”  Such criticism is completely off the mark, because modern free banking theorists (among which I count myself) have consistently rejected the real-bills money-issuing norm.  In particular, Selgin (1989) and White (1995, ch. 5) emphasize its errors and show how it differs from our theory of the self-regulating properties of a free banking system.

In a nutshell, our account of the self-regulation of the quantity of bank-issued money (banknotes and checkable deposits, redeemable on demand) in a competitive free banking system centers on the premise that profit-seeking banks must carefully attend to their reserve positions.  Running out of reserves and defaulting is costly.  A bank that issues an excessive volume of demandable liabilities will soon experience adverse clearings (will lose reserves to other banks).  To lower the risk of payment default it will be compelled to reverse its expansion to stop the outflow and rebuild its reserves.  Conversely, a bank that issues less than its clientele wants to hold will gain reserves and find it profitable to expand.  These responses to adverse or positive clearings will return the quantity of bank-issued money at an individual bank, and economy-wide (where flows of reserves out of and into the system play an important role), to the quantity demanded.  This account does not refer to the type of earning assets that any bank holds, whether real bills or otherwise, as central to the self-regulation of the money stock.  Thus it does not share any of the errors of the real-bills money-issuing norm.

While not offering a quantitative guide, selling and buying real bills did offer a convenient means for a bank to contract and expand the volume of its demandable liabilities in response to changes in demand (Glasner 1992), as indicated by changes in its reserves.  Attention to reserve surpluses and deficits, not any property of the bills themselves (short duration, low default risk, liquidity) automatically guided a bank (and the banking system) to contract and expand appropriately.  The maturation of bills of exchange did not as such compel a commercial bank or a central bank to contract (it did not “close a vent,” contrary to the Banking School’s “law of the reflux”).  A bank unconcerned about its reserves could always purchase new bills to replace maturing bills.

Nor did a system-wide reduction in the quantity of bills offered to the entire banking system at a given lending rate – even a reduction associated with fewer goods in process – compel the banking system to decrease the overall quantity of monetary bank liabilities by an equivalent amount to maintain monetary equilibrium.  A decrease in the demand for credit is not the same as a decrease in the quantity of bank liabilities that the public wants to hold.  Though both are correlated with a decrease in output, the correlation is less than 100%, and the coefficient is not one (the demand to hold bank-issued money does not decline 1:1 with the volume of real bills discounted).  Normally a system-wide decrease in the demand for credit in the bill market calls for an equilibrating decrease in the market discount rate.

Conversely an increase in the quantity of bills offered at a given lending rate, associated with more goods in process, does not signal that the entire increased volume of bills can be prudently purchased at the previous discount rate.  A rise in the rate is called for to ration the scarce supply of funds that the banks have with which to intermediate.  Competition for now-scarcer funds implies a concomitant rise in the deposit rate, which will somewhat increase the quantity of deposits demanded, but again not generally 1:1 with the volume of bills discounted.  By contrast the money-issuing norm version of the real-bills doctrine calls for accommodating all offers of real bills for discount, presumably at an unchanged interest rate, and is silent on the need for equilibrating changes in interest rates.

(2) The second real-bills doctrine – and the one that Rallo proposes – is a prudent banking norm. Its origins lie in remarks Adam Smith made in The Wealth of Nations.  Smith recommended real bills as a safe commercial bank portfolio asset.  (Actually both real-bills doctrines are in Smith, including an erroneous money-issuing norm.  But Smith also offered a more correct analysis of money-stock self-regulation, noting correction via reserve losses when a bank or a banking system tries to issue more liabilities than the public wants to hold.)  A prudent bank should avoid purchasing unreal bills, Treasury bonds, or mortgages.

The prudent-banking real bills doctrine, which is what I take Rallo to be defending, is basically innocuous with respect to monetary theory so long as it does not contend that a bank purchasing only real bills cannot over-issue its liabilities.  It is irrelevant to understanding how redeemability and the adverse clearing process regulate the quantity of bank-issued money.

There is much to commend (in my view!) in Rallo’s writings when he rejects mandatory 100% reserves in banking and when he favors free banking over central banking.  [All the quoted passages to follow are my Google-aided translations from the original Spanish.]  He rightly observes (Rallo 2013a) that a 100% gold reserve requirement “will provoke such economic inefficiencies that it will inevitably be abandoned.”  Thus “the real choice is between a free-market monetary and credit system” and an unfree system.  He told an interviewer: “Of course society without monopolistic state organs can soundly self-regulate the value of money and credit,” adding that healthy credit “occurs naturally in a competitive market.”

Clearly Rallo does not want to impose any real-bills requirement by statute or regulation, and he does not view the real-bills doctrine as a set of instructions for central bank policy.  Rather, he views (Rallo 2013) the doctrine as a prudent banking norm toward which competition will compel free banks to practice:

A bank without privileges in an environment of freedom is therefore to be prudently managed, which in my view would result in having covered its financing with cash or self-liquidating short-term credits and in counting on abundant capital to absorb losses in relation to the risk assumed in its assets.  It is what is known as the Real Bills Doctrine.

Modern free banking theorists would agree that competition in an unprivileged banking system promotes prudent bank management (insolvency and its resolution weed out the imprudent), and everyone can agree that prudence includes adequate liquidity and adequate capital.  But I have two concerns about the above statement.

First, contrary to the last sentence quoted and as already noted, a prudent banking norm is not the only or even the main idea known as the real-bills doctrine.  Historians of economic thought commonly use the name to refer to the money-issuing norm described above.  Free banking theory rejects the real-bills-centered view about the process that regulates the quantity of broad money.  Again, Rallo is not defending a money-issuing norm here, but rather talking about prudent bank management.

Second, the concept of “self-liquidating” (autoliquidable in Spanish) credit, which Rallo invokes here and in other writings, is unhelpful to clear thinking.  In some authors’ arguments it is part of the magical thinking underlying the notion that real-bills-only discounting will properly regulate the quantity of money.

What does “self-liquidating” mean?  Every debt instrument of finite maturity is “self-liquidating” in the sense that it eventually comes due and the borrower ordinarily repays the principal.  So that can’t be it.  Rallo cannot mean by “self-liquidating” only that the debt will come due soon, because then it would be redundant in the above-quoted phrase “self-liquidating short-term credits.”  Instead “self-liquidating” seems to signify an IOU that (like a real bill) finances a batch of goods in process through a stage of production, like the batch of flour in the example above, such that the sale of the goods ordinarily enables repayment of the IOU. (Sometimes “self-liquidating” bills are said to be those financing consumer goods, or goods in high demand.)  But business loans of all kinds finance projects that are expected to generate revenues sufficient to repay the loans.  Granted, real bills were typically lower-risk assets than ordinary business loans, but of course the repayment of a real bill did not carry zero risk.  The bill might not be repaid if for whatever reason the goods were not produced in timely fashion (the flour was not baked into bread within 90 days) or the products did not sell at the expected price.

Rallo has a broader concern about imprudent banking: the danger of banks undertaking “harmful maturity mismatch” by making long-term loans with short-term deposits that might not be rolled over.  Holding real bills (or other short-term assets) instead of longer-term loans reduces the mismatch.  Maturity mismatch, aka maturity transformation or duration gap, is a practice that does carry risks as well as performing a valued service for which there is normally a reward.  The reward for a bank with a positive duration gap (assets longer than liabilities) is that it borrows at a lower rate and lends at a higher rate than with a zero gap in a market where (as usual) long rates are higher than short rates.  The risk is capital loss when rates rise.  If the bank has to pay unexpectedly higher deposit interest rates to roll over its deposits, before it can roll over its loans, then it suffers a loss in net worth.  The US savings banks hugely suffered such losses in the 1980s.

Rallo seems to be of two minds on the extent to which a free banking system would exhibit excessive maturity mismatch.  On the one hand he writes (Rallo 2009):  “While I can agree with Selgin that a system of free banking would curb credit expansion and tend to remain liquid, I deny that any banking system (free or not) can be kept liquid by borrowing short and investing long.  And we should not overlook, however superior free banking is in comparison to central banking monopoly, the risks and trends that exist in the former to artificially inflate credit.”  On the other hand, and more accurately I think, Rallo (2012) recognizes that a free banking system will limit undue risk-taking by making imprudent bankers bear the consequences of their own actions:

Fortunately, in a market where the currency and banking develop in freedom and without government privileges, banks have little room for these dangerous operations, because as soon as their creditors stop refinancing them, they fall into receivership.  Unfortunately, in our ultra-interventionist and ultra-privileged market, a state institution called the central bank has the monopoly of issuing paper money, allowing it to provide cheap refinancing to private banks that have large maturity mismatches … and perversely to prolong the duration and devastation of economic cycles.”

Note that the US savings banks, which suffered from huge duration gaps when interest rates rose sharply in the early 1980s, were not operating under laissez-faire.  They had been specifically compelled by law to keep almost all of their asset portfolios in fixed-rate home mortgages.

To summarize: the characteristic of being backed by goods in process does not endow a bank-owned IOU with any special qualities not equally present in, or make it any more prudent to hold than a differently-backed IOU with equivalent default risk, liquidity, and maturity.  An emphasis on real bills as the mark of prudent banking is therefore misplaced, as opposed to an emphasis on the management of default risk, liquidity, and capital risk from duration gap.  These properties – not “self-liquidation” or any property of automatically regulating money-issue – explain why prudent banks in a historically competitive system, like Scotland’s held real bills in their asset portfolios.

  • Walker F. Todd

    Excellent article by Larry White, as usual. Minor bone to pick: I agree that adherence to real bills doctrine as it formerly was followed in the USA is a weak or fallible model for the conduct of monetary policy because, over time, the doctrine proves to be pro-cyclical. But real bills doctrine, in the real world, is helpful in preserving the safety and soundness of commercial banks (savings banks and savings and loans are another story). If a commercial bank's other loans and investments turn sour (mortgages begin to fail, foreign sovereign balance of payments loans begin to default, etc.), real bills linked to real commercial transactions are not default-proof but tend to pay off with greater frequency in a crisis than subprime mortgages and Indonesian government bonds. Bank examiners like to find real bills among banks' assets, for obvious reasons (comparatively safe and sound). Larry fails to draw an adequate qualitative distinction between such assets and the more speculative (higher yielding) ones.

    In his conclusion, Larry writes as follows:

    To summarize: the characteristic of being backed by goods in process does not endow a bank-owned IOU with any special qualities not equally present in, or make it any more prudent to hold than a differently-backed IOU with equivalent default risk, liquidity, and maturity. An emphasis on real bills as the mark of prudent banking is therefore misplaced, as opposed to an emphasis on the management of default risk, liquidity, and capital risk from duration gap.

    Back to me: I disagree with the first sentence of Larry's conclusion for the reasons stated above. In the last part of his second sentence, Larry illustrates the difference of world view today between nearly all economists and the few lawyers, bank examiners, and trade finance bankers who understand these issues. Remember that the types of derivative instruments that emerged ahead of (and again after) the 2008 financial crisis could fit the definition at the end of Larry's last sentence: They took account (supposedly, and by supposedly exacting mathematical calculation, at that!) of default risk, liquidity (the least understood characteristic because it is assumed that, in today's markets, everything can be sold–until it can't), and capital risk from duration gap (there presumably was a factor for this in each derivative's calculation, but was there?). Most of Wall Street (and not a few inside the Greenspan-era Fed) opened wide and swallowed whole the idea that a derivative was as good as or better than a real bill. I don't deny that, in a hot market, you can make more money dealing in derivatives than in real bills. But that does not a sustainable banking system make.

    Adam Smith also described, in his discussion of the Scottish banks and the Bank of Ayr case, the overissue of bank liabilities (in that case, bankers' acceptances, which were supposed to arise from real bills). In Ayr, the bankers issued what were called "accommodation bills" (also called "finance bills") to others (speculators) who, when their projects fell apart for one reason or another (e.g., the outbreak of war might inhibit shipping and reduce the demand for commercial ships), were unable to repay the bank. In a classic real bills transaction, the Bank of Ayr would have agreed to advance funds to the seller of goods on the buyer's behalf only against presentment of a bill of lading or a storage document that secured the bill; upon default, the bank could take the bill of lading or warehouse receipt, claim the goods, and then resell them to make itself approximately whole. Where there are no goods to seize, the transaction becomes increasingly speculative.

    I suppose that, in free banking, any banker can finance whatever he wants for as long as he wants. But tradition (the burden of the past, which is not always unwise) separated commercial (trade-related) from investment banking (speculative investments, the provision of capital, and the like). Investment banks also were permitted (even encouraged) to hold real bills. Senior executives in commercial banks, beginning in the 1970s, wanted to live like investment bankers and began to lobby to erode the old Glass-Steagall walls of separation. By 1999, with the Gramm-Leach-Bliley Act, the commercial bankers' dream world was achieved.

    The big banks essentially were engaged in free banking from 2000 to 2008. Traditional banking supervision was supine in their presence. They were somewhat protected from foreign competition (how many foreign bank-issued credit cards do you have in your pocket?), and they were heavily subsidized (they all obviously believed in Too Big to Let Fail, and then TARP arrived). But before the crisis, what was there that the big banks could not and did not do? The system also worked more or less as George Selgin and Larry White believe that it would: The biggest players in the market eventually disciplined the worst miscreants (Bear Stearns, Lehman Brothers, AIG, etc.) and forced their failures because of rising levels of distrust in their unsecured obligations, demanding increasing levels of derivatives-linked collateral for agreeing to hold their repurchase agreement liabilities (which were of the shortest possible term, overnight). A downward spiral was set in motion that, I think, eventually would have forced all the big banks into insolvency, which, from a market perspective, might have been the best outcome. Then smaller institutions less exposed on derivatives and repo liabilities could have bid for pools of assets carved from the larger institutions, probably at fire sale prices. Alas, the imperiled big players and their kept politicians demanded government intervention to stop the cleanout of Wall Street, with consequences that we all know.

    Free banking is pretty good, but The Powers That Be apparently no longer will let it be tried. Banking economists say that derivatives are better than real bills (easier to sell). Bank examiners know that derivatives are a crock in a crisis (I think that credit default swaps are bucket shop contracts; if they were insurance, where is the capital required of the issuer, the retention of premia paid until earned, reserves for the payment of claims, etc.?). A non-intervened banking system would be best, but how many bodies of innocent taxpayers do we have to throw overboard until we reach that goal? — Walker Todd, Chagrin Falls, Ohio

    • Larry White

      "Larry fails to draw an adequate qualitative distinction between [safe and sound] assets and the more speculative (higher yielding) ones." Walker, sorry, I tried to draw just such a distinction. The safety and soundness of banks' asset portfolios certainly does matter. Correspondingly holding real bills enhances a bank's prudence insofar as they are safe and sound and liquid, not *in addition* because they are backed by goods in process.

      • Walker Todd

        On this point then, we do not disagree. Walker Todd

  • Thomas M. Humphrey

    Kudos to Larry for a fine essay. As Larry notes, the real bills doctrine supposes that real production generates, via goods-backed commercial paper tendered as collateral for bank loans, just the right amount of money M to purchase that real output Q from the market at prevailing prices P, or M = PQ, with the direction of causation running from the right-hand side of the equation to the left. If M is to move solely with real output Q, however, something must exist to pin down the price level P. For Adam Smith, that something was the gold standard. With gold convertibility pinning down the price level in small open economies, P is determined exogenously by the world gold price of goods and M moves in step with output Q as the doctrine intends. This is the correct version of the doctrine.

    Antibullionist real bills apologists for the Bank of England during the Napoleonic Wars, however, failed to realize as much. At that time England operated on a (temporarily) inconvertible fiat paper standard. Under such a standard nothing (certainly not gold convertibility) exists to hold down the price level. Nothing, that is, except a very imperfectly stabilizing central bank. In such circumstances prices P are more or less free to vary at will such that the money stock M moves not with real output Q but with the nominal dollar value PQ of that output. With the nominal money stock governed by another nominal variable, there is no real anchor for the price level. Any rise or fall of prices will, by the real bills criterion, justify a corresponding money stock change necessary to sustain and boost it. The result will be a vicious circle of inflation or deflation. This is the incorrect or fallacious version of the doctrine adopted by the founders and governors of the Federal Reserve circa 1913-1951. And it is this version still seen in many textbooks today.

    • Larry White

      Thanks, Tom. I agree with your analysis of what's correct and what's fallacious. But I find it clearer to call the correct endogenous-money-stock doctrine something other than "the real bills doctrine" because the linkage from an increase in real money demand to an inflow of money need not involve banks discounting anything at all — the simple Humean PSFM works in a pure coin economy. Where there is bank-issued money, it doesn't matter what sort of assets banks acquire in expanding the quantity of bank-issued money.

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  • George Machen

    Much, MUCH more remains to be said here, but one small point briefly noted: It is laughingly-were-not-so-tragically ironic that early into the first phase of the Great Depression, the Fed brought to a grinding halt the banking system's rediscounting real bills ("eligible paper") — for which there was no shortage presented! — throwing the baby out with the bathwater while otherwise tightening in the name of quashing speculation. If this early-1930s having thrown goods in process under the bus doesn't epitomize Hayek's "secondary deflation," then, pray tell, what would?

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  • Thomas M. Humphrey

    I completely agree with George Machen. The real bills doctrine was a disastrous policy guide in the Great Depression. For the doctrine held that the stock of money (and credit, too) must move in proportion with the needs of trade defined as the nominal value of real output. So with the needs of trade collapsing, the Fed Board, under the doctrine's thrall, let the money stock shrink accordingly.

    Now monetary contraction in the face of collapsing economic activity was the worst thing policy could have done. Here, then, is one baneful aspect of the doctrine: It has money and credit moving procyclically when stabilization considerations call for countercyclical policy.

    Compounding this flaw was the doctrine's anti-speculation bent. All banks suspected ever of having made "speculative" loans — i.e. consumer installment loans, mortgage loans, loans to governments, loans for long-term capital investment projects, stock market loans — were denied assistance at the Fed's discount window even though they had plenty of eligible paper, namely real bills, to offer on discount.

  • George Machen

    ^ No, no, that's not what I meant — I must have been too terse, and I'm pretty sure you'll rescind your complete agreement in light of my elaboration, which roughly tacks canonical real bills doctrine onto Austrian theory but in contention with the 100% reservist faction:
    – First, it's crucial to distinguish between demand deposit liabilities newly-created to represent 1) monetary gold assets convertible on demand plus 2) real bills representing goods in process or working capital, such demand deposits corresponding to things being brought *to* markets — vs. previously-existing demand deposit liabilities representing investment-type assets, saved funds already extant, such demand deposits corresponding to things being taken *off* markets.
    – On this view, it's considered inflationary to "print money" to purchase those "speculative" loans — i.e., consumer installment loans, mortgage loans, loans to governments, loans for long-term capital investment projects, stock market loans, and anything else that takes things *off* markets, things *already* represented by transaction balances.
    – Die-hard 100% reservist Austrians consider it inflationary to create deposits for the real bills *and* investment-type assets, but I trust that most here know better than that. Yet I gather that even more modern Austrian-friendly Larry White agrees that such printing money in lieu of non-negotiable savings-type liabilities is inflationary; he just doesn't go along with doing so for real bills as innocuous or even salutary. In any event, for all Austrians it's the monetary inflating at the very least for the sake of those "speculative" loans that fosters the economic intertemporal discoordination that Austrians believe generated the collapsing economic activity in the early 1930s.
    – My point was that the Fed grievously, erroneously conflated real bills with investment-type assets during its tightening. While the steamroller of debt contraction very well may not have made a difference in the end even had all real bills presented been rediscounted, the interesting question is, would there have been collapsing economic activity in the first place had all those "speculative" loans been financed only from saved funds? (Hawtrey had a theory attributing the business cycle to real bills, but let's not go there right now… and I think that Mints was just plain dead wrong!)
    – My other point was, while Hayek certainly was no champion of the real bills doctrine, what else could his "secondary deflation" possibly mean in this context but monetary deflation *exceeding* that accompanying declining nominal business activity? Had 1929–33 been a "normal" downturn not triggered by monetization of investment-type assets, then would the "procyclical" real bills doctrine have been insipid, not leading the market but instead merely following it?… And while Hayek certainly changed his mind more than once about these matters, whether "liquidationist" or not, he surely couldn't be said ever to have been a "market monetarist," could he? He wouldn't have advocated countercyclical policy beyond any dealing with his secondary deflation, on pain of inducing the very intertemporal discoordination that caused the collapsing economic activity to start with, would he?

    I know you guys hate it, but at least within the confines of these considerations, methinks real bills remains a contender.

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  • Here are my comments following this very interesting post:

    Thanks again to Larry for writing it.

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  • Mike sproul

    The RBD asserts that money should be issued in exchange for short term real bills OF ADEQUATE VALUE. This automatically assures that if banks issue 10% more money, they will have 10% more assets backing that money, and the money will hold its value. "Over issue" is irrelevant, since money's value is determined by the assets backing it, and not by how much money is chasing how many goods.

    I've posted quite a bit on the RBD, including a few articles at alt-m's predecessor, free, but Larry's article did not address those posts. if anyone at alt-m can tolerate yet another of my posts on the real bills doctrine, I'd be glad to write a guest post giving a detailed refutation of larry's misguided attack.

  • W. Ferrell

    What you need is a free market. Then real bills will take care of themselves.

    • Mike sproul

      Correct. Some banks will insist on getting real bills in exchange for newly issued money, while others will accept government bonds or mortgages. But no banker will ever issue $100 of money for only $99 of bonds. That's why I emphasize that banks should only issue money in exchange for real bills of ADEQUATE VALUE.

      The RBD is the natural ideology of free bankers, so it's unfortunate that Larry and George selgin ar both so opposed to the RBD.

  • Add private insurance where depositors pay premiums determined by the soundness of the bank and you've got a robust monetary system.

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