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The Real Bills Doctrine: A Restatement

  • Economics


In this paper I argue that the Real Bills Doctrine has been wrongly discredited, and that it ought to displace the Quantity Theory as the dominant theory of money. The discussion begins with the observation that the issue of backed money will not be inflationary as long as central banks follow the real-bills rule of only issuing money to those customers who offer good security in exchange. I then contend that modern paper currencies, which we normally think of as unbacked fiat money, may be (and probably are) backed. If correct, this would imply that the Real Bills Doctrine, and not the Quantity Theory, is a correct model of the value of modern money. The paper concludes by discussing a few controversies in the history of the Real Bills Doctrine, and shows that the major arguments responsible for the defeat of the Real Bills Doctrine contain obvious and serious errors.

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