A Response to the Real Bills Doctrine

By: Douglas V. Gnazzo | Wed, Jul 27, 2005
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The recent debates in the public forum concerning the real bills doctrine, has been a treat for those longing for a return to Honest Money, as well as an overflowing well-spring of positive discourse on a most timely and complex set of issues.

It is only by questioning the great thinkers that progress will be had, whether they agree with each other is of no consequence. What matters is the discourse, the search for truth, the give and the take of inquisitive minds, which opens the mind to greater vistas that unfold far a field.

"If all mankind minus one were of one opinion, and only one person were of the contrary opinion, mankind would be no more justified in silencing that one person, than he, if he had the power, would be justified in silencing mankind." [John Stuart Mill Of the Liberty of Thought and Discussion.]

There appears to be many points and issues concerning the real bills doctrine that may have been misunderstood, which could lead to not only further misunderstandings, but to ill-advised rhetoric and even the spreading of disinformation. This will not help in the pursuit of an honest monetary system.

It is best to let cool heads and calm hearts prevail, and to throw away any and all preconceived allegiances, except for the search for truth - let that alone be our guide.

We need to unite against the foe of irredeemable paper fiat-debt money, and the elite international bankers that foster such evil upon us. A house divided falls - united we stand, steadfast and resolute. We must all work out the differences.

The history of mankind shows that the genesis of thought and the openness and awareness of knowledge takes place slowly over time. In any given science or discipline, the present day proponents add, change, and fine-tune the work of those that came before. Such has always been the way of progress.

None of us are perfect, far from it - if we were we wouldn't be here, we are here to learn: what to do, and what not to do, in this the university of the universe, in which we move and have our being.


In reading Professor Fekete's work on the real bills doctrine I noticed that one of the qualifications for the use of such bills is that there must be a parallel system of gold coin in use as Honest Money.

"Only a gold coin qualifies as a present good among the multifarious forms of purchasing media. This makes the gold coin sui generis, one of a kind, in the context of the theory of interest". [Fekete - The Dismal Monetary Science]

Note the distinction that only a gold coin qualifies as a present good amongst all forms of purchasing media. This point is very important to a sound theory of money and interest, and should be fully examined and discussed by all those in pursuit of an honest monetary theory and system that can be implemented and that will work.

As has been stated:

"Limiting the danger of inflation is a most prominent reason for using gold as money. While the supply of gold can at best grow slowly, the quantity of paper can be multiplied without limit". [Real Bills, Phony Wealth: Part 2 Tastes Great! Less Filling?- Blumen]

So it does appear that both Mr. Blumen and Professor Fekete believe that the use of gold as Honest Money is imperative. This is a solid starting point from which progress can be had.

As has been shown in my previous series Honest Money and Silver Is Money, I believe that gold and silver should be returned to their rightful place as the original form of constitutional money within the United States.

We shall refer to the use of the precious metals as money, as point # 1. However, there are other important considerations involved in such belief - such as the legal tender issue and the place of the State in regards to the issuance of money, to name just a few.


Mr. Blumen uses the following quote in part two of his work:

"The fundamental error of our financial policy lies in the attempt to create wealth by creating currency: it is putting the servant before the master -- the wrong power, in advance. We can create wealth only by producing commodities." [Carroll]

I agree with the basic premise of this quote in regards to wealth creation, however, I'm not sure that Professor Fekete ever stated that wealth could be created by the mere issuance of currency, especially any type of paper currency per se.

Money is only employed for one basic use, it is used as the medium of exchange with which needed goods are procured. Money also performs other functions, especially if it is Honest Money of gold and silver - such as being a store of wealth.

Paper fiat-debt money on the other hand, as represented by Federal Reserve Notes, have lost 95% of their purchasing power since 1913, hence it is an extremely poor instrument by which to store value, and or by which to use or exchange as a value unit of measure for other goods.

Note in the above quote the last sentence that reads "we can create wealth only by producing commodities". In the final analysis, it is man's labor that is wealth, and that which man's labor can produce and or provide as a service to other men - life's necessities that sustain our continued existence. Money is but a medium of exchange to procure these goods and services.

This is simply a restatement that money is used as a medium of exchange to procure other commodities that represent and are wealth: food, cloths, shelter and other of life necessities needed for survival. We shall refer to this as point #2, but as with all of these points, there is much more that could, should, and must be discussed.

Future Versus Present Goods

So far we have two important issues established: the importance of gold and or silver as honest money; and that wealth is created by producing commodities, goods and services. It follows from these two points that gold and silver as money is used to procure commodities that are needed to live, hence gold and silver are employed to exchange for other goods.

When one buys other goods with their money, one is selling their money for the other goods. When one sells their goods or services they are buying money. Hence money is both bought and sold. This is an important distinction not often discussed.

Returning to Professor Fekete's original quote at the beginning of this paper, we note that he states, "only a gold coin qualifies as a present good among the multifarious forms of purchasing media". This is a very important issue that appears to be misunderstood by some, but perhaps not.

As I have shown in the Honest Money Series, as well as Silver Is Money Series, only gold and silver coin as Honest Money are present goods.

Any type of paper, be it a bank note or a gold certificate, is a future good, as it represents an obligation to pay - to pay in the future, hence it is not itself payment, it is a future obligation waiting to be transacted. In a paper fiat system of debt money, payment can never be made - only discharged. We shall refer to this as point #3.

The Issue of Credit

Honest money of gold and silver coin are present goods, they are real money that can be used to "pay" or exchange for other goods. When gold or silver is handed over from one individual to another, the transaction is complete, there does not remain any type of future obligation or action needed to be taken. The act of trade or commerce between the buyer and the seller has been fulfilled and satisfied by both parties. It is a done deal.

When one individual hands another individual a bank note, or even a gold certificate, in exchange for a new coat, the act of buying and selling has not been fully completed.

For example, say the bank note is "backed" or redeemable in gold and silver. Just as the gold certificate represents a receipt - an obligation to pay a certain amount of gold upon demand, so too does the "backed" bank note contract as to be redeemable in gold or silver.

When either piece of paper is handed from one individual to another during a transaction or trade, the transaction is not complete for the holder of the paper until he redeems it for the gold or silver for which it is a receipt.

Hence, such paper receipts or obligations are future goods, not present goods. The gold or silver the paper obligations are redeemed for are present goods.

Paper bank notes, paper gold and silver certificates, paper of any kind, if the paper obligations are part and parcel of a monetary system that includes gold and silver, and more specifically, are "backed" by gold and silver, all such paper obligations represent and are - future goods. Only the gold and silver coin are present goods.

All paper obligations, being future goods, upon the exchange of them for present goods in the marketplace, automatically extend credit, credit that remains to be paid, a contractual obligation that remains to be fulfilled. We shall refer to this as point #4.

A Modern Doctrine

As many have noted, there exists many different types of "fiduciary" media, or money substitutes. What appears to be a point of confusion in the discussion of the real bill doctrine is that there may exist variations of the doctrine, similar to the variations of the quantity theory of money, or of theories of interest or money supply, which in turn lead to different schools of thought, even under the heading of the Austrian School of thought or economics, as occurs in all other disciplines as well.

This is true for all sciences and systems of thought and disciplines. Such is how man's awareness grows and evolves. The work of those in the past is built upon by those that come after. Even the greatest thinkers never got it all right.

The point being that it may not be the best of ideas to lump all variations of the real bills doctrine under one definition or meaning, specifically the present doctrine as being espoused by Professor Fekete.

If we are all looking for the most viable solutions for the present dysfunctional monetary system of paper fiat-debt money, it is imperative that every nook and cranny of monetary theory is looked into for any possible positive contributions in the offering that may have been overlooked in the past.

It is a fact that the real bills doctrine has been used extensively in the past by all the world's major industrialized nations, and that it worked to facilitate international trade on the global level. This alone suggests that it may well offer some positive points that at least should be looked into. To do otherwise who be folly at best, and a complete disregard for the search for truth at worst, which can only end badly.

From what I have read, Professor Fekete's variation is somewhat different from others that have come before, as with the aid of hindsight, he has adjusted for past mistakes and limitations, as well as trying to foresee future pitfalls. We shall refer to the possible misunderstanding and generalization of the real bills doctrine as point # 5.

No Inflation

Detractors of the real bill doctrine maintain that the use of real bills will cause inflation. As an example it has been said that:

"The discounting of bills as per the doctrine would introduce fiduciary media into circulation. The creation of fiduciary media is always inflationary because the paper notes have equivalent purchasing power to money itself and therefore affect prices in the same way". [Blumen]

As is obvious, the main issue under dispute is the question as to whether the discounting of real bills is always inflationary. Let's look at the definition of inflation as given by Mises:

"In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur. Again, deflation (or restriction, or contraction) signifies a diminution of the quantity of money (in the broader sense), which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange value of money must occur. If we so define these concepts, it follows that either inflation or deflation is constantly going on, for a situation in which the objective exchange value of money did not alter could hardly ever exist for very long." [Ludwig von Mises - The Theory of Money and Credit]

So, on the one hand we have the statement that "the creation of fiduciary media is always inflationary because the paper notes have equivalent purchasing power to money itself and therefore affect prices in the same way." Let's take a closer look at just what is being said.

The paper notes are said to be inflationary because they have "the equivalent purchasing power to money itself, and therefore affect prices in the same way."

Earlier we saw that money serves one major purpose - it is a medium of exchange by which other goods are procured. Hence, money is used to purchase other goods. The ability to purchase other goods is what gives money its purchasing power or quality.

In the above definition of inflation by Mises, it is said that "inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money".

So inflation is not simply an increase in the quantity of money, it is "an increase in the quantity of money that is not offset by a corresponding increase in the need for money".

With this distinction in mind, let us return to Professor Fekete's description of the emergence of real bills in the economy.

"Bills emerged together with the emergence of marketable merchandise, and were extinguished when the latter was removed from the market by the consumer. At no point did the bill increase the amount of purchasing media relative to the available supply of merchandise." [Fekete - The Dismal Monetary Science: Detractors of Adam Smith's Real Bills Doctrine]

Note that the "bills emerged together with the emergence of marketable merchandise", and that the bills were "extinguished when the latter was removed from the market by the consumer."

If the "latter", which is referring to the "marketable merchandise", is "removed from the market by the consumer", this means that the consumer has procured the merchandise.

The act of buying merchandise by a consumer(s) is the manifestation of demand for the merchandise, merchandise that has been added to the supply of goods in the market.

The real bills are not adding any new purchasing power into the market per se, as they are backed by the merchandise coming to market. They also represent increased supply of goods into the market.

The real bills only have the purchasing power of the new supply of merchandise being added to the market; they do not add any new purchasing power over and above the existing goods in the market, hence they do not create inflation.

Or in Mises' own words: "an increase in the quantity of money that is not offset by a corresponding increase in the need for money". The new supply of merchandise is the "offset" of the real bills, which are "extinguished when the latter is removed from the market by the consumer."

Furthermore, "at no point did the bill increase the amount of purchasing media relative to the available supply of merchandise." If there is no increase in the purchasing media relative to the new supply of merchandise, there is no inflation taking place. We will refer to this as point #6.

Self-Liquidating Bills

Elsewhere it has been stated that:

"Limiting the danger of inflation is most prominent reason for using gold as money. While the supply of gold can at best grow slowly, the quantity of paper can be multiplied without limit. The resulting inflation erodes the purchasing power of wages and savings. The Real Bills Doctrine -- a theory advocating the creation of more paper money substitutes -- cannot be exempt from this evil." [Blumen]

Once again this position is perhaps misunderstanding the presently proposed real bills doctrine. Real bills are backed by, and therefore represent actual real goods coming to the market, goods and service that are in the "pipeline" which will soon sit on the shelves of merchants for sale in the marketplace, and then they will be consumed by consumers.

They are a special type of promissory note for x amount of goods coming to market. They therefore do not add any excess money into the market. Once those goods are sold, the real bills represented by these goods are then liquidated or removed from the marketplace - hence they are self-liquidating.

The cart may be being placed before the horse in the above example, as the idea that "the quantity of paper can be multiplied without limit" is an all-encompassing statement that precludes that all "paper" is the same or acts the same in the money market.

This is not the case, as there is self-liquidating "paper", as well as short term "paper", as well as long term "paper", etc. There are many other distinctions and types as well.

Real bills are used to move consumer goods through the market from manufacturer to the whole-sale retailer, to the retail-seller, and finally to the consumer who removes the self-liquidating bills by using his gold coin to purchase the goods under question. We will refer to this as point #7.

The Offset

Another of the detractor's arguments ran thusly:

"On the other hand, an increase in the quantity of fiduciary media necessarily results in a higher market price for some good because when they are issued, there is no offsetting savings that withdraws demand elsewhere. When a business sells its bills to a bank for unbacked paper claims, the firm might use their phony paper money to pay wages to employees, rent office space, or purchase machinery. Whatever it is, it will sell at a higher price than would be the case in the absence of the fiduciary media." [Blumen]

The real bills represent real goods that have real value that do not add more money to the system that isn't offset. The real goods represented by the real bills offset the additional purchasing power that is equal to the new supply of goods. Point # 8.

Consumption Funds Production

Another point of contention is that "paper does not fund production. There is no way that paper by itself can fund production, only the goods purchased with the paper fund production." [Blumen]

Let's assume that it is true that only goods purchased with the paper fund production.

Ultimately, only man's labor can produce goods. It is man's labor that is used and exchanged in all commerce.

Under direct barter, a man can and did exchange his direct labor for other goods, or he would trade goods he produced or accrued through his labor for other goods.

Money is but the medium of exchange used to facilitate the development of direct exchange into indirect exchange. Any and all forms of money can only be used to exchange for other goods if they represent the perceived "value" of one's labor, which can then be traded for other goods, or used to "pay" for man's labor to produce other goods.

Gold and silver are representative of a unit value of man's labor, which is exchanged indirectly for other goods which themselves are but manifestations of man's labor. Real bills represent the value of the goods that are backed by them, they are backed by the labor and the production of the labor that produced the goods in question.

The point being that be it gold and silver, or be it real bills backed by real goods, both represent purchasing power, the power of labor and the goods it can produce. Hence the paper itself is not by itself funding production.

It is the value of the goods represented by real bills that when sold for gold coin, which in turn is but a unit of value of labor and or labor's production that is funding production.

In other words the consumption of that which is produced is funding production. This we will call point #9.

Collateralized Bills of Exchange

There are many more points that can be made, and should be made; including discussion of the points heretofore made, as they are not written in stone. One final issue that warrants a great deal of future discussion revolves around the idea that:

"There do exist instruments that are collateralized by particular goods", yet within the same paragraph it is said that "even collateralized bills of exchange are subject to market risk." [Blumen]

The question obviously arises - which is it: do collateralized bills exist or don't they, as you can't have it both ways just to attempt to support one's position. Point #10


So in this very brief and short discussion, ten different points or issues have been raised, which are deserving of much further analysis and examination. The ten points are merely touching the surface of what is a very complex set of issues regarding an honest monetary system of gold and silver in conjunction with the use of real bills, both of which would be in conjunction with the issuance of actual loans via gold bonds, etc. for long term loans that can not be executed by self-liquidating bills of credit.

Such a system is not written in stone and therefore absolute, it is meant as a basic starting point or plan from which to progress to an honest monetary system as opposed to the present system of paper fiat debt money, which is nothing but a wealth transference mechanism or scheme.

Hopefully these and related issues can be more thoroughly examined by the present day great thinkers that can collectively work together to provide a better world for our children and their children.

A reiteration of the ten points are:

  1. The use of gold and silver as money per our Constitution and the Coinage Act of 1792 would be a return to Honest Money

  2. Real wealth consists of man's labor and that which his labor can produce and provide

  3. Gold and silver as money are but a medium of exchange to procure other goods with

  4. Gold and silver are present goods, all paper money is a future good and involves the extension of credit

  5. The real bills doctrine has been misunderstood and over-generalized

  6. Real bills do not create inflation as they represent and are backed by real goods

  7. Real bills are self-liquidating and facilitate the movement of goods from production to consumption

  8. Real goods offset the purchasing power of the real bills that represent the real goods

  9. The consumption of goods is ultimately financing the production of goods

  10. Collateralized bills of exchange do exist and have been used to fund the past production of goods in the industrialized world

My hope and trust is that this paper will simply provide some food for further thought and discussion with the goal in mind of finding the truth for the implementation of an honest system of money. Such an accomplishment would be one of man's greatest works of both labor and love - Honest Money, which can only be had by honest men.


Douglas V. Gnazzo

Author: Douglas V. Gnazzo

Douglas V. Gnazzo
Honest Money Gold & Silver Report

Douglas V. Gnazzo is the retired CEO of New England Renovation LLC, a historical restoration contractor that specialized in the restoration of older buildings and vintage historic landmarks. Mr. Gnazzo writes for numerous websites, and his work appears both here and abroad. Just recently, he was honored by being chosen as a Foundation Scholar for the Foundation of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly, Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

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