Antal E. Fekete - Research - Real Bills Doctrine

Real Bills Doctrine

Fekete is a proponent of the real bills doctrine sometimes called the Quality Theory of Money. First described by Adam Smith, real bills are a form of circulation credit collateralized by lower-order goods in the final stages of being brought to market. Fekete's position can be summed up as follows: self-liquidating, short-dated commercial paper on goods in most urgent demand by consumers should form the flexible portion of a money supply whose other component is a stable store of value. Fekete advocates a worldwide, gold-coin standard with real bills and claims that these parts cooperate to act as both media of exchange and stores of value.

Fekete supports his position with historical notes on banking and international trade practices throughout the Industrial Revolution and with classical economic reasoning about the arbitrage activity of actors on the margin, while recognizing the emergence of real bills some time after the collapse of the Roman Empire but surely in Mediaeval Europe.

Real bills for goods in high demand cannot logically be "inflationary", since both goods and coin exist already. Both bills and goods are taken out of circulation simultaneously. The discount practice is therefore a bridge for time (maximum 91 days or 1 season), not for funds. The discount rate cannot be regarded as an "interest rate", a position Charles Rist and John Fullarton have also taken. The nature and origin of the discount rate are entirely different from that of the rate of interest. The two rates are completely independent of one another. The rate of interest is determined by the propensity to save; the discount rate by the propensity to consume.

The real bills doctrine has a legal dimension to it in as much that real bills are related to but separated from real - that is, tangible - goods and the contractual relations flowing from the consensual agreements made, which separates forward sales contracts from real bills. Forward contracts are settled on a future date and real bills are discounted in the present. Legal remedies and exceptions are possible between buyer and seller of the goods, but these remedies and exceptions would hamper the circulation of the real bill. Subsequently, the lex mercatoria worked out an unconditional full liability for the drawer. This completes the abstraction of the goods from the underlying contractual liabilities.

Real bills have in the past spontaneously emerged (see Lancaster region at the time of Adam Smith), provided that silver and gold were freely minted - that is, not hoarded such as in times of social instability, when there would be a premium on the metals. This would clearly but surely imply a society where law and order prevails, including the enforcement of the contractual liabilities made in general and with real bills in specific.

In his vision of privatized money and a market-determined discount rate, the supply of real bills is directly related to the value of consumer goods coming to market in the near future. Without financing on this basis, a merchant economy loses efficiency adapting to a discount rate signal not of its own making. Trade mediated by less-direct forms of credit is vulnerable to outside financial crises and may seize up, resulting in depression. Discounting bills would be logically preferred over investments in loans, even if the latter were at higher rates. Bills, circulating on their own steam as instruments of added value, are materially different from loans, which are instruments of debt. Besides being a superior instrument over a debt-based instrument, the bills' maturities differed materially from loans. The discount practice amounts in fact to profit sharing. Merchants engaging in bill discounting are more comparable to business-venture partners than to debtors and creditors, precisely because the different nature of their relationship. The face value of the bill does not relate to debt and the discount rate does not relate to interest.

In Adam Smith's time, real bills had already a long history (since at least the 13th century) of entering into circulation spontaneously. In 17th century Britain, high-quality commercial paper was for over a century considered a sound reserve asset for banking and brokerage purposes. In Fekete's opinion, real bills are earning assets and bank notes are liabilities, differing like "chalk and cheese". Bank-note currencies are therefore inferior to real bills as they require a larger element of trust in a smaller number of economic agents (that is, in the adequacy of the banks' fractional reserves).

However, current economic thinking, epitomized by J.M. Keynes, criticizes the gold standard for being the cause (and international transmission vector) of the 1930s depression. Fekete's rebuttal is that the Great Depression (and interest rate volatility generally) were a response to legislatures and central banks suppressing the market in real bills and taking gold coins (into which bills mature) out of consumers' hands. He cites events of 1909 in France and Germany, obliging their civil servants to accept paper money in lieu of gold coin, and says international trade sanctions after World War I destroyed the international commercial paper markets.

Both the quantity and quality sides in the debate over a correct theory of money acknowledge that a worldwide, gold-coin standard would seriously reduce government sizes, limit their indebtedness, and curtail their ability to run large deficits. Therefore, the debate between full-reserve-banking Austrians and advocates of real bills such as Fekete can be considered "technical" in nature. Both strongly advocate a return to the gold-coin standard in preference to the current monetary system, which both groups consider unsustainable and destructive.