Real Bills Doctrine - Use

Use

In normal times, the banker will be able to immediately redeem up to $100 for silver at the rate of 1 oz./$. If the banker expects a heavy demand for silver, they can sell the $500 worth of IOU’s for 500 oz. of silver and be ready to redeem all $600 at 1 oz/$. Even if the banker faces a run, where customers suddenly and unexpectedly demand silver for their dollars, the banker could try to survive the run by selling the $500 worth of IOU’s for $500 of his own paper dollars (un-issuing or cancelling his own paper dollars). Then there would be only $100 of paper left in the hands of the public, which the banker could redeem with his 100 oz. of silver. At no point would the value of the dollar fall below 1 oz./$, but note that the banker could not survive the run if the market did not give him $500 for his $500 worth of IOU's. The "backing view" assumes that since the banker's claims or assets are good, the market will always give the banker $500, even during a crisis.

Now let us reexamine the traditional view of the real bills doctrine: “that so long as a bank issues its notes only in the discount of good bills, at not more than sixty days’ date, it cannot go wrong in issuing as many as the public will receive from it.” According to what can be called the “backing view” presented above, it is only necessary that a bank issues its notes for assets of sufficient value. It is irrelevant whether the assets are due in sixty days or sixty years. It is also irrelevant whether the assets in question are “productive” (like a farmer’s IOU based on forthcoming productions) or “unproductive” (like a gambler’s IOU). It is even irrelevant whether the asset is a “bill” or not. One paper dollar could just as well be issued for a dollar’s worth of land as for a commercial bill worth $1.