What is the 'Real Bills Doctrine'

The Real Bills Doctrine refers to a norm in which currency is issued in exchange at a discount for short-term debt. According to the Real Bills Doctrine, limiting banks to only or primarily issuing money that is adequately backed by equally-valued assets, will not contribute to inflation. By contrast, proponents of quantity theory argue that any increases in the money supply tend to create inflation.

BREAKING DOWN 'Real Bills Doctrine'

The Real Bills Doctrine is commonly described as a simple transaction between a bank and a business that results in the issuance of money into the economy. For example, a parts supplier sells $10,000 worth of widgets to a manufacturer, along with an invoice with payment due in 90 days. The manufacturer agrees to these terms, as it intends to manufacture and sell the widgets over the 90 days. In effect, the supplier has created commercial paper (a “real bill” that is not secured, but represents tangible goods in process) that has a value of $10,000. Rather than wait to be paid, the parts supplier can sell the paper to a bank at its present discounted value of say $9,800. The bank monetizes the paper, and later collects the bill at full value.

Origins and Policy Debate

As economic theory, the Real Bills Doctrine evolved from 18th-century economic thought, including Adam Smith’s “The Wealth of Nations” in which Smith suggested that real bills were a prudent asset for commercial banks to purchase and hold. The Doctrine is often part of the larger debate about the appropriate role of central banks in managing money supply. Many economists argue, for example, that the recently created Federal Reserve adhered too strictly to the real bills doctrine, contributing to the Great Contraction and Great Depression of 1929-1932.

Although many economists find fault with the doctrine and consider it discredited, there is disagreement about which alternative system is most efficient. Economists supporting quantity-theory believe central banks should focus on stabilizing the quantity of money, preferring active open-market policies such as the purchase of government debt to drive liquidity in markets and stabilize currency. The doctrine is most heavily criticized by economists favoring free banking, who argue that the government should not be involved in managing the money supply and that open commercial competition provides the optimal stabilization of money creation.

RELATED TERMS
  1. Continuity Of Interest Doctrine ...

    The Continuity of Interest Doctrine requires shareholders of ...
  2. Doctrine Of Utmost Good Faith

    The Doctrine Of Utmost Good Faith is the minimum standard requiring ...
  3. Self-Liquidating Loan

    A self-liquidating loan generates proceeds that are in turn used ...
  4. Borrowed Servant Rule

    A legal doctrine indicating that an employer may be held liable ...
  5. D’Oench Duhme Doctrine

    A banking rule which states that a borrower or guarantor cannot ...
  6. Privity

    Privity is a doctrine of contract law which says contracts are ...
Related Articles
  1. Insights

    Understanding How the Federal Reserve Creates Money

    Read about how the Federal Reserve actually targets and creates new money in the economy, and find out why the savings and loans system magnifies this process.
  2. Personal Finance

    Getting a loan without your parents

    Do you want to receive a loan without the help of your parents? Use these five tips to finance your dreams without banking on a second signature.
  3. Personal Finance

    Different needs, different loans

    When it comes to loans, there are many different types according to your needs. Find out what options are available when it comes to borrowing money.
  4. Personal Finance

    Legality Of Selling Used Items

    An upcoming U.S. Supreme Court ruling could make it illegal for consumers to resell items due to copyright infringement.
  5. Managing Wealth

    Should You Pay Your Bills On Autopilot?

    Now that you can sign up to have your bills paid automatically online, it it a smart way to make your life more efficient? A look at the pros and cons.
  6. Financial Advisor

    Disadvantages of Federal Direct Loans

    Federal Direct Loans are popular ways to get federal help with college costs. However, they do have some drawbacks, especially for graduate students.
  7. Managing Wealth

    Personal Loans: Compare the 6 Biggest Banks

    Need a personal loan? You may stop by one of these big banks for help. Their offerings vary in size, rates and loan types, which means you have options.
  8. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  9. Personal Finance

    Lending From A Loan Officer's Perspective

    Learn how a loan officer thinks, so that you can get the best and safest loan.
  10. Personal Finance

    An Introduction to Federal Direct Loans

    Federal Direct Loans provide student funding that a majority of people can easily access. Find out if you qualify.
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center