Talk:Real bills doctrine/Archive 2

Fixed it best I could
Fixed it best I could. I think it's looking good now. Needs a bit more help with wikification, though. It currently reads like an old ecomomics textbook, however I think the sources are documented well enough. Sim 19:03, 29 April 2006 (UTC) --- This article is missing the most important point, which is that the Real Bills Doctrine concerns commercial paper that is *self-liquidating* within 91 days or less (rather than 60 days). In other words, any loan extended is repaid in specie within 91 days (This is in contrast to, for instance, a mortgage which lasts years in duration). This makes Real Bills the next best thing to gold, into which they mature within 91 days or less. They are also extremely liquid since they have such short maturities and self-liquidate, in comparison to longer dated instruments or equities.

In the interim 91 days, the bills can circulate as if they were money when they are endorsed (and this is why lenders are willing to issue them - they can be "rediscounted", i.e. sold and resold repeatedly at discount in the secondary market). As a result of the Real Bills Doctrine, entrepreneurs are able to finance new production by borrowing gold, paying wages with the gold, and repaying the borrowed gold from the proceeds of the sale of their new production. Real Bills thus finances the labor market. In connection with the Gold Standard, it is argued that the Gold Standard cannot work without a system for clearing Real Bills, because without the financing of the labor market that it facilitates, there would be structural unemployment.

The importance of Real Bills self-liquidating into gold cannot be underemphasized. This is because gold is the ultimate extinguisher of debt and has no counterparty risk. In a Fiat money system, cash only enters circulation when bonds are issued. As a result, there is never enough money in circulation to extinguish all outstanding debt (because dollars are issued in equal amount to the face value of the bond, and as a result, not enough money exists to repay both the face value *and* the interest).

I refer you to the work of Professor Antal Fekete for further explanation. ~Thisson, 03/21/2012

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thorough revision
I'm starting a thorough revision of this page, as part of my slow project to update the Gold Standard and 19th century monetary policy economics pages. The introduction got a first whack, next is the history of the RBD and the bills clearing system of the 19th century. When this is done I will add material at Gold Standard since RBD is relevant to that - I simply have not had time to update this page and wasn't going to link in the condition it was in previously. Stirling Newberry 12:38, 22 August 2006 (UTC)

Real Bills and Fiat Currency
In a regime not backed by some specific specie, there is no real bills doctrine, because the central bank uses open market operations for its portfolio - that is, it deals in government securities - and alters reserve requirements. Banks can make loans based on anything that they can show bank examiners has a market value. For example the Import-Export Banke makes loans to businesses to buy goods for sale abroad, the collateral being the goods themselves and their expected resale. Central banks don't need to concern themselves with, and neo-classical economic theory suggests that they avoid - purchasing private securities or other privately created instruments. This rule isn't universally adhered to.

There is also no inflationary, or non-inflationary, question being raised by the purchase of private securities or other instruments. If the central bank is allowing the creation of more currency than the economy can support, there is inflation, regardless of what the central bank is exchanging new federal reserve notes, or what banks are lending. The RBD controversy isn't unimportant - there are countries that go on dollar boards for example - and as a proxy fight over monetarism there is some interest, but the reason for the very thin literature on the subject is that it doesn't have general applicability for most currencies. Stirling Newberry 12:20, 29 August 2006 (UTC)

Reply to the above
The point of the RBD is that it doesn't matter what kind of asset a bank gets in return for its money. All that matters is that the assets have adequate value. As long as bank assets move in step with the amount of money issued, the money will maintain its value. It is not a question of matching the amount of money to what "the economy can support". It is a question of banks getting adequate assets to back the money they issue.

Currency
A handful of articles in 20 years does not make this an important controversy in present circles. Indeed the articles were already in the article - checking I put the references in to two of them myself.

Misrepresentation by overweighting minor view points - and indeed you misrepresent even the minor viewpoints that I, in fact, cited in the first place - is against both intellectual honesty and the NPOV policy. Stirling Newberry 01:36, 19 March 2007 (UTC)

Last line of the article
If a counterfeiter holds assets against the paper money he issues, and if that counterfeiter maintains either physical or financial convertibility of his money, then he is not a countereiter. His net worth is not affected by the issue of money, and he will also not affect the net worth of any other bank (including the central bank), so he will cause no inflation.

Reply to Last line of the article
Not quite true... Say the counterfeiter mints 100K and then buys 100K in bonds. A year later his assets are worth 110K. The person who sold him the bonds demands his money back, so the counterfeiter sells his bonds and gives the initial bond seller 100K back. This leaves the counterfeiter with 10K which for him is free money. When he spends this 10K into the economy something has to give because he didn't contribute any real wealth, and the net result has to be inflation to balance out his ill gotten gain.

Not quite true
The free lunch of 10K would attract rival bankers. Assuming costless issue of money, zero-profit equilibrium requires that the banker must pay interest on the money he issues. A dollar would start the year worth 1.0 oz of silver, and would rise to 1.1 oz. at year-end. Then there's no ill-gotten gain. The reason paper money normally doesn't bear interest is that the cost of issuing the money eats up the interest.

Reply
A couple things here...  The idea that it is ok for banks to create deposits because other banks can steal their business, is flawed on multiple fronts. As an analogy, should we permit counterfetters to create money because other counterfetters can do the same? This logic would justify any form of fraud. The reality is, is that barriers exist to free competition to banking such as economies of scale and government regulations. If we were to expect the 'free market' to remove the inflation caused by banks, then the rate of savings would match the cost of loans, which we don't have. Banks typically pay 0% interest on checking deposits and can charge in excess of 10% of loans which means this industry is not very competitive and this is a mute arguement. Dunkleosteus2 17:42, 25 June 2007 (UTC)

Misses the point
A bank is not a counterfeiter. A bank issues a dollar--either a paper dollar or a checking account dollar--in exchange for a dollar's worth of assets.
 * Banks don't issue paper dollars anymore (with the exception of travelers checks). Banks are for all practical purposes counterfeiters because they fabricate claims on wealth by convincing (frauding) people into accepting bank deposits as being the same as base money which it is not.

The bank puts its name on those dollars, recognizes them as its liability, and keeps assets as backing for the dollars it has issued. A counterfeiter doesn't put his name on the dollars, doesn't recognize them as his liability, and doesn't hold assets to back them.
 * Recognizing deposits as a liability is only a bookkeeping entry. Again a counterfeiter could counterfeit 200K, keep 20K of real money on hand, and loan out 180 for say a home loan. For those who notice something fishy about their fake bills, the counterfeiter could give them part of his 20K in real money.  So there is no discernible difference between the counterfeiter and the banker.  In theory, a bank does not even need to balance credit assets with liabilities, because a bank a bank could just spend that money into the economy and as long as people don't convert their deposits into reserves, the bankers prosper even though they don't have anything on an artificial asset sheet.

The zero-profit assumption is simply standard economics, and is based on the very sound no-arbitrage principle.
 * The zero-profit assumption is an offshoot of equilibrium theory which is a fraud that has been disproven by many economists. In a nutshell, equilibrium theory can not exist, because the division of labor and trade, creates an increment of association that exceeds the bargaining power of either participant.  The result is chaotic pricing with each player having equal bargaining power, and monopolies where bargaining power is hoarded by select traders.  The nice neat Zero-profit assumption/Equilibrium Theory of popular economics is just not correct.

Banks face worldwide competition, so the zero-profit condition is not a moot point.
 * Regulations and economies of scale are enough to ensure the banking industry is not competitive. Not just anybody can start a bank...  You need decent startup capital, and critical size to get deposits started.  From there banks tend to splinter into regional or specialty monopolies with no serious concern for competition.  The biggest proof that banks are not competitive, is their return on equity which is one of the highest of all industries (up there with IT and Drug companies).  Besides even if banks were competitive, it would be like having counterfeiters competing with each other.  Sure they may lose a bit from competing with other, but by and large they are the winners and we are the losers.

In the nineteenth century, when private banks issued bank notes, they usually claimed that bank notes were not profitable, since the cost of printing, handling, chasing counterfeiters, etc, easily used up interest earnings.
 * By and large printing issuing bank notes made many people incredibly wealthy. Sure some suffered from runs, were poorly mismanaged, or struggled to get off the ground, but in this doesn't matter because in the aggregate they created a massive amount of money and wealth for themselves.

The main reason banks issued paper notes was that they served as a form of advertising.
 * Not quite. Banks were a holdover from goldsmiths who merely issued more claims notes on gold then they had.  Bankers issues banking notes on first gold then government notes/deposits because it was profitable to do so.  Checking is merely a modern day form of issuing bank notes.

If private banks didn't earn a free lunch from issuing paper dollars, it's unlikely that government banks earn a free lunch either.
 * Banks earn(ed) a mint as do 'government banks'. The Federal Reserve in particular earned over 20 billion in profits in 2006 which it handed over to Congress as part of the budget.

Prof Sproul
Someone needs to come up with a good argument against Sproul and real bills on this one. I have not seen one yet. —Preceding unsigned comment added by 76.171.131.226 (talk) 08:13, 19 January 2008 (UTC)

I don't see a contradiction in this
Note that the real bills doctrine attributes inflation to inadequate backing, while the quantity theory of money, in contrast, claims that inflation results when the quantity of money outruns the economy's aggregate output of goods.

I don't see any contradiction in this. Both theories assert that inflation is caused by the supply of money outpacing the supply of real-world assets. Inadequate backing equals, at least to me, the lack of assets in the real world. Goods are assets. Whether the money is inadequately backed by the banks or by the amount of goods produced in the real world is nitpicking to me.Crusty007 (talk) 17:56, 31 January 2008 (UTC)

The real bills view is that the value of money is determined by the assets owned by the institution that issued the money. The value of money would not be affected by assets that are owned in the economy generally. If a bank has issued $100 and the same bank holds 100 ounces of silver, then each dollar will be worth one ounce, regardless of what assets are held in the rest of the economy. If the issuing bank lost 10 ounces, then the value of its dollars would fall to .9 oz./$, regardless of assets owned by others. By the same reasoning, the value of GM stock is affected by GM's assets, but not by Ford's assets, or by the total output of goods in the economy —Preceding unsigned comment added by 66.74.81.122 (talk) 00:50, 1 February 2008 (UTC)

Is the "folksy" explanation (farmer/gambler) good enough?
The final section mentions some academic work, and an empirical study, to support the real bills doctrine over the quantity theory. I have no argument with that (since I haven't read them yet). It is also mentioned that Ricardo's criticism fails because it assumed the Quantity theory to start with. Again, no problem with the idea that Ricardo's argument is theoretically wrong if it indeed is circular.

What I find hard to believe is that the academic papers would boil down to the mere assertion given in the early part of the article that there can be no inflation when there is adequate backing for the notes issued by the bank. Doesn't it require at least an empirical study to show that the extra amount of notes in circulation make no difference? In which case, the empirical eveidence should be the FIRST thing mentioned. The explanation actually given is hardly convincing is it? If the bank does not make the laon, the assets of the farmer or the gambler are not in circulation, and not buying anything, or only buying things by inefficient barter. It can't be obvious that this makes no difference, can it? Well, it wasn't obvious to at least one reader, i.e. me, and there might be others. E4mmacro (talk) 08:09, 3 November 2008 (UTC)

The backing view has been supported by the work of Sargent (1982), Bomberger and Makinen (1983), Makinen (1984), Smith (1984; 1985a, b), Wicker (1985), White (1986), Imrohoroglu (1987), Calomiris (1988a, 1988b), Siklos (1990), and Cunningham (1992). Several defenses of the quantity theory have been offered, notably by McCallum (1992), Michener (1987, 1988), and Laidler (1987).

If the value of a dollar were not equal to the value of the assets held as backing by the bank, then arbitrage profits could be earned. For example, if the dollar sold in the open market for 1.01 oz., then a trader could borrow 1 dollar, sell it for 1.01 oz, present the 1.01 oz. to the bank for $1.01, and repay the $1 loan for a profit of $.01. Of course the bank would also be eager to issue as many dollars as possible if it could sell them for 1.01 oz while keeping only 1 oz as backing. The same arbitrage arguments mean that a dollar that will be convertible in 1 year must sell for the present value of the assets that can be claimed in 1 year. —Preceding unsigned comment added by 76.87.133.178 (talk) 04:11, 6 December 2008 (UTC)

Informative example
The “Informative example” section is signally uninformative. It reads like musing turning into a senile fugue. —SlamDiego&#8592;T 08:53, 3 February 2009 (UTC)

It is also incorrect in that real bills are only drawable on goods that are to be consumed. Ie seasonal goods, food, clothes, etc. Furthermore history shows that real bills were in existance long before banks and are not dependant on them in any way. Rather clearing houses used to deal with real bills for convencience. 196.209.167.154 (talk) 11:12, 3 March 2009 (UTC) NeverPostedOnWikiBefore :)


 * Real bills are per definition only drawable on goods that are to be consumed. You are completely right about Real bills coming before banks, but the informative example does not have to cover the history. --DelftUser (talk) 18:43, 22 December 2009 (UTC)

I am somewhat confused by the article, and am trying to understand the meaning of "good bills". Historically, people expected their cash to be backed by some kind of vaulted commodity like precious metals, so the cash was payable "in gold" or "in silver". Saying that cash is issued "in the discount of good bills" appears to be a fancy and archaic way of saying that the asset backing the cash is the bank's portfolio of loans collateralized by goods in the hands of the borrowers. Corwin78 (talk) 01:48, 22 December 2009 (UTC)


 * "Historically" cash was either gold or silver, what you mean is notes (the modern dollar is a Federal Reserve note). In historical reality notes used to be covered by real bills (discounted bill for goods on their way to the market) and small fraction by gold & silver enough for the expected daily exchange of notes into cash (i.e. gold & silver). If you are still confused, then please list some specific questions and I will try to answer them --DelftUser (talk) 18:43, 22 December 2009 (UTC)

Is the Real Bills Doctrine the notion that changes in the amount of notes circulated should not result in price-level changes, because the value of the paper is tied to the value of deliveries of specific physical goods (and/or assets of equal value) -- and thus it is beneficial for banks to produce as many circulating notes as people would buy?


 * This article should really be split into two: one for the Real Bills and the other the doctrine. Real bills do not effect prices, this was formulated in the Real bills doctrine. The doctrine is nothing but the statement of a natural truth. --DelftUser (talk) 20:11, 24 December 2009 (UTC)

I can certainly see a factor which a theory, as I stated, ignores. Perhaps price levels (using the notes as the standard of price measure) shouldn't change as a direct effect of the circulation. But increased production of notes backed by loans and price-volatile goods should introduce market and default risks to the bearers. Thus, price-level changes measured in terms of the banknotes could be expected as the risks resolve.


 * It's not really a theory. The doctrine is only valid when the money is gold & silver coin. --DelftUser (talk) 20:11, 24 December 2009 (UTC)

I'm not suggesting actual edits with my comments. I'm just letting editors know what I am taking (or trying to take) from the article. Corwin78 (talk) 20:28, 23 December 2009 (UTC)

Edits to section Informative example
It looks like my dialog might have gotten someone to try to wade through this material, evaluate it, and change it. I reverted the post because it changes the theory behind the example given. The bank issues $100 in notes backed by elemental silver. Then the bank issues $500 in notes backed by a third party's promise to GIVE the bank $500 worth of elemental silver plus interest at a later time.

The promise is considered a valuable asset given to the bank. It is worth $500 when the bank "buys" it, or else the bank would not have handed the notes over while taking the promise in exchange. So the bank has $600 in assets to cover $600 worth of circulating notes.

That is what the article about the Real Bills Doctrine was saying, anyway. If you don't consider the promise to be an asset, then you would be making a new theory. The idea is to explain the Real Bills Doctrine.Corwin78 (talk) 23:02, 23 December 2009 (UTC)


 * You are right. --DelftUser (talk) 20:11, 24 December 2009 (UTC)

Rip off of Someone's Personal Web Page
This entire article is just Mike Sproul's website for an economics course! http://www.csun.edu/~hceco008/realbillsintro.htm —Preceding unsigned comment added by 128.112.48.144 (talk) 14:34, 23 September 2010 (UTC)

Yeah, you're right. Which makes most of the discussion on this page make no sense whatsoever. — Preceding unsigned comment added by 65.102.59.64 (talk) 03:06, 9 November 2011 (UTC)

Deposits are assets?
I was wondering why the 100oz. of deposited silver is listed as an asset for the bank? Since the bank owes this 100oz to the depositor, isn't it a liability? The Wikipedia article deposit account also seems to say that deposits are liabilities for banks. Arnob (talk) 11:18, 11 August 2011 (UTC)


 * Depositing silver is not the same as depositing Federal reserve notes (also known as fiat dollars). The bank in the example is not a modern bank under a fiat currency system. The whole article needs re-writing, I will try to do that soon. --DelftUser (talk) 15:30, 10 November 2011 (UTC)

Call to Action!
This is an article on one of the most important economic subjects, it should be a star article, instead it is a mesh of nonsense! I had my eye on this article for a long time and I was hoping someone would step up, but that has not happened, so this is a Call to Action: if you are interested let us discuss what should be done and then proceed without any juvenile reverting. I suggest removing sections 2 to 6 and 9; we can then edit the remaining stuff.--DelftUser (talk) 15:42, 10 November 2011 (UTC)