Real bills doctrine

Source: Wikipedia, the free encyclopedia.

The real bills doctrine says that as long as bankers lend to businessmen only against the security (collateral) of short-term 30-, 60-, or 90-day commercial paper representing claims to real goods in the process of production, the loans will be just sufficient to finance the production of goods.[1][2] The doctrine seeks to have real output determine its own means of purchase without affecting prices. Under the real bills doctrine, there is only one policy role for the central bank: lending commercial banks the necessary reserves against real customer bills, which the banks offer as collateral. The term "real bills doctrine" was coined by Lloyd Mints in his 1945 book, A History of Banking Theory. The doctrine was previously known as "the commercial loan theory of banking".

Moreover, as

money stock
, the doctrine assures that the volume of money created will be just enough to allow purchasers to buy the finished goods off the market as final product without affecting prices. From their sales receipts, businessmen then pay off their real bills bank loans. Banks retire the returned money from circulation until the next batch of goods need financing.

The doctrine has roots in some statements of

monetary expansion and maintain price stability, by using land as a measure of, and collateral for, real activity.[4]
Smith then substituted short-term self-liquidating commercial paper for Law's production proxy, land, and so the real bills doctrine was born.

The British banker, parliamentarian,

feedback loop running from price to money to price. When the monetary authority holds the market (loan) rate of interest, below the profit rate on capital, this feedback loop can generate continuing inflation.[5]

Doctrinal historians have noted the real bills doctrine's place as one factor contributing to the instability of the U.S. money supply precipitating the

money stock
.

Here was the doctrine's third flaw. It calls for pro-cyclical contractions and expansions of the money stock when correct stabilization policy calls for counter-cyclical ones.[9] The doctrine fell into disuse in the late 1930s, but its legacy still influences banking policy from time to time.

Commercial bank clearinghouse system

In 1988, economist James Parthemos, a former senior vice president and director of research at the Federal Reserve Bank of Richmond, wrote for the bank's Economic Quarterly, "This so-called commercial loan theory or real bills doctrine was a basic principle underlying the money functions of the new system. The essential fallacy in the doctrine was that note issue would also vary with the price level as well as the real volume of trade. Thus its operation would be inherently inflationary or deflationary." Milton Friedman and Anna J.Schwartz held that opinion but did not discuss its full implications in their book published in 1963, A Monetary History of the United States, 1867–1960.[10]

The gold standard

According to

false dichotomy
between "productive activity" and "speculative activity", Humphrey and Timberlake argue, the Doctrine wrongfully impugned speculation as the source of asset price bubbles and financial panic. Such flawed premises made the Fed unduly reluctant to make full use of the United States' ample gold reserves.

Financial panic of 1929

U.S. monetary policy
in the 1930s.

Federal Reserve Bank

In 1982, Thomas Humphrey wrote,

With recession lingering and interest rates remaining high, one hears increasingly that the Fed should abandon its money growth targets and move to a policy of lowering interest rates to full employment levels. All would be well, we are told, if only the Fed would set a fixed low interest rate target consistent with full employment and then let the money stock adjust to money demand to achieve that desired target rate. In effect, this means that the Fed would relinquish control over the money stock, letting it expand as required in a vain effort to eliminate discrepancies between the market rate and the predetermined target rate. This low target interest rate proposal has much in common with the long-discredited real bills doctrine, according to which the money supply should expand passively to accommodate the legitimate needs of trade.[14]

Thomas Humphrey and Richard Timberlake in their 2019 book, Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder 1922–1938, discussed the real bills doctrine (RBD) and the chief personnel involved in its failure. They identified

1929 crash
when bank depositors were seeking to cash in their checking deposits and take the cash from the banks. Instead of borrowing the reserves needed to meet the cash drain from the Fed and exposing themselves to "Direct Pressure" questioning, those banks failed in huge numbers. Humphrey and Timberlake assert that a real bills doctrine is essentially a "metastable mechanism", since it is "beyond" stable. They contend that the doctrine itself "does not imply either a stable or an unstable system", but that "it depends completely on the institutional environment in which the doctrine appears".

FDIC
and was the only economist Timberlake and Humphrey could find who, other than themselves, identified the Direct Pressure initiative as a major cause, if not the cause, of the Great Depression. However, Warburton did not single out Adolph Miller as Direct Pressure's principal formulator, as Humphrey and Timberlake have.

Economists

Pareto optimal and the real-bills prescription is." Monetary historian David Laidler
has observed that Sargent and Wallace's version of the real bills doctrine is not the same as the one prevailing in the 19th and early 20th centuries.

Federal Reserve Bank of Richmond economist Robert Hetzel wrote:

The founders of the Federal Reserve desired to end financial panics. In order to achieve this end, they created a decentralized collection of reserve depositories – the Federal Reserve banks. They also wanted to remove control of the financial system from Wall Street. At the time, policymakers understood financial panics as resulting from speculative excess, especially on Wall Street. These "real bills" views of financial panic originated in the 19th century American experience. They influenced monetary policy significantly until the post-World War II period.[16]

Real bills doctrine in the 21st century

Australian Professor Emeritus Roy Green, a Special Advisor and Chair for UTS Innovation Council at the

The New Palgrave in 2018.[19]

In 2018, Parintha Sastry's article "The Political Origins of Section 13(3) of the Federal Reserve Act" was published in the

New York Federal Reserve
's Economic Policy Review. In this article Sastry discussed the role of the real bills doctrine in the financial crisis of 2007–2009:

At the height of the financial crisis of 2007–09, the Federal Reserve conducted emergency lending under authority granted to it in the third paragraph of Section 13 of the Federal Reserve Act. This article explores the political and legislative origins of the section, focusing on why Congress chose to endow the central bank with such an authority. The author describes how in the initial passage of the act in 1913, Congress demonstrated its steadfast commitment to the "real bills" doctrine in two interrelated ways: 1) by limiting what assets the Fed could purchase, discount, and use as collateral for advances, and 2) by ensuring that any newly created government-sponsored credit enterprises were kept separate from the Federal Reserve System. During the Great Depression, however, Congress passed legislation that blurred the line between monetary and credit policy, slowly chipping away at the real bills doctrine as it sought to combat the crisis. It was in this context that Congress added Section 13(3) to the Federal Reserve Act. In tracing this history, the author concludes that the original framers of Section 13(3) meant to sanction direct Federal Reserve lending to the real economy, rather than simply to a weakened financial sector, in emergency circumstances. This Depression-era history provides insights into the evolving role of the Federal Reserve as an emergency provider of liquidity.[20]

Since

Facebook, Inc.

References

  1. S2CID 154699071
    .
  2. ^ Mints, Lloyd W. (1945). A History of Banking Theory in Great Britain and the United States (1945 ed.). Chicago & London: University of Chicago Press. p. vi.
  3. . Retrieved 21 April 2020.
  4. ^ Law, John (1720). Money and Trade Considered With a Proposal for Supplying a Nation with Money (2nd ed.). Edinburgh: Andrew Anderson.
  5. ^ Thornton, Henry; Hayek, F. A. (1939). An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. New York: Rinehart.
  6. ^ Reform of the Nation's Banking and Financial Systems: Hearings Before the Subcommittee on Financial Institutions Supervision, Regulation, and Insurance of the Committee on Banking, Finance, and Urban Affairs, House of Representatives, One-hundredth Congress, First Session. U.S. Government Printing Office. 1988.
  7. JSTOR 40751223
    .
  8. .
  9. ^ Humphrey, Thomas M. "Historical Origins of the Cost-Push Theory" (PDF). Federal Reserve Bank of Richmond Economic Quarterly: 58. Retrieved 9 May 2020.
  10. ^ Friedman, Milton; Schwartz, Anna J. (1963). A Monetary History of the United States, 1867-1960. Princeton, New Jersey: Princeton University Press.
  11. .
  12. .
  13. ^ Hetzel, Robert; Leach, Ralph F. (Winter 2001). ""The Treasury-Fed Accord." Federal Reserve History" (PDF). Federal Reserve Bank of Richmond Economic Quarterly: footnote 5.
  14. SSRN 2120000
    .
  15. .
  16. ^ Hetzel, Robert (Second Quarter 2014). "The Real Bills Views of the Founders of the Fed". Economic Quarterly. Federal Reserve Bank of Richmond. Retrieved 27 May 2020.
  17. ^ "Roy Green". University of Technology Sydney. Retrieved 12 May 2020.
  18. ^ "Roy Green". The Conversation. Retrieved 12 May 2020.
  19. .
  20. ^ Sastry, Parinitha. "The Political Origins of Section 13(3) of the Federal Reserve Act". Federal Reserve Bank of New York. Retrieved 9 May 2020.
  21. ^ "China Is Said to be Cracking Down on a Cryptocurrency Loophole". Fortune. 2018. Retrieved 14 May 2020.
  22. ^ How 18th Century Ideas of Money Supply Can Help Identify Problems with Libra. Retrieved 19 April 2020.
  23. ^ Romm, Tony (19 September 2019). "Facebook's Mark Zuckerberg seeks to reassure wary lawmakers about Libra, elections in rare D.C. trip". Washington Post. Retrieved 14 May 2020.