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The Problem With Modern Monetary Theory

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The Real Bills Doctrine And Honest Money

"All the perplexities, confusion and distress in America arise, not from the defects in the Constitution or confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation."
- John Quincy Adams, 1829

Gold Is The Basis

As the following quote illustrates, the purpose and role of importance that real bills hold in the present Honest Money system under review, appears to have been misplaced by recent detractors of the system.

"However, the issue with the Feketians is that they think poor old gold is somehow too scarce to allow it to form the basis of an honest money system (not that we'll ever have one of those in our bankster - and career politician-dominated real world). So, what they insist we need is ever more commercial credit to finance growth as the world progresses." Fool's Gold - Sean Corrigan

For whatever the reason, undue attention has been focused on the real bills portion of the proposed system as if it were the central pillar of the new edifice. This unwarranted zealousness leads the reader to myopically forego the forest for the tree(s). It is more than obvious from the following quotes that none of the advocates for Honest Money considers gold to be too scarce to form the basis of a new monetary system - as a matter of fact - just the opposite is true: gold is the basis of the new monetary system being proposed.

It is crucial to understand exactly what the intended role of real bills are in the overall system under consideration. The real bills are being offered as an augmentation to help facilitate commercial trade and credit, they are not intended to be the backbone of the system.

Gold coin is the anchor and basis of the new monetary system required to replace today's dysfunctionable paper fiat currency.

As Professor Fekete clearly states in the first paper of his Monetary Economics 101 and 102 Series

"An Act of Congress on Opening the Mint to Gold will re-establish the constitutional right of the people to convert gold in their possession into coins of the realm. On M-Day, the Mint will be declared open to gold, and those who prefer to trade and save in terms of gold coins will, once more, be free to do so." - Ayn Rand's Hymn to Money - Fekete

Further elucidation on the topic can readily be found in any of the papers by Professor Fekete, - a further example is provided below:

"Only a gold coin qualifies as a present good among the multifarious forms of purchasing media. This makes the gold coin sui generis, one of a kind, in the context of the theory of interest." - The Dismal Monetary Science - Fekete

The most critical point to be recognized in this blueprint is that it starts with the opening of the mint to free coinage of gold; and as advocated by some, silver coin as well. This would simply be the re-establishment of the opening up of the mint to free coinage as was the case in the first 70 years of our country's history. See Alexander Hamilton's 1791 Report - Page 1 on opening the mint to free coinage.

It also illustrates that as such, the blueprint is but a basic outline for a new monetary system, one that needs to refine all of the critical issues with deftly surgical precision; but at least it is a start - and a most important start, as a journey of a thousand miles begins with one step. For those that say it cannot be done, I say stand aside and get out of the way of those doing it. If one is not part of the solution, one is definitely part of the problem.

For those that insist on further evidence that gold is to be the foundation of the system, there is the following from Fekete:

(1) Open the Mint to free and unlimited coinage of gold. The one-ounce Gold Eagle coin should be adopted as a monetary unit minted for the account of anyone tendering the right amount and purity of gold, free of charge.

(2) To get the grass-root circulation of gold coins going, labor organizations (including those of pensioners and retired people) ought to be involved through their Credit Unions offering gold-coin deposit facilities. Banks must be excluded.

(3) Short-term credit to move goods from the producer to the consumer should be provided by the bill market, rather than by the banks, on the pattern of the pre-1914 way to finance world trade with gold.

(4) Long-term credit to the economy should be provided by the gold-bond market. The primary demand for gold bonds comes from financial institutions offering gold life insurance and gold annuity policies to the people. The primary supply is from the government and firms that want to operate on the basis of gold capital. Gold bonds must have a sinking fund protection. Issuers of gold bonds must see the revenues with which to retire the liability. - Don't Fix the Gold Price! - Fekete

As is obvious from the above quote, there are four major components to the proposed new monetary system:

  • Free and unlimited mintage of gold (and silver) coin

  • The means of circulation of the gold and silver coin, without the use of banks

  • Short term credit for commerce by the use of real bills

  • Long term credit by the use of gold-bonds

For those that believe that silver should have a role in any new monetary system there is such a plan for that contingency as well, see: Silver IS Money - Gnazzo.

Remember, these are all basic ideas. Before action can be taken, and placed into proper form and function, there must first exist ideas to be precipitated into manifestation. Such is the only way that creativity is realized - through, and by the exteriorization of ideas into form and function as action.

Also note, the purpose of the real bills doctrine is simply meant to help provide short term self-liquidating credit for commerce - to facilitate the movement of goods and services from production to consumption. Nothing more, nor less. And - it is not the real bills doctrine of old, it is a new and more refined plan.

Lastly, for the most hardened detractors of the proposed new gold monetary system, we have one last quote that should suffice to establish the fact that gold is the intended anchor and base of the new system:

"Chances are that it is the further irresistible snowballing of debt that will turn public opinion around in favor of a gold standard. People will realize that without the golden flywheel regulator for debt creation no monetary system can last long.

It will err either on the side of being too permissive and then the system will soon start spinning out of control (as it does in our case), or on the side of being too restrictive, in which case the system will seize up for lack of lubrication. Gold plays the role of the doorman that lets some loan applicants pass, while turning away others." - Fekete - Don't Fix the Gold Price!

As is readily apparent, the first and foremost pillar of the proposed new monetary system is gold coin, and for some - silver coin as well. Be it duly noted that according to the Constitution, the original and still standing standard of hard money, is the silver standard in conjunction with a bimetallic system of silver and gold coinage, see: Honest Money, Part II: Silver Standard with a Bimetallic Coinage System - Gnazzo

The True Remedy

Some advocate that the only true remedy is to have a gold specie reserve standard:

"So, if these other 'liberty-minded' folks are genuinely sincere in wanting a better world - rather than running around gratifying their own false prophet's ego - the sooner they rid themselves of this tired, old mental affliction and start campaigning for the only true remedy - a 100% gold specie reserve standard based on free banking (for my taste, with unlimited liability, to boot) - the better." - Fool's Gold - Sean Corrigan

However, a gold reserve standard is different than a system where gold itself is the standard and the circulating currency as well. Also, our original monetary system according to the Constitution is a hard money system where silver is the standard in conjunction with a bimetallic system of silver and gold coin.

If we are to return to our Constitution, and to the purest monetary system possible, then that system should be one where the money is silver and gold coin - not paper bank notes backed by reserves of the precious metals, even 100% backing. That has been already tried, weighed in the balance, and found to be wanting.

If silver and gold are good enough to back the paper bank notes, then they are obviously the real deal, and more than capable of being the circulating money. For those that require evidence of our original constitutional system of money, see Honest Money, Part I: The Constitution and Honest Money, GOLD: Sovereign of Sovereigns, and Silver IS Money.

Crucial Points

Regarding the importance of certain crucial points, there are those that say:

"But the crucial point is that such credit is not and cannot ever be allowed to become 'money', in an honest world."

"Instead, the discounting bank should only be able to buy the bill with a sum of money already in existence in the form of gold itself, or of 100% gold-backed, instantly-convertible notes or account entries on its books." - Fool's Gold - Sean Corrigan

I believe that the above was written with complete honesty and good intentions, the goal being a sound monetary system. However, that does not preclude the possibility that what is being offered is less than what was intended to be offered.

Note the listing of the instruments deemed to be money already in existence:

  • "Money already in existence in the form of gold itself"

  • "100% gold-backed, instantly-convertible notes"

  • "Account entries on its books"

This goes back to our point that a gold-backed reserve system of instantly-convertible notes is not the same as a system of gold and or silver coin, neither of which are the same as account entries. The mere fact that they are listed as separate choices shows that they are different - why else list them separately.

Not only are they separate choices of types of monetary instruments - they are different as well, not only in form, but according to function as well. One can cancel or suspend the convertibility of paper notes that are backed by gold, as witnessed by the several occasions that the United States government, as well as many foreign governments, have resorted to in the past.

The most pure, simple, and honest form of money is gold and silver coin.

Present vs. Future Goods

All other forms of money are fiduciary money, i.e. money substitutes - including bank notes. Bank notes are future goods, not present goods. This is an important distinction that has been overlooked by many, and disagreed to by others. It is a crucial issue that needs to be fully examined and determined.

It is my contention that any type of paper, be it a bank note or a gold certificate, is a future good, as it represents an obligation to pay - to pay in the future, hence it is not itself payment, it is a future obligation waiting to be paid - waiting to be fulfilled. The paper are receipts of obligation - of liability.

Honest Money of gold and silver coin are present goods, they are real money that can be used to pay or exchange for other goods. When gold or silver is handed over from one individual to another, the transaction is complete, there does not remain any type of future obligation or action needed to be taken. The act of trade or commerce between the buyer and the seller has been fulfilled and satisfied by both parties. It is a done deal.

Gold and silver are no ones obligation or liability, as they are assets of payment - not paper promises to pay at a later date or time. Gold and silver are direct payment - they are real and ultimate money.

When one hands another individual a bank note, or even a gold certificate, in exchange for a new coat, the act of buying and selling has not been fully completed. For example, say the bank note is backed or redeemable in gold and silver. Just as the gold certificate represents a receipt - an obligation to pay a certain amount of gold upon demand, so too does the backed bank note contract as to be redeemable in gold or silver. It has yet to be redeemed, hence it is waiting to be redeemed - in the future.

When any piece of paper is handed from one individual to another during a transaction or trade, the transaction is not complete for the holder of the paper until he redeems it for the gold or silver for which it is a receipt. Hence, such paper receipts or obligations are future goods, not present goods. The gold or silver the paper obligations are redeemed for are present goods.

Paper bank notes, paper gold and silver certificates, paper of any kind, if the paper obligations are part and parcel of a monetary system that includes gold and silver, and more specifically, are backed by gold and silver, all such paper obligations represent and are - future goods. Only the gold and silver coin are present goods.

All paper obligations, being future goods, upon the exchange of them for present goods in the marketplace, credit is thereby, automatically extended, credit that is yet to be paid, a contractual obligation that remains to be fulfilled - in the future, not instanteously in the present.

The First Step

One of the first sins of dishonest money is committed when money substitutes are allowed to circulate as being the same as the common medium of exchange or currency, which in an honest monetary system is gold and silver coin. This is one of the first breaches of the Maginot line of Honest Money.

Once this boundary has been crossed, further debasement of the money unit easily begins to occur. Another deadly nemesis of Honest Money is fractional reserve lending - the elite collectivist bankers and political deficit spenders dream come true. A marriage born in hell.

If real bills, however, do not circulate as the common medium of exchange; and are fully backed by secure collateral; and are self-liquidating within 90 days - they do not add to the total sum of circulating currency or money above and beyond the demand for such, as they are self-liquidating receipts for real underlying goods that are liquidated by the gold coin of the consumer when he purchases the goods in the marketplace. Hence the bills return from whence they have come, and are no more, i.e. they are self-liquidating. They do not cause any inflation (see Mises' definition of inflation predicated on the demand for money, not just the supply).

Now some will say, ah yes, but real bills can be over-issued beyond the goods they represent, thus adding to the supply of available credit and money, and hence the proliferation of inflation or the rise of prices. We will deal with the issue of real bills versus unreal bills and the possibility of over issuance in a moment.

First let's try to decipher just what exactly is meant by value, especially the intrinsic value of gold and silver coin; as this too has been misunderstood by some, and allows and leads to further misunderstandings regarding the nature of money.


Gold is both real money and Honest Money, however, it is the goods that can be exchanged for gold as money that is the true value. The well-being that these goods and services provide and maintain for man, is our true and ultimate wealth.

The word wealth is derived from weal and implies a state or condition thereof. Weal is synonymous with well as in well-being. The primal state of man is that of being, or of having life. Life is the first order of wealth, as without life man is unable to experience the world in which we live, move, and have our being in.

All other considerations of wealth must be in accordance with true wealth or well-being. Whatever contributes to man's well-being contributes to his true wealth, and as such can be considered a secondary form of wealth.

Gold or any other form of money has no intrinsic value, it simply represents the value of the goods and services for which it can be exchanged. The most important quality of money is that it is able to be exchanged in value for any other good or service. Money is only good for one thing - to exchange for any and all goods and services in the marketplace.

When one buys goods with money, they are selling their money. When one sells goods, they are buying money. Because the only purpose that money fulfills is to be a medium of exchange, it follows that money represents a measure of value - of purchasing power to be used to exchange for other goods.

Even gold as money is actually backed by the value surrendered by the seller and potentially backed by the value in the possession of the next seller, and so on. In other words trade creates money - money does not create trade.

The market creates and stands behind money, as the market is the sum total of all producers of the goods that are the real value behind the money. Men as producers provide both the goods and the labor needed to produce the goods.

Money is but the proof or evidence of purchase or exchange that the buyer issues to the seller. For a monetary system to properly function, the buyer must fulfill his inherent obligation in the act of buying that at a future date he will offer his own goods for sale in the marketplace.

Likewise, the seller must offer his commitment that he will at a future date act as a buyer in the market. Such reciprocal buying and selling is what makes a market. When money is exchanged for other goods, we do not literally exchange the money for the other goods, but the value that the money represents in other goods. We exchange values for values.

In trade we give goods for goods, evaluating them in comparison to the monetary unit. The money is but the medium of exchange that represents the purchasing power by which other goods can be exchanged for. Money is the standard - for comparison - the measure of value.

Thus money is a receipt for value. The monetary system is an agreement between traders to regulate the issuance of money, to exchange values in terms of the monetary unit, and to keep an account of all such exchanges.

Quality Theory Of Money

Gold as money is a measure of value. Gold as money is a standard of value. Gold as money is a store of value. The quality or purchasing power of money is more important than the quantity or supply of units of money. The quantity theory of money is not sufficient to fully explain the plethora of intricacies to all of the facets of money.

The quality theory of money provides a much more comprehensive and detailed understanding of money as compared to the quantity theory, which is actually the barbaric relic that has created and allowed many of the monetary problems to continue to exist that has plagued mankind for centuries.

Be not deceived. The proliferation of the quantity theory of money with all of its illusions and delusions has not occurred by mistake or accident. It is all part of a well orchestrated plan by the elite collectivists and statists of the world. It is the wealth transference mechanism supreme that allows them to bid for the coveted prize of ruler of the universe.

Gold Is Money

Gold retains its purchasing power through time and over time. Gold cannot just be printed up or made to appear on the ledger by the mere flick of a computer key, it must be mined from the bowls of the earth, by the sweat, blood, and tears of man. This gives gold an inherent discipline from being overproduced at will - by fiat.

Another quality that makes gold so valuable is the fact that it is not consumed. This is best shown by gold's "stocks to flow ratio" - the above ground stock of gold divided by the annual production rate of gold. This ratio is approximately fifty to one. In other words, it would take fifty years at the present rate of world gold production to produce the present stock or supply of gold.

Gold's stocks to flow ratio is an important reason why it is deemed to be so valuable, it is not just because of subjective valuation. There is also a cumulative process of subjective valuation that has taken place over centuries of market behavior that has by freedom of choice determined that gold is the most marketable commodity. This means that gold has the least declining marginal utility as perceived by the market.

Thus gold is seen to be the best transmitter of value in time, through time, and over time. This cumulative process has caused gold to be saved and hoarded throughout the ages. Because gold retains its purchasing power, it is the best store of value - the best store of wealth.

Gold has obtained an objective form of valuation based on its stocks to flows ratio in combination with its many other monetary qualities. This objective valuation has given gold an objective exchange value as well. Collectively, these numerous monetary qualities and functions make gold the most accepted common medium of exchange throughout history.

Free Choice

Although gold has no intrinsic value in and of itself, man has chosen to value gold most dearly throughout the ages. He has chosen gold as the supreme receipt and store of wealth - The Sovereign of Sovereigns.

To believe that gold or any form of money has intrinsic value is to misunderstand the concept and theory of money. This is just what the would be rulers of the universe want - illusion and delusion, as the people can't question that which they do not know.

Gold is most valuable and will become of even greater value, but the value comes from what We The People place on it - nothing more, nothing less. Gold represents a receipt for wealth, as long as man so chooses to make it and accept it as such.

Thus money, even Honest Money of gold and silver coin, is but a receipt for value - a receipt that is backed by the goods and services of the market, and man's labor that brings them forth from production to consumption. Hence, even gold and silver are not wealth, they merely represent the best purchasing power or medium of exchange for true wealth: the necessary goods and services required to provide continuance of life - man's most dear value of wealth.

John Law

Many discredit the Real Bills Doctrine because they believe that it fails to properly recognize that banks and financial institutions could and would use the same sum of money to support many bills, thus causing inflation through the fraud of fractional reserve banking.

Other detractors raise what they consider to be a valid comparison between the foolhardy theories and practices of the infamous John Law, with those of the new real bills doctrine presently being put forth, as seen below in a quote from John Law, in his Money and Trade Considered :

"...trade depends on money: a greater quantity employs more people than a lesser... nor can more people be set to work without more money to circulate so as to pay the wages of a greater number..."

"...the (note-issuing) commission giving out what sums are demanded and taking back what sums are offered to be returned, this paper money will keep its value and there will always be as much money as there is occasion or employment for, and no more..."

To equate the system of pure fiat paper money that Law perpetrated, with the present monetary system under discussion that has gold and or silver as its main basis, in conjunction with the use of a limited and controlled form of real bills to augment short term credit with - is so incongruous that it baffles even the most erudite minds with the question as to just why such comparisons have been put forth.

An example of the divergent views between Law's system and Fekete's can be seen in the previous examples near the beginning of this paper, where gold and or silver are shown to form the basis of the system, and by the following quotes as well:

"The point is that as goods in urgent demand emerge in production, the credit needed to finance their move to the consumer also emerges in the form of real bills drawn by the producer on the distributor. The real bill is a non-inflationary purchasing medium which the market has endowed with limited monetary privileges. Non-inflationary because the face value of the bill is matched by the value of the emerging merchandise. Limited because upon maturity the purchasing medium expires as the underlying merchandise is sold to the ultimate cash-paying consumer."

"I hasten to add that the circulation of real bills assumes the underlying circulation of gold coins."

"For this reason, the real bill is said to be 'self-liquidating'. The ultimate sale of the underlying merchandise in exchange for the gold coin of the consumer liquidates all the credit that was needed to move it forward to the consumer..."

"Real bills are flying, as it were, on their own wings and under their own steam. That is, provided that you do have a gold coin standard. If you don't, then forget it. Irredeemable paper currency in the hands of the consumer has no steam-generating power, nor can it lend wings to the real bills representing maturing merchandise. Bills will no longer fly. They no longer mature into gold coins. There are simply no real bills under a regime of irredeemable currency. They have been replaced by a bloated money supply. The nature-ordained dynamics of monetary circulation has been destroyed. Now paper is shuffled against paper, and you need an army of parasitic bankers to do the shuffling. Credit is no longer self-liquidating." - Fekete - Don't Fix the Gold Price!

So much for any valid attempt to compare the voodoo economics of John Law with the disciplined and honest system being put forth by Professor Fekete. Now we shall address another false premise and assumption regarding the issue that real bills fail to properly recognize that banks and financial institutions could and would use the same sum of money to support many bills, thus causing inflation through the fraud of fractional reserve banking.

Fractional Reserve Banking

First, if we go back to where in the above work we listed the four main components of the new gold monetary system, you will note that the second provision reads: The "means of circulation of the gold and silver coin, without the use of banks."

Today's central and national banking system thrives on fractional reserve lending. This is one of several reasons why the new Honest Money system includes doing away with banks that use fractional reserve lending policies, as they are parasites sucking the life-blood from the body of all unwary hosts - We The People.

One of the main goals of the new Honest Money system is to return the power of money back to the people, which is presently in the hands of the bankers. This is not how a free market operates. The people, as consumers, should dictate what it is they desire or want from the manufacturers.

It should not be the bankers that decide what is to be manufactured by their approval or disapproval of loans needed to facilitate the production of goods they so choose to finance. That is not a free market, it is a forced market.

Production should be for the people, by the people, and of the people - under the guidance of the people, not under the guidance of middleman bankers that do no work, and contribute nothing to the production of goods, acting simply as a middleman taking their cut from both sides of the deal.

As Professor Fekete clearly elucidates:

"The combination of a gold coin standard and real bill circulation is necessary if we want to put supreme economic power back into the hands of the people. The consumer must have gold coins, rather than bank notes, at his disposal as he goes to the market. The gold coin is his 'ballot paper' with which he casts his vote on a daily basis. If the consumer is denied the gold coin, then he is denied the right to vote. The act of purchasing goods with bank notes is not the same as purchasing with gold coins. In the former case the decision what to produce, how much, and when, has already been made by the issuer of the bank note. Too bad if the offering is not to the consumer's liking. He must 'take it or leave it'. He must 'grin and bear'.

In the latter case the consumer is the decision-maker himself. He is in the driver's seat. He has the whip: he can withhold the gold coin if he doesn't find what he wants. The producer and the distributor know this and they take the order directly from the consumer, not from the banker. The consumer is the boss; the producer and distributor are his most obedient servants who try to anticipate every wish of his.

It is important to see why the bank note couldn't be used to extinguish the liability at maturity. It would be tantamount to rolling the bill over, violating the absolute prohibition that maturity must never exceed the limit of 91 days. At any rate, it would take the power away from the consumer and transfer it to the issuer of the bank note, the banker.

In order tosafeguard the integrity and solvency of the clearing system, gold coins must be used to liquidate the creditrepresented by the real bill. The sovereign consumer, the ultimate guardian of the gold coin, will liquidate the credit at maturity in buying the consumer goods of his choice." -Fekete - Don't Fix the Gold Price!

Once again, it can clearly be seen that to equate Fekete's gold monetary system with any type of central banking and fractional reserve lending policy is so far out of line that no further discussion is warranted.


An attempt by detractors has also been made to equate the inflationary bubbles of history with the new real bills doctrine being put forth. The following quote illustrates some of those attempts:

"Naturally, today's South Sea Bubbles and Mississippi Schemes call into play instead what the market argot terms the 'Greenspan Put', for they are now watched over by a coterie of central banks, collectively untrammeled in the exercise of their peculiar brand of RBD and ever-ready to abandon even the pretence of sound conduct in a crisis, by invoking the necessity of maintaining the 'financial stability' of their multi-trillion dollar Ship of Fools."

"But, even setting aside the case of such effusions of wild optimism and their ensuing outbreaks of despair, it remains to emphasize that one of the most insidious dangers of the RBD is precisely that it allows such 'clearing instruments' to be converted into - indeed, to form the basis of the issue of - money and thus it begins to disrupt all-important relative price signals, both between factors of production and across time itself which perverts economic activity and so triggers the highly wasteful cycle of repeated Boom-and-Bust." - Fool's Gold by Sean Corrigan

The most important sentance in the above quote is the one that reads: "... that one of the most insidious dangers of the RBD is precisely that it allows such 'clearing instruments' to be converted into - indeed, to from the basis of the issue of - money..." Where in any of the writings on the real bills doctrine is it stated that such clearing instruments are to be converted or to form the basis of the issue of money?

The number one foundation of the system under review is that gold coin is to form its basis . Several of the above quotes show that quite clearly. Also, the real bills have been shown to be self-liquidating, which means they return from whence they have come, and are no more. They do not add new money that is not commensurate with new goods in the system - thus they are not inflationary, per Mises' definition.

And how are the real bills liquidated - by the ultimate consumer's use of their gold coin to purchase the goods that have been brought to market by the use of the real bills. Now that the goods have been brought to market, and are purchased with real money, i.e. the gold coin , the bills are no longer needed. They have performed their function and they self-liquidate or disappear.

"Financing production and distribution of consumer goods with gold will have to remain outside of the domain of the banks."

"I hasten to add that the circulation of real bills assumes the underlying circulation of gold coins."

"The consumer's single gold coin suffices to finance efficiently the journey of bread from the corn-fields to the dinner-table, even in the complete absence of banks. The movement of the "maturing bread" from the grain farmer to the grocer is matched by the parallel but opposite movement of the real bill from the grocer to the grain farmer. The three payments are made, not with gold coins, but with real bills. When finally the grocer gets paid, the single gold coin of the consumer will liquidate all four credits to which the journey of the bread has given occasion." -Fekete - Don't Fix the Gold Price!

To equate a monetary theory based on gold coin, which allows for the facilitation of the movement of goods from production to consumption, using a non-inflationary, limited, asset backed, and self-liquidating instrument (real bills) with the South Sea Bubble, John Law, The French Assignats, and other delusions of mass hysteria is similar to comparing sycophantic idol worship with true scholarship.


The term inflation has been bandied about by many who have pontificated on the real bills doctrine. It would only be fair to use the definition for inflation given by the great Ludwig von Mises himself, a true giant amongst men. Here is how Mises defined inflation:

"In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur.

Again, deflation (or restriction, or contraction) signifies a diminution of the quantity of money (in the broader sense), which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increases in the objective exchange value of money must occur. If we so define these concepts, it follows that either inflation or deflation is constantly going on, for a situation in which the objective exchange value of money did not alter could hardly ever exist for very long." [Ludwig von Mises - The Theory of Money and Credit]

So according to Mises himself, inflation is not simply an increase in the quantity of money, it is "an increase in the quantity of money that is not offset by a corresponding increase in the need for money".

With this distinction in mind, let us return to Professor Fekete's description of the emergence of real bills in the economy.

"Bills emerged together with the emergence of marketable merchandise, and were extinguished when the latter was removed from the market by the consumer. At no point did the bill increase the amount of purchasing media relative to the available supply of merchandise." - Fekete - The Dismal Monetary Science: Detractors of Adam Smith's Real Bills Doctrine

Note that the "bills emerged together with the emergence of marketable merchandise", and that the bills were "extinguished when the latter was removed from the market by the consumer." If the "latter", which is referring to the "marketable merchandise", is "removed from the market by the consumer", this means that the consumer has procured the merchandise.

The act of buying merchandise by a consumer is the manifestation of demand for the merchandise, merchandise that has been added to the supply of goods in the market. The real bills are not adding any new purchasing power into the market per se, as they are backed by the merchandise coming to market. They represent an increased supply of goods coming to market.

The real bills only have the purchasing power of the new supply of merchandise being added to the market; they do not add any new purchasing power over and above the existing goods in the market, hence they do not create inflation.

Or in Mises' own words: "an increase in the quantity of money that is not offset by a corresponding increase in the need for money".

The new supply of merchandise is the "offset" of the real bills, which are "extinguished when the latter is removed from the market by the consumer."

Furthermore, "at no point did the bill increase the amount of purchasing media relative to the available supply of merchandise."

If there is no increase in the purchasing media relative to the new supply of merchandise, there is no inflation taking place.

Real Bills vs. Unreal Bills

Another issue that seems to be a point of contention is a dispute between real bills and unreal bills, which is kind of unreal itself, but we will attempt to assuage the preponderance of frenzied nerves. Some have resurrected the works of Henry Thornton to employ as proof that their position regarding the real bills doctrine is correct and unassailable. To defend their position the specters of Thornton, Ricardo, Joplin, and others have been brought back from the dead, from days gone bye - of yesteryear.

"As Henry Thornton - that giant of the Currency School - succinctly put it, two hundred years since:"

'[Law] forgot that there might be no bounds to the demand for paper; that the increasing quantity would contribute to the rise of commodities and the rise of commodities require - and seem to justify - a still further increase'. - Fool's Gold - Sean Corrigan

Immediately following Thornton, Joplin is then trotted out to seemingly add to the persuasion of the argument:

"Bankers, indeed, have the idea that their issues are always called forth by the natural wants of the country, and that it is high prices that cause a demand for their notes, and not their issues which create high prices, and vice versa. The principle is absurd, but it is the natural inference to be deduced from their local experience. They find themselves contracted in their issues, by laws which they do not understand, and are consequently led to attribute the artificial movements of the currency to the hidden operations of nature, which they term the wants of the country." - Fool's Gold - Corrigan

First we will deal with the quote by Joplin. The quote is over 200 years old. It is referring to bankers of the past, which at the time it was written was the present. What past bankers believed 200 years ago has no bearing on the present discussion of the real bills doctrine, unless the ideas and theory put forth are applicable to the questions and topics at hand; and more importantly, provide correct and positive information and refutation.

For the sake of giving one the benefit of the doubt, let's say that what Joplin states is correct, which is not that far from the truth. But how does what Joplin states have anything to do with the real bills doctrine under question?

First of all, under the present theory of real bills, it is not the bankers that would be issuing them, it would be the commercial producers themselves.

Second, they are not the same as "notes" which the bankers issue and to which Joplin is referring.

And thirdly, the real bills that are being offered in the new gold based monetary system are liquidated by gold coin - not by other monetary instruments of paper, bank notes included.

To use the above quote by Joplin is nothing more than folly committed by over-reaching for something to hang one's hat on.

In the very article that the above quotes from Thornton and Joplin are taken from, the author himself has the following to say:

"Now, narrowly, it can be admitted that a clearing instrument (CI), a bill (real or otherwise) could greatly facilitate the movement of the stream of products which emanates from our highly vertically-divided arrangement of labour."

"One key point here, however, is that, even if they should be used for convenience, the clearing instruments are not themselves money in that they cannot automatically be used for final settlement pari passu for final goods, certainly not on demand and not at full face value." - Fool's Gold - Corrigan

I'm sure that I will be corrected if wrong, but isn't saying that real bills "could greatly facilitate the movement of the stream of products" exactly one of the points we are trying to get across regarding them?

Also, neither Fekete or anyone else has said that real bills are real Honest Money. If they were real money, then why is the new real bills doctrine advocating their final liquidation by gold coin, and gold coin only? If they were being considered as real Honest Money, why do they self-liquidate within 90 days?


Now for the giant of the currency school - Henry Thornton.

First, the above quote attributed to Mr. Thornton is a rather poor example in which to find evidence against the present theory of real bills that is being put forth, as the quote and Mr. Thornton begin by saying that Law, as in John Law, forgot.... Once again, what does John Law have to do with it? It has already been shown that the system that Law espoused and that of the new real bills doctrine are so far apart that further comment on such is not warranted.

However, we will discuss what is considered the definitive statement made by Thornton, regarding the issue of real bills, although it was pertaining to the real bills doctrine of the 1800's, not the present theory.

Thornton had the following to say in his report on an Enquiry into the Nature and Effects of the Paper Credit of Great Britain that was looking into various monetary matters brought under question during the suspension of the Bank of England's cash payments that originally called for The Bank's notes to be redeemable in gold coin, which as of 1797 was repeeled, thus rendering the bank's notes inconvertible until the Resumption Act was passed in 1819, and put into effect in 1821 - 24 long years in the waiting.

"Real notes," it is sometimes said, "represent actual property. There are actual goods in existence, which are the counterpart to every real note. Notes which are not drawn, in consequence of a sale of goods, are a species of false wealth, by which a nation is deceived. These supply only an imaginary capital; the others indicate one that is real."

"In answer to this statement it may be observed, first, that the notes given in consequence of a real sale of goods cannot be considered as, on that account, certainly representing any actual property. Suppose that A sells one hundred pounds worth of goods to B at six months credit, and takes a bill at six months for it; and that B, within a month after, sells the same goods, at a like credit, to C, taking a bill; and again, that C, after another month, sells them to D, taking a like bill, and so on. There may then, at the end of six months, be six bills of 100 pounds each existing at the same time; and every one of these may possibly have been discounted. Of all these bills, then, only one represents any actual property." [Thornton, 1802, Enquiry into the Nature and Effects of the Paper Credit of Great Britain]

What Thornton is attempting to say is that bank credit will not be sufficiently limited by the requirement that loans only be granted on the basis of adequate security. Such belief has always been a popular misconception that the currency school has tried to use to support their agenda. It does contain some cogent points, but they have usually been used out of context, misapplied, and generally misunderstood.

Before getting into the gist of the matter, a few points of reference are required. During the time (1802) that Thornton made the above statement, the Bank of England had suspended the redeemability of the Bank of England's notes by gold coin for a period of five years to date (1797-1802).

This goes to the earlier point we made concerning that when there is a paper currency backed by gold or redeemable in gold, it is always a possibility that such convertibility can be suspended or ended. Then the paper money will be on its own with nothing to back or sustain it. This is one of the exact reasons why we advocate having gold and silver coin as the currency or money itself. Gold and silver need no backing - they stands on their own merit - the light of day only enhances their brilliance and luster.

Also, Thornton's rebuttal of the real bills doctrine depends on whether the British pound is regarded as backed or unbacked, as will shortly be shown.

Going back to the above quote by Thornton, it is readily seen that the first paragraph of the quote lays out an argument for what it calls real bills and unreal bills. Real bills are said to be real because they represent "actual goods", what Thornton calls their "counterpart". Unreal bills on the other hand, are a "a species of false wealth," supplying "only an imaginary capital."

In the second paragraph Thornton then gives his reasoning for real bills versus unreal bills. Basically, his entire argument hinges on the fact that he claims that the same bill can be continually discounted, and thus come to represent six or more bills that are all backed by the one original good(s), thus, according to him, only one bill can actually exist, the rest are fictitious and represent nothing. This is a most interesting position for a man who was himself a banker - to take. It appears Mr. Thornton has never heard of collateral, or he chose to forget about it at this particular juncture.

What Thornton apparently misses is that given his example, 600 hundred pounds of debt will never be given, unless there is also given collateral of 600 hundred pounds worth of security. Let us look at Thornton's example a bit closer.

Say A sells corn worth 100 pounds to B, and receives B's IOU in exchange. B then sells the corn to C, in exchange for C's IOU. Let us agree with Thornton that the process repeats six times.

Say B is a respected businessman in the community. His IOU is sound enough to serve as money. The exchange would increase the money supply by 100 pounds. Accordingly, as Thornton postulates, B's IOU might be discounted by a banker, and the banker's IOU would then serve as money.

Either way, each exchange increases the supply of money, and it is possible that six successive sales of the same corn could increase the money supply by 600 pounds. But is this the end of the story? I think not.

Herein, lies the error. A would only accept B's IOU if it were backed by collateral worth 100 pounds. For example, B might own a herd of cows that A could take from him in court. It is as if B's IOU were actually backed by a lien on B's property.

Every additional sale of the corn would create new IOU's secured by new goods, and no matter how far the process went, the self interest of the parties involved would assure that every new IOU would be secured by goods of like value.

Thornton's argument that the six IOU's are backed only by the original unit of corn is clearly incorrect, as he seems to have forgotten about collateral and security, which in business and banking is of prime importance.

Or in the words of Mises, "there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money..."

As we have earlier seen, even gold is backed by real goods and real labor - it has no intrinsic value of its own. It has the value that man chooses to give it. Nothing more. Nothing less. The same holds true of all goods, commodities, and services. Man gives his value to them accordingly.

Man's true wealth is his life, and the continuance of that life. The goods and services of necessity that maintain man's life are the next order of wealth, along with man's labor that produces and brings to market all such goods and services.

And man even has the power to forsake or give up his most valuable wealth - his life, if and when he decides it no long is of value to him - such is the act of suicide, a most despicable act, but one that man can so choose, nonetheless. Value like beauty - is in the eye of the beholder.

As stated earlier in the above discussion, Thornton's rebuttal of the real bills doctrine depended upon whether the British pound was backed or unbacked. The reason for this being that at the time that Thornton was writing his opinion (1802), the British pound was the current money of Great Britain. Of even more importance, however, was the fact that the Bank of England had in 1797 suspended the redemption of pounds in gold coin; so that in 1802, when Thornton was writing, the pound had been incontrovertible for 5 years, and several more years were yet to come.

We will save the reader the time and effort of going through a detailed explanation of the backed versus unbacked theory reasoning. Suffice it to say, in the new gold monetary system outlined above by Professor Fekete and others, gold and or silver coin is the foundation of the system, and only specie will be used as money.

Real bills will simply be an augmentation to help facilitate short term commerce for up to 3 months time or one quarter of the year. Gold bonds will be employed for longer term credit. And as has been repeatedly said, this is just a blueprint, it is not written in stone or blood. Any and all well thought out additions, subtractions, changes, etc. are more than welcome, as the goal is an honest monetary system for all - freedom and liberty for all.

In the Honest Money system being proposed, the actual money - gold and or silver coin, is better than backed - as the precious metals are themselves the currency, the same as the hard money system originally advocated by The United States Constitution. So the question of being backed or unbacked is a mute point.

Not only is gold and silver coin honest, it is sound, lawful, legal, and constitutional. What more could a free citizen ask for, except a free market that allows Honest Money to soar on its own wings of freedom and liberty - the wings of private property for all of We The People.

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