Detractors of Adam Smith’s Real Bills Doctrine

Courtesy of Professor Antel E Fekete of Safehaven:

Credit versus clearing

Strictly speaking a bill of exchange, pejoratively called “real bill” by Milton Friedman following his mentor Lloyd Mints, is not a credit instrument. It is a clearing instrument. It enables the market to clear goods in most urgent demand without needlessly invading the pool of circulating gold coins that would cause monetary contraction whenever division of labor is further refined and production processes are made more “roundabout” (to use the phrase of Bëhm-Bawerk) by the most progressive elements in the ranks of entrepreneurs and inventors. Lending and borrowing are not involved. The real bill circulates on its own wings and under its own steam by virtue of the urgent demand for the underlying consumer good.

Self-liquidating credit

In spite of the conceptual difference between credit and clearing, it is customary to extend the concept of credit to include, in addition to credit arising out of the propensity to save that financesfixed capital, self-liquidating credit arising out of the propensity to consume that finances circulating capital in the final phases of production of merchandise moving sufficiently fast to the final, gold-paying consumer. Thus, then, the bill of exchange is the embodiment of self-liquidating credit, so called as the credit is liquidated directly with the gold coin surrendered by the consumer in 91 days or less, 91 days being the length of the seasons of the year. With the change of seasons the type of merchandise demanded most urgently by the consumer also changes in the temperate zones where spontaneous bill circulation has taken its origin during the Renaissance. For this reason bills of exchange are limited to maturities 91 days or less. Under no circumstances would a bill circulate after maturity. If the underlying merchandise couldn’t be sold during the current season, then it wouldn’t be sold until the same season comes around again the following year. Continue reading