Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Credit Based on Consumption Not Savings, Real Bills Revisted

Economics / Economic Theory Jul 25, 2010 - 07:32 AM GMT

By: Professor_Emeritus


Best Financial Markets Analysis ArticleAdam Smith in his Wealth of Nations worked out the foundations of a second type of credit that is based, not on savings, but on consumption. Later this theory was pejoratively called "Real Bills Doctrine" by its detractors. We stick to this name because the adjective "real" admirably captures the essence of a bill of exchange, making it different from anticipation bills, accommodation bills, treasury bills, which all have a measure of being "unreal".

What makes real bills real is that they represent real goods and real services in greatest demand without which society would stop functioning in a matter of months, if not weeks or days. Examples are: bread, seasonal clothes, fuel in winter; the services of the miller and the baker; the spinner and the weaver, etc. Seasonal goods will be removed from the market by the consumer during the next 91-day period, before the turn of seasons changes demand.

A real bill, as its name suggests, is just a notice of payment due that typically the wholesale merchant sends to the retail merchant along with his shipment of goods demanded most urgently by the consumers. It is useful to think of the bill as a security in the process of "maturing into the gold coin" that the consumer will expend when he buys the underlying good. The value of the real bill, unlike that of most securities, is increasing day-after-day till maturity, which is at most 91 days away. By that time the goods itemized on the bill will have been sold to the ultimate gold-paying consumer and disbursement of the proceeds is in progress. The face value of the bill is the amount to be paid upon maturity.

It is a grave error to think that the bill represents a loan transaction. The wholesaler is not lending and the retailer is not borrowing. The credit is an inseparable part of the transaction, as confirmed by centuries and centuries of merchant custom. The quoted price is never ever cash: it is "91 days net". The goods are more valuable and more liquid in the hands of the retailer than in the hands of the wholesaler by virtue of the former's greater proximity to the gold coin. Who is the wholesaler to extend a loan to the retailer?

The most important aspect of a real bill is its metamorphosis that takes place when the retail merchant endorses it by writing "I accept" across its face over his signature. At that moment the character of the real bill changes from that of a notice of payment due, to that of a means of payment. In fact, the bill is acceptable in payment by the trade. It is returned to the wholesale merchant who can now replenish his inventory and pay his supplier with the bill complete with his endorsement. This metamorphosis of the bill from a notice of payment to a means of payment is one of the few miracles that economics has to deal with. Economists have to explain the circulation of real bills, and the fact that other bills such as accommodation bills just won't circulate. Nor will mortgages.

This is certainly not a case of creating something out of nothing. Subsequent endorsements of the bill occur as the semi-finished good underlying the bill is passed on from the higher to the lower order producer. In each case the bill is subject to a discount, that is, the seller of semi-finished goods accepts the bill in payment subject to a reduction of face value proportional to the number of days remaining before maturity as well as to the prevailing discount rate.

It is a serious error to confuse the discount rate with the rate of interest. The two have different sources: the propensity to consume and the propensity to save. The discount rate varies inversely with the propensity to consume; the rate of interest varies inversely with the propensity to save.

The type of credit represented by the real bill is also called self-liquidating as all the obligations originating from the journey of the bill will be liquidated out of the proceeds of the final sale, that is, out of the gold coin surrendered by the ultimate consumer. Credits of other types are not self-liquidating. For example, a mortgage is not usually liquidated from the proceeds of the sale of the underlying real estate; typically it is liquidated over a long period of time from other sources. It is important that in the case of a bill of exchange the credit is liquidated simultaneously with the sale of the underlying merchandise and, therefore, self-liquidating credit is never inflationary.

Self-liquidating credit is indispensable in paying laborers who produce the underlying goods, often as much as 91 days before the ultimate consumer purchases the product. In the meantime laborers must eat, get clad and shod. Thanks to self-liquidating credit, there is no problem in paying labor's worth long before the product is sold. The laborers' remuneration comes out of the proceeds from discounting the unexpired real bill. We express this dependence by saying: "No bills, no wage fund".

Evidently, real bills make sense only in the context of a gold standard. The system worked for a hundred years without a hitch. It would be preposterous to suggest that a real bill "matures" into an irredeemable bank note. All things considered, both the bill and the note are instruments of credit but, of the two, the first is vastly superior. How can a superior instrument mature into an inferior one? It is also evident that the bill market is the clearing house of the gold standard. Even under a gold standard not all payments are made in the form of gold coins. Only balances arising between mature bills at the clearing house are settled in gold upon the closing of every business day. The vast majority of payments are made, not in gold but by "crossing out" the value of bills of equal value. Without the bill market the gold standard is still-born. Removing the bill market is tantamount to castrating the gold standard, making it impotent. Without bill circulation the gold standard will not perform, as we shall now see.

Before 1914 world trade was financed through real bills drawn on London. Hostilities in World War I shut down the bill market. World trade became touch-and-go, strewn with shortages. After the armistice the Entente powers did not lift the economic blockade of Germany and other central powers but, in their wisdom, decided not to return to multilateral world trade at all. Instead, they kept international trade at the barter level what they called "bilateral trade". In this way they thought they could monitor and control Germany's imports and exports. They accepted the fact that this would also inconvenience their own producers and distributors, but for them it was a small price to pay for safety from German rearmament. They were blinded by hatred as they wanted to punish Germany over and above the provisions of the peace treaty. They forgot that the gold standard they reintroduced (the pound sterling was made gold-convertible in 1925) could not function without its clearing system, the bill market. The result was the vanishing of world trade, the Great Depression, the collapse of the gold standard and, most frightening, the destruction of the wage fund causing catastrophic unemployment world-wide -- as correctly predicted by the German economist Heinrich Rittershausen.

The ban on international bill trading by the Entente was tantamount to the destruction of the wage fund. Producers of goods demanded most urgently by the consumers could no longer pay their laborers and laid them off. Governments were forced to pay out dole to the unemployed in order to contain social unrest. The gold standard did not fail because of its inner contradictions, as charged by Keynes. It failed because of sabotage by the Entente in blocking the international bill market, the clearing house of the gold standard.

Under the regime of irredeemable currency self-liquidating credit plays no role whatever. As a consequence, the Debt Tower of Babel can only grow until it will topple, burying the world economy under the rubble. It would be most unfortunate if the gold standard were rehabilitated without rehabilitating its clearing house, the international bill market. Only the latter can replenish the wage fund so that everybody eager to earn wages could find a job.

Arguments that real bills are inflationary are based on ignorance of facts, as well as on ignorance of the rich literature on self-liquidating credit.

If Paul Krugman of The New York Times really wanted to restore jobs to the unemployed, he would advocate the restoration

Calendar of Events

August 9-20, 2010, in Budapest, Hungary. The New Austrian School of Economics, the first 20-lecture course offered, entitled: Disorder and Coordination in Economics -- Has the world reached the ultimate economic and monetary disorder? For more information, see the website or contact

Preliminary announcement: a session in Hong Kong in late October is on the drawing board, followed by more events in New Zealand in November. Stay tuned.

By Professor Antal E. Fekete,
Intermountain Institute for Science and Applied Mathematics


For further information please check or inquire at .

We are pleased to announce that a new website is now available. It contains e-books, archives, news about GSUL, and material of current interest

Copyright © 2010 Professor Antal E. Fekete
Professor Antal E. Fekete was born and educated in Hungary. He immigrated to Canada in 1956. In addition to teaching in Canada, he worked in the Washington DC office of Congressman W. E. Dannemeyer for five years on monetary and fiscal reform till 1990. He taught as visiting professor of economics at the Francisco Marroquin University in Guatemala City in 1996. Since 2001 he has been consulting professor at Sapientia University, Cluj-Napoca, Romania. In 1996 Professor Fekete won the first prize in the International Currency Essay contest sponsored by Bank Lips Ltd. of Switzerland. He also runs the Gold Standard University on this website.


Antal E. Fekete / Professor_Emeritus Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules