Tuesday, 18 August 2015

The Real Bills Doctrine.

According to this Wiki article, the real bills doctrine is as follows, to quote:

“According to the Real Bills Doctrine, unrestricted intermediation either by private banks or by a central bank has a beneficial economic effect. The doctrine proposes unrestricted discounting of real bills – evidences of indebtedness which, in accordance with Adam Smith's definition, are safe or free of default risk. The doctrine asserts that one function of banks is to issue notes or similar liabilities that are more convenient and easily held as assets than the bills being discounted. The keystone of the doctrine is that no government regulation ought to restrict the scope of such intermediation. In particular, market forces through competitive banking can be relied on to prevent excess credit creation. Moreover, if there happen to exist regulations that inhibit private intermediation - for example regulations that prohibit banks from issuing bearer notes that make a central bank the monopoly issuer of currency-like assets, then the central bank ought to conduct open-market operations or provide a discount window in order to vitiate such restrictions. By doing this, it brings together borrowers and lenders who might otherwise not be matched.”

Well having private banks issue “currency-like assets” is fine by me as long as the state, i.e. taxpayers, don’t subsidise the process. But the problem is that THEY DO.

That is, once a private bank has issued “currency-like assets”, the holders of those assets, i.e. depositors, then demand that the state makes those assets totally safe. And if the state gives in to that demand (which it has done since WWII) then to all intents and purposes, private banks are then able to print money, in a way which is not a hundred miles from what those backstreet counterfeiters do.

Private money creation enhances intermediation?

Also, let’s examine the last sentence of the above quote, which read: “By doing this, it brings together borrowers and lenders who might otherwise not be matched.”

Well clearly if firm A supplies goods to firm B on credit, and B gives A an IOU, and A can then go along to the central bank and get cash for that IOU, then that encourages firms to supply each other with goods on credit. And that will increase aggregate demand. GDP will rise, assuming the economy is not already at capacity. Of course if the economy IS ALREADY at capacity, then the effect will be excess inflation.

But assuming there’s scope for more demand, why raise demand by encouraging non-bank firms to lend to each other, or supply each other with goods on credit? The basic purpose of the economy is to supply consumers with what they want. So if the economy is operating at below capacity, consumers should be given more of the stuff that enables them to get what they want, and that stuff is known as “money”.

As for firms which supply goods to each other on credit, there’s absolutely no reason for the state, or central banks, or taxpayers to get involved. For example if firm X wants to try to sell a debt owed to it by firm Y, that’s fine by me, just as long as taxpayers, government and the central bank doesn’t get involved.

(H/t to Occupy National Debt.)

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