Talk:Real bills doctrine

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Fixed it best I could. I think it's looking good now. Needs a bit more help with wikification, though. It currently reads like an old ecomomics textbook, however I think the sources are documented well enough. Sim 19:03, 29 April 2006 (UTC)

I'm starting a thorough revision of this page, as part of my slow project to update the Gold Standard and 19th century monetary policy economics pages. The introduction got a first whack, next is the history of the RBD and the bills clearing system of the 19th century. When this is done I will add material at Gold Standard since RBD is relevant to that - I simply have not had time to update this page and wasn't going to link in the condition it was in previously. Stirling Newberry 12:38, 22 August 2006 (UTC)

Contents 1 Real Bills and Fiat Currency 2 Reply to the above 3 Currency 4 Last line of the article 5 Reply to Last line of the article 6 Not quite true 7 Reply 8 Misses the point 9 Prof Sproul 10 I don't see a contradiction in this

[edit] Real Bills and Fiat Currency

In a regime not backed by some specific specie, there is no real bills doctrine, because the central bank uses open market operations for its portfolio - that is, it deals in government securities - and alters reserve requirements. Banks can make loans based on anything that they can show bank examiners has a market value. For example the Import-Export Banke makes loans to businesses to buy goods for sale abroad, the collateral being the goods themselves and their expected resale. Central banks don't need to concern themselves with, and neo-classical economic theory suggests that they avoid - purchasing private securities or other privately created instruments. This rule isn't universally adhered to.

There is also no inflationary, or non-inflationary, question being raised by the purchase of private securities or other instruments. If the central bank is allowing the creation of more currency than the economy can support, there is inflation, regardless of what the central bank is exchanging new federal reserve notes, or what banks are lending. The RBD controversy isn't unimportant - there are countries that go on dollar boards for example - and as a proxy fight over monetarism there is some interest, but the reason for the very thin literature on the subject is that it doesn't have general applicability for most currencies. Stirling Newberry 12:20, 29 August 2006 (UTC)

[edit] Reply to the above

The point of the RBD is that it doesn't matter what kind of asset a bank gets in return for its money. All that matters is that the assets have adequate value. As long as bank assets move in step with the amount of money issued, the money will maintain its value. It is not a question of matching the amount of money to what "the economy can support". It is a question of banks getting adequate assets to back the money they issue.

[edit] Currency

A handful of articles in 20 years does not make this an important controversy in present circles. Indeed the articles were already in the article - checking I put the references in to two of them myself.

Misrepresentation by overweighting minor view points - and indeed you misrepresent even the minor viewpoints that I, in fact, cited in the first place - is against both intellectual honesty and the NPOV policy. Stirling Newberry 01:36, 19 March 2007 (UTC)

[edit] Last line of the article

If a counterfeiter holds assets against the paper money he issues, and if that counterfeiter maintains either physical or financial convertibility of his money, then he is not a countereiter. His net worth is not affected by the issue of money, and he will also not affect the net worth of any other bank (including the central bank), so he will cause no inflation.

[edit] Reply to Last line of the article

Not quite true... Say the counterfeiter mints 100K and then buys 100K in bonds. A year later his assets are worth 110K. The person who sold him the bonds demands his money back, so the counterfeiter sells his bonds and gives the initial bond seller 100K back. This leaves the counterfeiter with 10K which for him is free money. When he spends this 10K into the economy something has to give because he didn't contribute any real wealth, and the net result has to be inflation to balance out his ill gotten gain.

[edit] Not quite true

The free lunch of 10K would attract rival bankers. Assuming costless issue of money, zero-profit equilibrium requires that the banker must pay interest on the money he issues. A dollar would start the year worth 1.0 oz of silver, and would rise to 1.1 oz. at year-end. Then there's no ill-gotten gain. The reason paper money normally doesn't bear interest is that the cost of issuing the money eats up the interest.

[edit] Reply

A couple things here... The idea that it is ok for banks to create deposits because other banks can steal their business, is flawed on multiple fronts. As an analogy, should we permit counterfetters to create money because other counterfetters can do the same? This logic would justify any form of fraud. The reality is, is that barriers exist to free competition to banking such as economies of scale and government regulations. If we were to expect the 'free market' to remove the inflation caused by banks, then the rate of savings would match the cost of loans, which we don't have. Banks typically pay 0% interest on checking deposits and can charge in excess of 10% of loans which means this industry is not very competitive and this is a mute arguement. Dunkleosteus2 17:42, 25 June 2007 (UTC)

[edit] Misses the point

A bank is not a counterfeiter. A bank issues a dollar--either a paper dollar or a checking account dollar--in exchange for a dollar's worth of assets.

Banks don't issue paper dollars anymore (with the exception of travelers checks). Banks are for all practical purposes counterfeiters because they fabricate claims on wealth by convincing (frauding) people into accepting bank deposits as being the same as base money which it is not.

The bank puts its name on those dollars, recognizes them as its liability, and keeps assets as backing for the dollars it has issued. A counterfeiter doesn't put his name on the dollars, doesn't recognize them as his liability, and doesn't hold assets to back them.

Recognizing deposits as a liability is only a bookkeeping entry. Again a counterfeiter could counterfeit 200K, keep 20K of real money on hand, and loan out 180 for say a home loan. For those who notice something fishy about their fake bills, the counterfeiter could give them part of his 20K in real money. So there is no discernible difference between the counterfeiter and the banker. In theory, a bank does not even need to balance credit assets with liabilities, because a bank a bank could just spend that money into the economy and as long as people don't convert their deposits into reserves, the bankers prosper even though they don't have anything on an artificial asset sheet.

The zero-profit assumption is simply standard economics, and is based on the very sound no-arbitrage principle.

The zero-profit assumption is an offshoot of equilibrium theory which is a fraud that has been disproven by many economists. In a nutshell, equilibrium theory can not exist, because the division of labor and trade, creates an increment of association that exceeds the bargaining power of either participant. The result is chaotic pricing with each player having equal bargaining power, and monopolies where bargaining power is hoarded by select traders. The nice neat Zero-profit assumption/Equilibrium Theory of popular economics is just not correct.

Banks face worldwide competition, so the zero-profit condition is not a moot point.

Regulations and economies of scale are enough to ensure the banking industry is not competitive. Not just anybody can start a bank... You need decent startup capital, and critical size to get deposits started. From there banks tend to splinter into regional or specialty monopolies with no serious concern for competition. The biggest proof that banks are not competitive, is their return on equity which is one of the highest of all industries (up there with IT and Drug companies). Besides even if banks were competitive, it would be like having counterfeiters competing with each other. Sure they may lose a bit from competing with other, but by and large they are the winners and we are the losers.

In the nineteenth century, when private banks issued bank notes, they usually claimed that bank notes were not profitable, since the cost of printing, handling, chasing counterfeiters, etc, easily used up interest earnings.

By and large printing issuing bank notes made many people incredibly wealthy. Sure some suffered from runs, were poorly mismanaged, or struggled to get off the ground, but in this doesn't matter because in the aggregate they created a massive amount of money and wealth for themselves.

The main reason banks issued paper notes was that they served as a form of advertising.

Not quite. Banks were a holdover from goldsmiths who merely issued more claims notes on gold then they had. Bankers issues banking notes on first gold then government notes/deposits because it was profitable to do so. Checking is merely a modern day form of issuing bank notes.

If private banks didn't earn a free lunch from issuing paper dollars, it's unlikely that government banks earn a free lunch either.

Banks earn(ed) a mint as do 'government banks'. The Federal Reserve in particular earned over 20 billion in profits in 2006 which it handed over to Congress as part of the budget.

[edit] Prof Sproul

Someone needs to come up with a good argument against Sproul and real bills on this one. I have not seen one yet. —Preceding unsigned comment added by 76.171.131.226 (talk) 08:13, 19 January 2008 (UTC)

[edit] I don't see a contradiction in this

Note that the real bills doctrine attributes inflation to inadequate backing, while the quantity theory of money, in contrast, claims that inflation results when the quantity of money outruns the economy's aggregate output of goods.

I don't see any contradiction in this. Both theories assert that inflation is caused by the supply of money outpacing the supply of real-world assets. Inadequate backing equals, at least to me, the lack of assets in the real world. Goods are assets. Whether the money is inadequately backed by the banks or by the amount of goods produced in the real world is nitpicking to me.Crusty007 (talk) 17:56, 31 January 2008 (UTC)

The real bills view is that the value of money is determined by the assets owned by the institution that issued the money. The value of money would not be affected by assets that are owned in the economy generally. If a bank has issued $100 and the same bank holds 100 ounces of silver, then each dollar will be worth one ounce, regardless of what assets are held in the rest of the economy. If the issuing bank lost 10 ounces, then the value of its dollars would fall to .9 oz./$, regardless of assets owned by others. By the same reasoning, the value of GM stock is affected by GM's assets, but not by Ford's assets, or by the total output of goods in the economy —Preceding unsigned comment added by 66.74.81.122 (talk) 00:50, 1 February 2008 (UTC)