In the previous postings in this series, we have seen that the objections to the real bills doctrine (as well as the dogmatic assertion that capital cannot be financed except out of existing accumulations of savings) are based on incorrect assumptions about how capital formation is financed. That being the case, the arguments against the real bills doctrine (and the Just Third Way), fall apart when examined more closely than has become the habit to examine anything in any depth in the modern age. Everything in the modern age, even science, must be taken on faith. Questioning any article of faith is unforgivable heresy . . . especially if the questioner just might turn out to be right.
In the end, there are only two real arguments against the real bills doctrine, both of which come under the broad heading of "overissue" of money. 1) If banks are permitted to create money backed by bills representing the present value of marketable goods and services produced or to be produced, they will inevitably be tempted to extend unsound loans when it appears profitable to do so, and refuse to extend credit when times were bad for fear that they will become overextended, with consequent inflation and deflation, respectively. 2) From discounting real bills, bankers will inevitably begin discounting derivatives of real bills, that is, bills drawn on bills that are drawn on bills, and so on, ad infinitum, setting off hyperinflation.
Both of these potential problems can be warded off by 1) strict separation of financial institutions according to function, 2) better regulations (and enforcement thereof), 3) discouraging loans for projects that are not truly financially feasible, 4) forbidding discounting of bills for speculative purposes, and 5) prohibiting the discounting of derivatives as well as any bills drawn for consumption or government spending. These practices present an extremely volatile mix, and appear to bear a large measure of the responsibility for the Crash of 1929, the Savings and Loan debacle of the early 1980s, as well as the recent sub-prime mortgage disaster.
Kelso and Adler add an additional check in the form of replacement of traditional collateral with capital credit insurance. The insurance company will naturally add its scrutiny to that of the bank's loan officer, and refuse to insure anything that is too risky or does not meet the requirements for discounting. If insurance is refused, the bank will not make the loan, for there will be no collateral.