Lies, Damned Lies, and Definitions, V: The Real Bills Doctrine

As we saw in the previous posting in this series, the Keynesian approach to economic growth embodies a number of self-defeating assumptions and redefinitions. Given the assumption that human labor is the sole input to production, for example, Say's Law of Markets not only cannot function, it doesn't even make sense. When added to the Keynesian/currency principle redefinition of money, the necessity of every child, woman and man becoming an owner of capital as well as labor is perceived as delusional.

The line of reasoning seems to be that because it is impossible to finance new capital formation except by cutting consumption, all proposals to make propertyless people into capital owners are doomed to failure. This is because if capital ownership is widespread, people will use capital incomes for consumption, not reinvestment.

This is, in fact, why Keynes advocated the elimination of small ownership. As he explained the benefits of the disappearance of small owners — "rentiers" — "functionless investors" who use their capital incomes for consumption instead of reinvestment,

"I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution." (General Theory, VI.24.ii.)

Two, the only real money is coin or certificates of some sort issued or authorized by the State; all economic transactions are therefore either directly or indirectly under State control.

Keynes's analysis falls apart, however, the moment we realize, one, that new capital formation can be financed using future increases in production instead of past reductions in consumption, and, two, that money is anything that can be accepted in settlement of a debt.

People used to incur and settle debts in the same transaction, without any medium of exchange other than the actual goods and services being exchanged. This is barter. People soon realized, however, that they can make exchanges easier by drawing up contracts offering marketable goods and services that they own or will own at the agreed upon time, and offer the contracts in trade for things they want. If the offer is accepted, money has been created. If the offer is not accepted, no money has been created.

This becomes understandable once we realize that all contracts consist of an offer, an acceptance, and consideration. (Consideration is the inducement to enter into a contract, the thing of value being conveyed.) If all money consists of good promises, that is, offer, acceptance, and consideration, then there can always be exactly as much money as an economy requires, and there will be neither inflation nor deflation.

This is the "real bills doctrine," an application of Say's Law of Markets. It is the essence of what is called "the banking principle," and is based on the natural rights of liberty (freedom of association/contract) and private property.

We have to understand that property is not the thing owned, but the natural right every person has to be an owner, and the socially determined bundle of rights that define how an owner may exercise or use what he or she owns.

Obviously, this is not the understanding of money that prevails throughout the world today, and serious problems have resulted from that misunderstanding. The most immediate of these is the global debt crisis, which governments keep trying to solve by creating even more debt. There is also, however, the question of the role of the State in the economy, and whether governments should be in the business of money creation at all, or should be limited to a regulatory function.

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