Say’s Law of Markets, based on the fact that the purpose of
production is consumption, is applied in the “real bills doctrine.” The real bills doctrine is simply this: that
if the present value of private sector bills and notes used as the media of
exchange in an economy is equal to the present value of all existing and future
marketable goods and services in an economy (i.e., total savings, whether past or future), there will be neither
inflation nor deflation, but an elastic, asset-backed money supply sufficient
to meet the demands of agriculture, commerce and industry.
This, then, is the definition of money in binary economics. As can easily be seen, it is not, in fact, a
redefinition, but (as we stated) a return to the original, and more useful
definition that preceded a number of historical events that caused matters to
take a wrong turn — and that we won’t get into in this posting, however
fascinating they might be.
This is also why we say that, in our opinion, the
correspondent’s friend and CESJ are not at all saying the same thing. The friend in his analysis assumed as a given
that Say’s Law and its application in the real bills doctrine do not
operate. True, when a portion of the
total money supply consists of government bills of credit instead of private
sector mortgages and bills of exchange, the real bills doctrine (and thus Say’s
Law) does not — and cannot — operate to that extent.
This is not, however, because the real bills doctrine is
invalid, as the Keynesians, Monetarists and Austrians assert. It is because government bills of credit are
not, in fact, real bills at all, despite the claims of Knapp and Keynes. They are “fictitious bills,” that is, bills
that do not represent “real” value, but “fictitious” value.
Real bills are based on a property right that the issuer has
in the present value (the consideration) being conveyed — exchanged — by means
of the bill. Bills of credit, however,
are backed not by the present value of future marketable goods and services in
which the issuer has a property right, but by the present value of future tax
collections in which the emitter does not
have a property right: taxes are not
an exercise of property, but a grant from the citizens. No government has a right to collect taxes
until and unless the citizens have granted that right. Anything else abolishes private property as a
meaningful and effective right.
A government that emits bills of credit is levying a hidden
tax in the form of inflationary increases in the money supply. Unless the government collects actual taxes
in the future to redeem the bills and deflate the money supply to the degree it
inflated it previously, it is committing theft, that is, violating private
property.
Even given an induced deflation to counter a prior
inflation, there is the problem that emitting bills of credit transfers wealth
from creditors to debtors, a transfer for which no restitution is made by
deflating the currency. Adding insult to
injury, emission of bills of credit as a usual means of government finance
erodes private property as an institution and endangers social and political as
well as economic stability, as Henry C. Adams and others have noted.