If Say’s Law of Markets confuses most of today’s “Currency School” economists, its application in the “real bills doctrine utterly baffles them. It’s not that hard to understand why. If you’re convinced that “money” is and can only be coin, banknotes, and (sometimes) demand deposits and some time deposits (M2), you’re not going to be able to grasp the intricacies of a system based on the common sense understanding of money as “anything that can be accepted in settlement of a debt.”
According to Say’s Law, we don’t purchase what others produce with “money,” but with what we produce by means of our labor and capital. Say’s Law is applied in the real bills doctrine. The real bills doctrine is that as long as the present value of contracts (mortgages and bills of exchange) used as money, whether directly or as backing for currency and demand deposits, is equal to the present value of existing and future marketable goods and services in the economy, there will be neither inflation nor deflation.
As anything with a present value can be used as money, a contract conveying the present value of future marketable goods or services to be produced by new, unformed capital (a bill of exchange) can be used to finance that same capital. The contract can be redeemed as the new capital becomes productive and generates a profit. In this way new capital can be financed using the present value of future increases in production as well as past reductions in consumption.
Say’s Law will not operate when people do not have equal access to ownership of both labor and capital, especially in an economy in which technology is advancing rapidly and displacing labor at an increasing rate. Similarly (and for the same reasons), the real bills doctrine will not operate when private individuals, businesses, or financial institutions issue bills of exchange with no present value, in which they do not have a property stake, or of which the present value has been inflated by speculation. If people cannot own, they cannot produce; if they cannot produce, they cannot create money to exchange for what others produce.
Bills that have no present value, in which the issuer has no property stake, or that have inflated present values are called “fictitious bills.” (Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain (1802). London: George Allen & Unwin, Ltd., 1939, 81-89; also, Harold G. Moulton, Principles of Money and Banking. Chicago, Illinois: University of Chicago Press, 1916, II.234.) A government bill of credit must therefore be classified as a fictitious bill, for the emitter does not at the time the bill is issued own that which the emitter promises to deliver in the future.