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.
