THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Monday, February 2, 2009

Stimulus, Part III: The "Real Bills" Doctrine

As we saw in the previous posting in this series, Say's Law of Markets contradicts Keynes' belief that it is economically sound to create money without first producing something. Say's Law, however, is only half the story. The other half is something called the "Real Bills" doctrine, which Keynesians have been careful to declare has been "discredited" without giving any reason other than it contradicts Keynesian dogma.

The "Real Bills" doctrine assumes the validity of Say's Law. Thus, if we produce something, we have generated income and increased wealth, that is, we have created something that has value. We can 1) consume the wealth ourselves, 2) exchange some or all of our wealth directly for whatever others have in the way of wealth that we want or need to have instead (barter), 3) go to a bank or other financial institution and turn our wealth into "money," or generalized purchasing power, by giving the banker a lien on our wealth, or 4) sell the wealth outright for money.

When we exchange our wealth for money (#4), the transaction ends there. We take what is now our money, and do with it as we please, while whomever we sold our wealth disposes of what is now his or her wealth as he or she pleases. If, however, we give a bank or other financial institution a lien on our wealth (#3), we have to pay it back, plus a fee for the service that the bank provided in "monetizing" our wealth (generalizing our purchasing power by substituting the bank's promise for our own), or the bank has the right to take possession of that portion of our wealth on which it has a lien.

If the wealth we have monetized in this fashion consists of inventories of existing goods we have produced, there is usually no problem. We can sell our inventory of goods, and make a profit out of which we redeem the lien on our goods, pay the service fee to the bank, and provide ourselves with income. This is possible because no bank or other financial institution will ordinarily create money to exchange for more than the wealth is worth, and usually much less, thereby ensuring that the lien will be redeemed — banks don't want your inventory, they want the service fee they charge for monetizing your inventory. Keynesians don't (usually) have a problem with this process. The wealth, "savings" or unconsumed wealth, clearly exists, and can thus be exchanged, traded, or confiscated by the State for redistribution among the unproductive. Keynes' assumption, that saving must precede investment, appears to hold true.

The problem is that, carried out in a rational manner, the above process contradicts Keynes. Money created by a bank by taking a lien on existing inventory goes to pay for the costs of producing the inventory (including the service fee to the bank), and provide a just profit to the producer, out of which he or she meets his or her consumption needs. Only a small proportion of the money created is available for new investment, whether new productive machinery or additional inventory, although (depending on the amount of profit and the wants and needs of the producer) a large proportion of the profit might be diverted into new capital formation instead of being consumed. This is the "matching principle" in accounting, and is the basis for accrual accounting. Accrual accounting assumes that revenue generated by the sale of a good or service goes first to meet the costs of producing that good or service, then provide a profit — income, or an increase in wealth — for the producer. The profit, the amount by which revenue exceeds costs, not the total revenue, represents the increase in wealth that can either be consumed or saved.