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.