The Real Bills Doctrine

Website maintained by Mike Sproul


   This website contains materials relating to the real bills doctrine, which holds that the creation of paper or credit money will not cause inflation as long as the money is issued in exchange for sufficient security. For example, a bank might originally receive a deposit of 100 silver dollars, for which it issues 100 checking account dollars to the depositor. If another customer subsequently requests a loan of 200 checking account dollars, then that loan will not cause inflation as long as the bank receives security worth at least $200 as collateral or backing for the loan.

   A direct implication of the real bills view is that there is no such thing as fiat money. All money, whether paper, credit, or otherwise, is backed by the assets of its issuer. A private bank’s checking account dollars are backed by the assets of the private bank. A central bank’s paper money is backed by the assets of that central bank—usually government bonds. The credit card dollars issued by a credit card company are backed by the assets of the credit card company, which in turn consist of the IOU’s of the customers who use the cards. Needless to say, the real bills view is completely contrary to the monetary theory presented in economics textbooks. Textbooks present only the quantity theory of money, which holds that the backing of money is irrelevant to its value, and that most government-issued money is fiat money. These books rarely mention the real bills doctrine, and the few that do will say only that the real bills doctrine is thoroughly discredited. Unfortunately, it has been 50 years since economists took the real bills doctrine seriously. Even more unfortunately, those old economists wrongly rejected it. That has left modern economists knowing nothing of the real bills doctrine except for vague memories of their long-dead professors saying that it was a fallacy

   In my opinion, this failure to understand the real bills doctrine has been a major factor in recessions, inflations, and currency crises, and I hope that the materials below will improve public understanding of this important doctrine.


Introduction to the Real Bills Doctrine

A Quick History of Paper Money

Backed Money, Fiat Money, and the Real Bills Doctrine

Colonial American Currency and Finance

Discussions with  (1) Aaron Fontaine ,  (2) Jack Hirshleifer,  (3) Anwer Khan, (4) David Laidler

Introduction to the Real Bills Doctrine

Paper Money: Chapter 29 of my Online Textbook

The Quantity Theory versus the Backing Theory in Colonial America

There's No Such Thing as Fiat Money

Three False Critiques of the Real Bills Doctrine

The Law of Reflux