The Analytical Framework of the Real-Bills Doctrine

Abstract

Though regarded as discredited by most theorists, the continues to find support in discussions of theory and policy.1 That the doctrine persists despite substantial criticisms aimed at it suggests that critics have yet to grasp it by the roots. Although it appears to be an ad-hoc formula for banking policy, based upon the casual adaptation of bankers' rules of thumb, the real-bills doctrine actually stems from a peculiar but comprehensive view of banking processes. The major policy prescription of the real-bills doctrine is that commercial (and also central) banks should limit credit extension to loans backed by short-term commercial bills. Such paper is supposed to represent actual transfers of existing goods. Therefore (defenders of the doctrine argue) loans made on the basis of it will be liquid and non-inflationary. The present study is not concerned with the practical merits of this prescription for bank management. Nor will it repeat any of the traditional, well-known criticisms of it.2 Instead its purpose is to examine critically certain heretofore unacknowledged theoretical assumptions that (it will be argued) have formed the heart of the doctrine throughout the course of its development. With this

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