Carl Menger and the Real Bills Doctrine



In the Daily Bell’s recent interview, Dr. Antal Fekete: Blowing Up Modern Austrian Economics … in a Good Way, Professor Antal E. Fekete addresses the foundational economic work and understanding of “Real Bill” money by  Carl Menger. Reviewing this subject, may be a new experience for most and for mainline economists a topic that is problematic. How is it possible for central banks to use the argument of real bills, when modern academics differ with the mechanics of their cherished monetary theory?

Investopedia defines the Real Bills Doctrine accordingly.

“An economic theory that surmises that when central banks loan money only for “productive” projects the loans will not be inflationary. The Federal Reserve Act of 1913 was based in part on the Real Bills Doctrine, which asserted that the creation of money would automatically be directed to real goods and services if the central bank and banks provided credit only to short-term, self-liquidating loans. The Real Bills Doctrine has been completely discredited since 1945 by most economists.”

Mike Sproul reflects this same assessment.

“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.”

So what is the real meaning of Menger’s theory? Yukihiro Ikeda provides a clue in Carl Menger’s Monetary Theory: A Revisionist View.

“Menger believes that a monetary system cannot develop fully without governmental intervention. In this paper, I have investigated the evolution of Menger’s views in this regard through an analysis of relevant writings from the first edition of the Principles, Investigations, and the various versions of “Geld”. This element in Menger’s monetary thought separates him from later members and descendants of the Austrian school, and especially from protagonists of the free banking school.  Although the Austrian school of Economics is known for its economic liberalism, it is doubtful that its founder shared the passion of its later members for the principle of governmental non-intervention.”

For those familiar with the Austrian School of Economics the canons of libertarianism do not seem to be consistent with Ikeda’s conclusion. So it is interesting to examine A Tale of Two Schools. Since NASE “goes back to the fountainhead of Carl Menger”, could the Ludwig von Mises viewpoint that embraced the Quantity Theory of Money, be wrong?

The Mises Institute Carl Menger’s Theory of the Origin of Money offers their insight, while New Austrian School of Economics attempts to defend the Mengerian doctrine.

“Professor Fekete has written often about the real bills doctrine, describing real bills as ‘self-liquidating credit’. Professor Fekete calls the discovery of the spontaneous circulation of self-liquidating credit ‘one of the great achievements of the human intellect, on par with the discovery of indirect exchange’. Understanding the real bills doctrine is essential to understanding why irredeemable currency cannot function as money.

First, let us look at the Mengerian definition of ‘money’. Carl Menger proposed that money is that good which buys all else. It is born of indirect exchange and rests on the principle of marketability. A more marketable good will purchase a larger array of goods than a less marketable good.”

Now if you are up for an economic migraine examine the input on the Real Bills Doctrine by Milton Friedman and Anna J. Schwartz. As expected, their conclusion is not favorable.

“The foregoing fallacy survives today in the notion that the Federal Reserve should use easy monetary policy to lower interest rates to target levels consistent with full employment. For just as the real bills doctrine calls for expanding the money stock with rises in the needs of trade, so does the interest targeting proposal call for increasing the money supply when the market rate of interest rises above its target level-this monetary expansion continuing until the rate disparity is eliminated.”

By now most students of the vague discipline of Economics should be confused. So in deference to Dr. Antal Fekete, his position that real bills exist independent of a central bank, is noted. “The existence of central banks is irrelevant to the proper functioning of real bills, as the experience of the 19th century convincingly demonstrates. Nor is the existence of a central bank a prerequisite for real bill circulation. By contrast, circulating gold coinage is.”

Now in a world where legal tender laws bring the full force of government compliance into the marketplace, is there really room to debate theories that face the prospects of being illegal?

What is money? Well, in a perfect world, it is anything that a buyer and seller is willing to accept as a medium of exchange for a voluntary transaction. However, in the globalist utopia, a one world currency is the Holy Grail. Under these circumstances, how can Gresham’s law – Bad money drives out good – be avoided?

Whether the Social Credit Monetary Theory, the construct of the Real Bills Doctrine, or any other conceptual method designed to implement a monetary system, has a major hurdle to overcome. The controllers of finance and credit write the rules and impose the aftermaths on the rest of us.

Consider a chicken and egg analogy. If Banksters dominance has mastery over politics, laws and policies, how is it possible to create political critical mass to take over the power of the State? As history attests, the debt-created money scheme is never replaced through political reforms. In order to obviate the chains of usury and compound interest, it will take more than money theory.

James Hall – January 14, 2015

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