The Real Meaning of the Real Bills Doctrine (revised Nov., 2018)

The real bills doctrine asserts that money should be issued in exchange for short-term real bills of adequate value. Critics of this doctrine have thought of it as a means to make the money supply move in step with the production of goods, a task at which it supposedly fails. In this essay I explain that the real bills doctrine is actually a means to make the money supply move in step with the money-issuer’s assets. When viewed this way, I find that the real bills doctrine is an effective means to prevent inflation. More importantly, the real bills doctrine is a means to make the quantity of money grow and shrink with the needs of business, thus preventing money shortages and the resulting recessions