Did you get a chance to read Corrigan’s “Robinson Crusoe and the Curse of ‘Real Bills’” on lewrockwell.com? I think it’s worth a read and then after that a good study.

In this article, he evaluates the use of bills as private credit instruments in the Crusoean economy and then the effects of introducing a real bills doctrine on such credit transactions. He is able to do this without an “appeal to arcane arguments about inflation; nor to the intricacies of the entrepreneurial effects of disrupted price signals…”

Corrigan lays out “what happens when temporally-extended credit is diabolically transmuted into instantly-expendable money – which is, after all, the very purpose of a system of ‘real bills’ wedded to fractional reserve banking…” and emphasizes the “primary need for capital and hence of its irreplaceable role as a temporal bridge between the present – when ‘roundabout’ methods of work are begun – and the future – when their consummation will hopefully result in an array of useful final consumer goods.”

There are some funny lines in there also.

http://www.lewrockwell.com/corrigan/corrigan76.html

A detailed refutation of Sean Corrigan’s working paper on real bills has been posted by me.

Click here.

You’re looking at the RBD as a recipe for making the quantity of money move in step with the quantity of goods. The other way to look at it is that the RBD is a recipe for making the supply of money move in step with its backing. Viewed in this way, every bank that issues a new dollar in exchange for a dollar’s worth of assets is necessarily causing money to move in step with backing, and would not cause inflation. Hence fractional reserve banking is not a fraud. It makes no difference if a dollar is issued for a dollar’s worth of gold or a dollar’s worth of bonds–either way the new money is adequately backed.

I hope i don’t add to your headache with my answer.

Let’s dissect the analogy (a little) and the seemingly reasonable statement “If the bills have a termination date at which they must be settled in gold coin, then they no longer circulate as either money, and the money issued by the bank to purchase the bill becomes backed by that gold coin” then “where is the inflation?”

The problem is that when you submit your real bill to the bank for cash, it issues you new money, (not its own money) at that moment, the same way it expands credit when it creates a loan. Therefore, your statement and question applies as well to credit expansion arising out of any fractional reserve bank loan. The loan must eventually be redeemed in gold. However, while that loan exists, the money supply has been increased. Loans are paid back, true, but more loans are made, the cycle continues and the money supply remains inflated. This is the inherent feature of the RBD as well. The fact that a real bill must one day be fully redeemed is similar to the fact that a bank loan created via credit expansion must also be paid back. It doesn’t change the fact that they are both inflationary and contribute to business cycles.

Now take two aspirins.

Like I wrote earlier, this gives me a headache thinking about it.

There can be no question but that fractional reserve banking is a fraudulent activity; its benefits consist entirely in achieving a lower rate of interest than would otherwise prevail on the market so affected. Its baleful effects are not limited, however, merely to those unlucky enough not to be among the first to receive the new and increasing amounts in the form of loans, wages, or business profits. “Right from git” the increases in the supply of money are rearranging EVERYTHING economic, that is, the priorities and plans of everyone. Ultimately, the effect of such increase (and lowered interest rates)is to persuade some among the very beneficiaries of the largesse to expand their stocks of “higher orders” of production goods–to invest in plant capacity which would have been obviously inadvisable under the previous, higher-interest regime and which will later prove incompletely covertible when the money supply must be reduced to avoid hyperinflation. The entire arrangement of production for the market will have been rearranged away from the actual preferences (as revealed by the interest rate)but with the added loss of equipment specialized for a market which no longer exists. The result is a depression; or, if not quite as bad, a recession.

Nothing about Dr. Fekete’s RBD is persuasive to me (and I think I’ve given his website a fair shot) and, in particular, his argument that the financial transaction involved is different than an ordinary commercial loan and involves not interest but “discounting” of the various paper obligations. At the very outset of this thread–about the third or fourth post or so–I tried to make this point and, additionally, to liken the loan activity to what used to be called (and might still be, for all I know) the “money market.” I was hoping to induce a comment from the author (Corrigan) on the matter.

I think i agree with the latter part of what you say, but i’m unclear on what you mean in this part in particular:

“Fekete, Hultberg, and the rest of the “Real Bills” people have a point about … “Fractional Reserve Banking” representing various permissible interbusiness forms of contract that may indeed have a salutary effect on business-to-business transactions and, by transitive property, the economy at large.”

The reason the above statement confuses me is that at the core of the debate, I believe at any rate, is that the Austrians are completely opposed to fractional reserve banking usually both for reasons of ethical and economic considerations, and it is this concept, which is ingrained in the RBD, that makes the RBD unacceptable from an Austrian perspective.

Is there some particular reason that Fekete has not been allowed to reply on this site directly?

“Except for fuel, which underpriced, housing, which is caused by zoning and govt regs, and taxes, the price of most everything else has stayed about the same or dropped in work hours per consumer product. In a century, food dropped from 50% to less than 10% of a person’s life energy. Since WW2, a new low end car has cost about a half year’s pay and the quality of design has improved exponentially.”

Bill, the insane increase in the price of housing is solely caused by monetary inflation – too many dollars chasing too few goods. The price goes up because the supply of desirable existing houses and land for building more is naturally restricted.

The opposite is true for cars – until the last ton of iron ore is smelted or oil converted into vinyl upholstery, even though there are too many dollars chasing autos, the price of autos should be declining while quality and performance should be increasing – they are not.

Arguing that certain goods cost the same in terms of labor hours that they did before the advent of the unbacked dollar in 1913 is begging the question. A car should cost much less than it does now, go faster, steer better, use less gas, and be much safer than it is currently.

But you didn’t refute my core statement – inflation makes each dollar worth less every single day it is held. Bank interest and the stock market return available to most dollars is negative after inflation and taxes, so I repeat – why would anyone save even one dollar, traditions of prudence aside?

I understand it is traumatic to have your illusions smashed, and much easier to impute wickedness to the public at large rather than change your views, but come on – who is likely to be “correct” (remember, this is MISES.org we are on here)one monetary liberal(you), or the independent economic decisions of millions of free people?

I’m not playing devil’s advocate. I believe that the real bills doctrine gives the only coherent explanation of money. I have a few papers on the subject on my website, which you can find easily by doing a google search for “real bills doctrine”. (As if your head didn’t hurt enough already!)
The real bills view is that if the Fed issued $200 billion in paper, and bought $200B in bonds, then Fed assets would have risen in step with Fed liabilities, and there would be no change in the value of the dollar. Since you accept this argument for GM stock, you should notice that if GM issued new stock for new assets, there would be “more GM stock chasing the same amount of goods” out in the economy. And yet no serious economist would claim that this would reduce the value of GM stock, because GM’s value is not determined by how much GM stock is “chasing” how many goods. The real bills view says the same thing is true of money. Its value is not determined by how many paper dollars are “chasing” how many goods. The value of paper dollars is determined by how many assets are backing how many dollars.

Except for fuel, which underpriced, housing, which is caused by zoning and govt regs, and taxes, the price of most everything else has stayed about the same or dropped in work hours per consumer product. In a century, food dropped from 50% to less than 10% of a person’s life energy. Since WW2, a new low end car has cost about a half year’s pay and the quality of design has improved exponentially.

People are buying like crazy because almost no American under 40 years old has seen a week of hard times or unintentially missed a meal. They don’t believe that the ride can stop.

I must admit that you have completely confused me; are you playing Devil’s Advocate for the RBDers? I agree with your analogy about GM, but not with the one about the Fed. Is there not an inflationary problem with your Fed analogy? If the Fed issues $200 billion in new money and exchanges them with the Treasury for the bonds, and the Treasury simply consumes using the money as payment to society, exactly what real assets are we talking about? Sure, the Fed could redeem the bonds with the Treasury, thus removing the currency from the market (inflation, then deflation), but, on balance, has it ever really done this?

This whole debate gives me a splitting headache every time, even though it is fascinating to follow.

For that matter, GM could, in principle, issue a trillion new shares for $60 each, deposit the $60 trillion in a bank account, and its assets would still rise in step with its liabilities, and the stock price would not change. I say “in principle”, because GM would only issue the new shares if it had some good use for the money, and the public would only want the shares if they believed GM could put the money to good use. This is the limit of how much GM stock will be issued. The limit to the issue of money (always understanding that equal assets are received as money is issued) is the degree to which the public wants $1 of green paper instead of $1 of bonds.
Most people are used to thinking that the RBD is a recipe for making the supply of money move in step with output of goods. That is an incoherent view that has been justly criticized. The correct view is that the RBD is a recipe for making the money supply move in step with the assets backing it.

And the biggest reason for this is?

Exactly. People are consuming like crazy because each dollar grows less valuable every day. Holding onto those dollars, which prudence suggests we do, is a sucker bet.

I’m going to extend your analogy which starts like this:

“By analogy, when the Fed prints one new paper dollar and sells it for a dollar’s worth of bonds, the Fed’s assets rise in step with its liabilities, and (on the RBD view) the value of the dollar is unchanged.”

My logical extension is to repeat the analogy except by adding one new word and one extra ‘s’ as follows:

“By analogy, when the Fed prints one [trillion] new paper dollar[s] and sells it for a [trillion] dollar’s worth of bonds, the Fed’s assets rise in step with its liabilities, and (on the RBD view) the value of the dollar is unchanged.”

This new analogy seems to put the RBD view in clearer perspective. Does it now seem flawed to you? The fed is creeping up on adding its very first trillion of additional reserves to the banking system on which the banks have been pyramiding credit expansion. I wonder if anyone at the fed will sit down and pour a glass of Champaign to mark the event.

Take it a step farther: Economists also agree that if GM stock currently sells for $60/share, then GM can print one new share, sell it for $60, and the price of GM stock will be unaffected, since GM’s assets increased in step with its liabilities. By analogy, when the Fed prints one new paper dollar and sells it for a dollar’s worth of bonds, the Fed’s assets rise in step with its liabilities, and (on the RBD view) the value of the dollar is unchanged.

Same reason the Mafia has turf wars. Greed and power.