Real Bills Doctrine

Inflation: it’s good for balloons, Tom Brady footballs, and bouncy houses, but when it gets too high, it’s not so good for economies.

One thing that can cause inflation to rise is an increase in the overall money supply, which is why some economists tend to get pretty stressed out whenever the Federal Reserve does it. But there is one school of thought that says that certain increases in the money supply will not increase inflation, and we call it the “Real Bills Doctrine.”

Specifically, Team Real Bills Doctrine says that, when money is issued in return for a real bill, inflation won’t go up. Let’s break this down a bit, and we'll start by talking about what a “real bill” is. It’s kind of like an invoice crossed with a short-term IOU, and it’s backed by a real asset (hence the “real” part).

For example, let’s say we own a lumber yard, and one day we sell our fave customer, Zeke, $2,500 worth of lumber. We give him an invoice due in 90 days. Zeke plans on turning around and building furniture out of the lumber; once he sells it, he’ll have the money to pay our invoice. Now...here’s where it gets fun. Zeke can endorse that invoice and take it to the bank, and they’ll issue him real cash money in return for it, knowing they’ll get it back when he sells his furniture. They won’t give him the whole amount, but let’s say they give him $2,400. The Real Bills Doctrine says that this issuance of cash won’t increase inflation, because it’s in return for an asset-backed real bill.

We should point out that there are a lot of folks out there who don’t agree with the Real Bills Doctrine. They call themselves “free-banking economists” (or, at least, that’s what other people call them), and they see the Real Bills Doctrine as an unnecessary meddling in the economy by the government. They say that real bills do, in fact, increase inflation, and that’s bad, m’kay, because inflation rates should be decided by competition and a free market and not governmental action and interference.