Real Bills Doctrine


The real bills doctrine asserts that money should be issued in exchange for short-term real bills of adequate value. The doctrine was developed by practical bankers over centuries of experience, as a means for banks to stay solvent and profitable. Banks that follow it avoid inflation, maturity mismatching, and speculative bubbles and unwanted reflux of money.

Real Bills Doctrine

What is ‘Real Bills Doctrine’

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.

Explaining ‘Real Bills Doctrine’

Opponents of the Real Bills Doctrine emphasized that all monetary creation is inflationary, regardless of how the money is used or what types of projects the loan will support. Some economists place blame on the Real Bills Doctrine for the Federal Reserve policy during the Great Contraction and Great Depression of the late 1920s and early 1930s.

Further Reading