What is the Real Bills Doctrine?

Real bills doctrine is a term used to refer to the means through which inflation is prevented. In other words, it is a means of growing the quantity of money as well as a means of shrinking it, according to the business needs, so as to prevent the possibility of the economy experiencing recessions and running short of money.

• Real Bills Doctrine is a means of growing the quantity of money as well as a means of shrinking it, according to the business needs, so as to prevent the possibility of the economy experiencing recessions and running short of money.
• Real bills doctrine can be traced back to the 18th century, where Adam Smith was of the opinion that real bills were a vital asset that commercial banks needed to purchase and hold.
• Real bills doctrine involves transactions between banks and businesses a process that leads to economies being issued with money.
• The doctrine is considered to be the best measure of growth rate because of its ability to adjust inflation and to put in check the purchasing power.

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How does the Real Bills Doctrine Works?

Real bills doctrine involves transactions between banks and businesses a process that leads to economies being issued with money. It ensures that there is no inflation caused in the market. It prevents this by ensuring that the paper or credit money being issued in the market has sufficient security. Generally, real bill doctrine plays a big role in the Gross Domestic Product (GDP) of a given economy. It is considered to be the best measure of growth rate because of its ability to adjust inflation and to put in check the purchasing power. Its major role is to, therefore, consider the inflation effect on economies.

The origin of Real Bills Doctrine

The origin of a real bills doctrine can be traced back to the 18th century, where Adam Smith was of the opinion that real bills were a vital asset that commercial banks needed to purchase and hold.

How Real Bills Doctrine Works

For instance, a bank may receive a 100 silver dollars deposit. It then issues a checking account of 100 dollars to the person depositing. So, if another customer requests from the bank a 200 dollars checking account loan, this will not lead to inflation provided that the bank acquires security of not less than $200, which in this case will be used as collateral for the loan. Generally, economists who favor free banking have criticized the real bill doctrine. They argue that it is not appropriate for the government to be involved in money supply management because the competition in the open commercial banking provides money creation whose stability is optimal.

Related Topics

• Central Bank
• Reserve Currency
• Federal Reserve System
• Money Multiplier Formula
• Velocity of Money
• Multiplier Effect
• Quantity Equation of Money
• McCallum Rule
• Neutrality of Money
• Real Bills Theory