The real bills doctrine is an economic and legal principle that emerged in the early 19th century, primarily associated with the banking and monetary policies of the time. It posits that the issuance and acceptance of short-term commercial bills of exchange, backed by tangible goods or commodities, should be the basis for the expansion and contraction of the money supply in an economy, rather than relying solely on a fixed gold or silver standard.
According to the real bills doctrine, when a commercial bill of exchange is accepted by a bank, representing a genuine transaction of goods or services, it becomes a legitimate, self-liquidating, and low-risk instrument that could serve as a basis for issuing additional banknotes or credit. This approach assumes that the acceptance and circulation of such bills will automatically lead to the liquidation of the underlying transaction, thereby ensuring that the money supply remains in equilibrium with the overall productive capacity of the economy.
Supporters of the real bills doctrine argue that this approach prevents excessive inflation while maintaining a flexible money supply that can expand and contract based on the needs of the real economy. However, critics question the doctrine's reliance on self-regulating markets and argue that it may lead to speculative behavior, financial instability, and potential over-issuance of credit if improperly implemented.
Despite its historical significance, the real bills doctrine has largely fallen out of favor in modern economic theory and central banking practices, with most countries adopting alternative monetary policies, such as central bank control of interest rates and open market operations, to regulate money supply and manage inflation.
