In Defense of the Real Bills Doctrine

Per Hortlund ()

Econ Journal Watch, 2006, vol. 3, issue 2, pages 73-87

Abstract: The real bills doctrine roughly holds that a central bank should limit its operations to the discounting of short-term commercial paper. The doctrine is widely held to be a fallacy. Several writers have alleged that its operations are dynamically unstable. Such instability is said to have caused various inflations and deflations in history. In particular, it has been said that the Fed’s adherence to the real bills doctrine caused the Great Depression in 1929–1932. Focusing on the charges of Richard Timberlake, I criticize the dynamic-stability argument. I argue that historical inflations have rather been caused by monetization of government debt, and that the cause of the Great Contraction was rather that the Fed strayed from the real bills doctrine. I suggest that the historical record supports the view that adherence to the real bills doctrine may improve the performance of a central-banking system on the gold standard.

Keywords: Real Bills Doctrine; Great Depression; Fed; Gold standard; Banking Principle; Elastic currency; Dynamic instability (search for similar items in EconPapers)
JEL-codes: E31 E42 N12 (search for similar items in EconPapers)
Date: 2006
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Persistent link: http://EconPapers.repec.org/RePEc:ejw:volone:200673-87

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