Ingo Bischoff on Real Bills and Why They Are Not Inflationary

An amazing article explaining the basics of Real Bills, the core of a gold-based monetary and commercial banking system. A bit dense, but enlightening and worth the read.

The currency created against Real Bills is "redeemable" into a fixed quantity of gold. A redeemable currency is suitable to keep as savings since it can be exchanged for gold. The willingness of people to invest their gold savings determines the rate of interest paid for the use of people's savings. With the creation of a redeemable currency, commercial banks enable savers to have control over their savings... Central bankers dislike Real Bills, because their creation is entirely in the hands of private businessmen. Central bankers crave control over the issuance of currency which they do not have with Real Bills. Furthermore, Real Bills are drawn only when they can be cleared with a "redeemable" currency or with gold. The gold standard required under the Real Bills Doctrine strips central bankers of control over the interest rate.

With the prohibition of gold ownership, the Real Bills market was destroyed. Businessmen will simply not draw Real Bills that would only be settled with irredeemable currency. The destruction of the bills market spelled the demise of the commercial banking system. What today are called "commercial banks" are the carcasses of the old, real commercial banks, which have been authorized by the FED to create a "deposit currency" against the issuance of loans and mortgages. This deposit currency is converted into Federal Reserve Notes by the payments made on the loans and mortgages. In other words, today's commercial banks function merely as outlets for the distribution of irredeemable FED central bank fiat currency.

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A banking system based on the Real Bills Doctrine along with the collection of a "land value tax" is the most stable system to advance prosperity, bar none. The distortions caused by the absence of commercial banking employing the Real Bills Doctrine are all reflected in the ills brought on by central banking. Most unjust is the distribution of the central bank currency. Central bank currency cuts all connections to an ability to properly value the contribution made by each factor of production in the creation of wealth or in valuing services, be they private or governmental.