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In Defense of the Real Bills Doctrine

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Author Info
Per Hortlund ()
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.

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Publisher Info
Article provided by Atlas Economic Research Foundation in its journal Econ Journal Watch.

Volume (Year): 3 (2006)
Issue (Month): 2 (May)
Pages: 73-87
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Handle: RePEc:ejw:volone:200673-87

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Related research
Keywords: Real Bills Doctrine; Great Depression; Fed; Gold standard; Banking Principle; Elastic currency; Dynamic instability;

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
N12 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - U.S.; Canada: 1913-

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Peter Temin, 1994. "The Great Depression," NBER Historical Working Papers 0062, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. David C. Wheelock, 1992. "Monetary policy in the Great Depression: what the Fed did and why," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-28. [Downloadable!]
  3. Barry Eichengreen, 2002. "Still Fettered After All These Years," NBER Working Papers 9276, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. repec:fip:fedreq:y:1982:i:sep:p:3-13:n:v.68no.5 is not listed on IDEAS
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