Less Than an Ideal Type: Varieties of Real Bills Doctrines

Conventional histories of monetary policy often focus on three episodes that allegedly illustrate the battle between proponents of the quantity theory of money and proponents of the real bills doctrine. As defined by Lloyd Mints (1945, 9), the real bills doctrine is the assertion that ‘if only “real” bills are discounted, the expansion of bank money will be in proportion to any extension in trade that may take place, or to the “needs of trade.” ’ The doctrine maintains that money created by this process provides liquidity to the monetary system without generating inflationary pressures. The three frequently cited episodes are the Bullionist Controversy in Great Britain during the Napoleonic wars, when the convertibility of the pound sterling into gold was severed; the Currency School-Banking School Controversy of the 1840s (and after), which centered on the Bank Act of 1844, during a period when the pound was convertible into gold; and the origins of the Federal Reserve System and its behavior from the early 1920s through 1932, when monetary policy was blamed to lesser or greater degree for the onset of the Great Depression. That the three episodes differ in crucial ways is widely understood. However, the two approaches have been treated as ‘ideal types’ reflective of the major elements of the competing approaches.