Invitation to a Debate: Are the Austrians Right about the Real Bills Doctrine?

Over the years, I have found that my ideas and those of the Austrian classical economists are in sync for the most part. We believe in the gold standard, in the constitutional robustness of the unfettered free market, in the dismal prospects for even the kindest-hearted versions of socialism, and in the innately evil ulterior motives of the political class - to which unfortunately some very prominent modern economists have applied for admittance these days. (See, e.g., my hammering of Paul Krugman here.)

However, there is one notable area where I can't decide where I stand. It has to do with what is called the "Real Bills Doctrine." To make my conundrum as short and sweet as possible for those who don't know what I'm talking about, let me explain below under HISTORY. For the others who are already informed, please skip below to THE DEBATE.



HISTORY

The banking industry has gone through various evolutionary stages over the millennia, and the Austrians tend to believe that it has gone through at least one step too many. I advise any newcomers to economics to read my posts here, most particularly Economics Lessons 1 through 4, in order to get up to snuff on the background stuff. (It's easy and hopefully amusing reading, so don't let the word "economics" scare you.)

To continue with the story, back just after the cave man days, one of the first clever ideas potential lenders of money discovered was the notion of interest. Interest is not immoral, actually, in spite of what you may think instinctively. In fact, the first lenders were people like you and me; there were no bankers.

After all, it makes sense: Any person, willing and able, through his own industriousness, to forego consumption now - say of a fourth meal, or another piece of jewelry, or a third house - in order to help someone else create something of use to himself, is doing that person a favor. If lots of people do it, then lots of people benefit, which raises our standard of living. Wouldn't you agree? There is no reason the lenders should not share in a small portion of the extra benefits, in proportion to their - uh - "selflessness." Interest, therefore, is not really evil. It is simply an equitable reward, a sharing where sharing is due.

Good bankers, as it happens, and in spite of their historically negative reputation, are mainly professionals who happen to be very astute at bringing savers (lenders) and borrowers together in a kind of symbiotic anonymous partnership; and because they do perform this very useful service, there is no reason they should not also share in the rewards.

All well and good. Thus, bankers learned over the centuries that they could not only lend out the money of those who entrusted them with their savings, but they could make a good living at it as well (much to the chagrin of their covetous rulers, churches and less savvy neighbors.) Being smart and observant, they also learned that they could sometimes lend out more money than they really had in their coffers... AND survive, IF they did it wisely. People would continue to have confidence in their judgment as loan brokers, because savings were not only kept safe, they were remunerated, without fail and on time. (Or at least they were by the scrupulous bankers. Of course, those with poor judgment or devious intent were soon out of business.) Thus was born the various ways and means of money lending, among which, I believe, is the well refined art of sound commercial banking.

THE DEBATE

I maintain that a rule of thumb for wise, experienced commercial bankers evolved over time, through trial and error, which rule now says this, more or less:

A commercial banker may loan an amount equal to any gold he has in his safe, plus an amount that he can VERIFY as representing goods on their way to market that his solid loan customers have pre-sold.

Furthermore, I tend to believe that the money a wise commercial banker lends out over and above the gold in his reserves is valid, non-inflationary purchasing media, the key condition being that all such loans must be paid off, thereby retiring the non-gold-backed money from circulation - canceling it out, as it were as soon as the goods are delivered to the marketplace and are paid for as promised.

The Austrians disagree with this assessment. As is illustrated by this article at the Mises.Org website, they believe that the above-described banking tactic is dangerously speculative, and that it invites the over expansion of the money supply circulating around, leading in turn to corrosive inflation. (For newcomers, see my articles here and here regarding how inflation happens and why it is dangerous, and I do believe that it is, fatally so.)

I can understand why the Austrians might be correct in today's fiat money environment (i.e. no gold standard to maintain the value of currency); but I can't really see the danger in a more stable gold-convertibility situation where (a) any banker with a code of ethics, a survival instinct and a distaste for jail would be forced to withdraw any excess inflationary bills from circulation as soon as the resulting higher price of gold on the market encouraged customers to turn their under-valued bills back in to that banker, thereby forcing him to hand over his gold at the bank's lower standard gold exchange rate; and where (b) any unwise bankers making too many loans to unsound producers of goods would be eliminated from the marketplace by going bankrupt.

May we open the debate?

PS: On a different subject, I resisted delving into the Kelo case (see excellent write-up here), because I am too emotional about it. Unless this very poor Supreme Court decision is overturned within the next few years, we surely have here the beginning of the end of property rights and thus of the American Constitution. On the other hand, I try to remind myself that there is no beginning and no end to human societal evolution. It's simply a long eroding and rebuilding process; and when the tension gets too strong for the people, they will rise up, even if it has to be done over and over, again and again. It happened without a drop of blood in Berlin and the Ukraine. Hopefully, we here in the Western Hemisphere can follow their courageous example when the time comes.