Who Needs the History of Thought?, Part 2

In 1982, Thomas Sargent and Neil Wallace published a paper entitled, “The Real Bills Doctrine Versus the Quantity Theory: A Reconsideration.” Within the paper, the authors outlined what they called a “real-bills regime.” Sargent and Wallace showed that within the regime the price level could be indeterminate and yet still produce a Pareto-optimal allocation of resources. This conclusion is viewed as calling into question the desirability of price stability.

However, as David Laidler explained:

Sargent and Wallace’s attempted rehabilitation of the real-bills doctrine suffers from the following deficiencies: (1) the conclusions on whose basis they seek to rehabilitate the real-bills doctrine would have been anathema to its proponents; (2) what they refer to as the real-bills doctrine is not the real-bills doctrine; and (3) their interpretation of Adam Smith’s analysis of the social productivity of banking is quite misconceived.

This, of course, does not denigrate the findings of the paper. The implications of the paper can be judged based on the contents without reference to the history of thought. However, the explicit reference to the real bills doctrine remains problematic as David Laidler subsequently explains (p. 155):

If economics is to make progress, it clear needs analytic results, and Sargent and Wallace have certainly provided these. However, new results are only a necessary condition for progress, which also requires that, in the process of working out new ideas, we do not lose sight of or distort old ones. I hope that this note has done something to help ensure that, in the process of absorbing Sargent and Wallace’s new and provocative analysis, readers of the Journal of Political Economy do not lose sight of what was at stake in earlier monetary debates.

7 responses to “Who Needs the History of Thought?, Part 2

  1. Since I have a website dedicated to the real bills doctrine, I feel qualified to comment.

    I never heard the phrase “real bills doctrine” in my undergraduate and graduate days at UCLA. It might have been mentioned in my History of Thought book, but it was definitely not emphasized. Even today I would have to look long and hard to find any macro textbook that even mentions it, and even then it is always dismissed in a sentence or two.

    I started to learn about it only because of my doubts about the quantity theory: How to define money? What about derivative moneys, gift certificates, overdrafts, etc? This led me to the library at CSUN, where the first book I found that dealt with those issues was Wicksell, Lectures on Political Economy. From there, I discovered Tooke, Fullarton, Charles Bosanquet, Simon Clement, etc.

    I honestly don’t think a more thorough coverage of History of thought would have helped. Most econ professors have the wrong idea about the real bills doctrine anyway. Mine sure did.

    What helped was having an old fashioned library like CSUN used to have, where I could browse books that had been shelved together by topics. The automated book retrieval system now in use makes that impossible.

  2. Mike,

    Were Tooke and Fullarton really advocates of the real bills doctrine?

    Neil Skaggs work seems to suggest otherwise. For example, Skaggs argues that Fullarton’s position is one that combines the monetary approach to the balance of payments with a theory of competitive money supply. (Cf. “John Fullarton’s Law of Reflux and Central Bank Policy”, History of Political Economy, 1991; “Less Than an Ideal Type: Varieties of Real Bills Doctrines” in David Laidler’s Contributions to Economics)

  3. Josh:

    If they weren’t, then nobody was. Of course, the RBD has been stated and mis-stated in many ways over the years, but Fullarton’s statement below is considered a classic statement of the RBD:

    “Much as I fear disgracing myself by the avowal, I have no hesitation in professing my own adherence to the decried doctrine of the old bank directors: that so long as a bank issues money only in the discount of good bills, at not more than 60 days date, it cannot go wrong in issuing as many notes at the public will receive from it.”

    I have a paper called “The Law of Reflux” that argues against Skaggs.

    As usually understood, the RBD requires that new money should only be issued for bills that are :
    1) of adequate value
    2) productive—ok to lend to a carpenter, but not to a gambler or tourist
    3) short term—30-60 days

    I contend that (2) and (3) were mistakenly attached to the RBD, and in fact were due more to RBD critics than to its advocates. Correctly understood, the RBD is nothing but the backing theory of money, which says that the value of money is determined by the value of the assets backing it.

  4. Mike,

    I will check out the paper.

    I suppose that my question would be whether or not advocates of the real bills doctrine like Tooke and Fullarton would have supported such a doctrine in the absence of the gold standard.

  5. Josh:

    Here’s a relevant passage from fullarton:

    “Let it not be supposed, for a moment, that I am indifierent
    to the expediency and importance of maintaining intact
    the metallic basis of our circulation, and providing by
    the most judicious means of security that can be devised,
    for the perfect and uninterrupted convertibility of our
    bank paper. I do not, indeed, profess to look back with
    all the horror testified by some at the epoch of the Bank
    Restriction. I look upon that measure as a measure
    that was greatly to be deprecated, and productive of
    many inconveniences. I believe that it might have
    been exceedingly dangerous, but for the singularly per-
    fect adaptation of the machinery through which it was
    administered. I think it was continued quite long
    enough, and never desire to see it revived. Yet I do
    not hesitate, at the same time, to avow, that I consider
    it to have been the wisest course which, under the
    actual circumstances of the country, could have been
    adopted, nor to express my full conviction, that the
    suspension of cash payments had nothing like the share
    which has been commonly supposed, in producing those
    violent alternations of price,…”

    Fullarton, however, was confused on several points, especially the question of a “forced” currency, and his belief that currencies like the assignats and the continentals were unbacked. He believed that even without a gold standard, the Bank of England could avoid inflation by prudently issuing notes against good bills. But for all this, he failed to see that if the B of E did for some reason issue more notes, then as long as its assets moved in step with the issuance of notes, the notes would hold their value.

  6. Mike,

    I seem to recall Fullerton making the remark that the Bank of England needed to keep the discount rate above the market rate to avoid inflation as well as a comment about the inability to control the supply of paper currency in the absence of convertibility. I will have to find the precise citation, but these types of comments suggest he was not a great proponent of the real bills doctrine.

    I will have to check out your paper on the Law of Reflux, but based on my knowledge of the concept, the Law of Reflux is not synonymous with the real bills doctrine. In fact, I think that is the point that Skaggs made in his work; the supply of money is demand determined, but the price level is pinned down by the commodity price. (I think that Earl Thompson made this point as well, but I would have to go back to that paper to say for sure.)

    My understanding of Tooke, from reading the work of David Laidler, was that his policy prescriptions were somewhat similar to those advocated by Henry Thornton and later the currency school. (In fact, Tooke may have fit into this camp earlier in his life.) The interesting question is then in regards to why his theoretical structure changed, but his policy suggestions didn’t.

  7. Josh:

    Here’s a link to Fullarton’s book:


    Historical discussions of the RBD get pretty tangled, since both sides made pretty serious errors. The best examples are from the Bullionist debates (e.g. Ricardo vs. Bosanquet) and the Currency/Banking debates (Tooke & Fullarton vs. I-forget-who, Overstone I think). Thornton was as guilty of error as anyone. (I have another paper that covers him, called “Three False critiques of the Real Bills Doctrine”.)

    You are correct that the RBD and the Law of Reflux are not the same. If rightly understood, the RBD says that money will hold its value as long as it is only issued in exchange for assets of adequate value, while the Law of Reflux says that unwanted money will reflux to its issuer in exchange for those assets. A point I made in my reflux paper was that the reflux preserves the value of money, not by assuring that its quantity does not become excessive, but by assuring that the public has access to the assets backing that money. That access is provided by the various channels through which money can reflux to its issuer in exchange for the assets backing the money.

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