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.