Monday, May 4, 2009


REAL BILLS DOCTRINE The desirability of having commercial banks heavily specialize in this type of business lending was elaborated into a doctrine of banking both in England and the United States. In England it was called the real bills doctrine,whereas in the United States it was called the banking school theory,r the commercial loan theory. When the Federal Reserve was established in 1913,the banking school theory was in evidence,inasmuch as the act required that eligible commercial paper presented by the banks to a Federal Reserve Bank for discount should not have a maturity longer than 90 days.
The economic justification for the real bills doctrine was that the price level would tend to be stable if commercial banks restricted themselves to such inventory loans.As the money supply expanded with bank lending,so too would real goods production be increased to permit the expansion of business inventories. The pari passu expansion of goods wit money would make impossible,it was thought,any general rise of prices caused by "too much money chasing too few goods"

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