Issues of so called ‘commercial paper’ or ‘unsecured promissory notes’ are currently used to fund the operating expenses of enterprise. Their main similarity to Real Bills is that they are short term instruments; apart from this, Commercial Paper and Real Bills are worlds apart.
To begin with, commercial paper is generally available to large, credit worthy companies… as they are unsecured liabilities of the company. In contrast, Real Bills are drawn against consumer goods in urgent demand, on their way to the ultimate consumer. The goods that Bills are drawn against will be sold and the Gold coins (money) the merchant receives from the consumer will pay the bill when it comes due.
Thus, credit represented by Bills will be extinguished by the consumer’s Gold coins. In contrast, commercial paper must be repaid by the issuer; an issuer with a less than stellar credit rating will pay a relatively higher interest rate; indeed, the market may decline to grant credit to shaky enterprises at any rate of interest.
For this very reason, because of higher risk, commercial paper has a higher cost (interest rate) than collateralized loans. In contrast, Bills are discounted, and the discount rate is always lower than even the lowest interest rate…because Bills carry the lowest possible risk of any paper. “Twix cup and lip there is many a slip”…but with Bills, the ‘cup’ is already touching the lip!
Again, by contrast, Bills do not depend on the creditworthiness of any enterprise, as they are not issued (sold) by any enterprise. Rather, Bill are drawn against actual goods delivered to retail outlets… just like a commercial invoice is accepted by the retailer on delivery of goods ordered.
For example, suppose an eighteen wheel tank truck drives up to the local gas station, making a delivery of gasoline, around 30,000 liters. The wholesale price of this much gasoline is about $25,000 Dollars… at least in 2010 in Canada where a liter of gasoline retails for around $1.00.
Now, do you suppose the gas station attendant gives the truck driver $25,000 cash to pay for this delivery? Hardly! Or writes a check for $25,000…? Not likely, is it? In fact, the attendant simply signs an invoice; ‘30,000 liters of gasoline were accepted on this date… for an amount of $25,000’. This invoice is the embryonic Real Bill.
It represents value, to the tune of $25,000… and the cash needed to pay the invoice will be collected by the gas station bit by bit, as it sells the 30,000 liters over the next several weeks. The time it takes to collect the $25,000 depends on traffic at the particular station, and the due date of the invoice will take this into account.
The next question is what does the wholesaler do with this invoice? Keep it in the till until the due date, use it (along with many other invoices… the ‘receivables’) as collateral to borrow against… and pay interest to the Bank? Or, perhaps, send it along to the refinery as payment for gasoline it bought… at a discount of course. Now the refiner will be happy to get this bill… it is as good as cash, and gives a discount as well… that is, the refiner will pay less for the bill than face value. The refiner may in turn use it to pay for crude oil… and so on up the line.
This gasoline invoice is an example of vertical circulation; the bill is used to transfer value or ‘net out’ transactions in one industry. Real Bills enjoy horizontal circulation; they are available to any industry… but Real Bills will not circulate under a Fiat paper regime.
Real Bills are the highest quality paper instruments available; they are an earning asset that matures, in not more than 91 days, into Gold. No one in his right mind would ever trade a Real Bill for a rapidly depreciating, dubious item like an irredeemable bank note!
Another significant difference between Bills and Commercial Paper becomes apparent if we examine the larger picture. Real Bills reflect the value of goods actually sold into the market place; they are strictly consumer driven. In effect, the velocity of circulating money is a proxy for Real Bill creation.
The more spending (rapid velocity) the more Real Bills are drawn… and if the velocity of money -or the propensity to spend- declines, fewer new bills are drawn. The bills in existence mature, are paid off… and thus the total value of Bills in circulation declines. Real Bills are never rolled over, but must be paid in Gold at maturity.
Real Bills have a monetary quality, being used as a means of exchange; but unlike freely printed paper currency, they are not inflationary. Real Bills are self liquidating. Under a Real Bills system, the immense trade imbalance existing between China and the USA is impossible.
Still another benevolent characteristic of Bills is that the physical limits of the economy constrain the number of Bills that can be drawn; if capacity to refine more gasoline is not available, then clearly no new gasoline Bills can be drawn… as no more gasoline can be delivered to the retailer. No such constraint applies to Commercial Paper, or indeed to Fiat currency.
Compare Real Bills with non-inflationary qualities, consumer driven qualities, rapid and automatic response to consumer demand and physical constraints… with ‘commercial paper’. Control of Commercial Paper lies in the hands of large corporate interests, banks, and politicians. Rates and quantities are set by ‘authority’… not by market demand. This leaves the Commercial Paper market ripe for manipulation based on greed and corruption. It bears little consideration for the needs of the real economy. Dare we say ‘Wall Street vs. Main Street’?
By contrast Real Bills and the Gold Coin standard are truly Democratic; power is in the hands of the consumer who wields the Gold coin as his daily ballot. The discount rate is set by consumer spending, just like interest rates are set by consumer saving. No Central Bank is needed; indeed, Real Bills circulate very well without any banking system whatsoever. As Austrian Economist Hans Sennholz so aptly put it;
“Sound money and free banking are not impossible, they are merely illegal. That is why money must be deregulated. The Gold standard will return as soon as people realize that honesty is the best policy.
As hope of ill gain is the beginning of the fiat standard, so is honesty the mother of the Gold standard. The Gold standard is as old as civilization. Throughout the ages, the Gold standard has emerged again and again because man needed a dependable medium of exchange.”
No doubt we are witnessing the re-emergence of a Gold Standard once again, as the current regime of irredeemable ‘Fiat’ currency collapses. The important thing for us is to ensure that Real Bills circulation is once again facilitated… or else any new Gold Standard is doomed to failure, just as the effort of Great Britain to return to Gold after the Great War was doomed to failure.
Rudy J. Fritsch
September 6th, 2010
