There is a lot of discussion about Real Bills, the circulation of Real Bills, the monetary effects of Real Bills… but nobody seems to be talking about just what IS a ‘Real Bill’??
In more modern terms, a Real Bill is a commercial invoice; an invoice drawn against consumer goods in urgent demand.
An eighteen wheel tank truck drives up to the local gas station, making a delivery of gasoline, around 30,000 liters. The price of this much gasoline is about $25,000… at least 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 necessary to actually 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 will take 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 gas station is the acceptor or signer of the bill, and is bound to pay the invoice on maturity. In the meantime, the gasoline wholesaler who made the delivery has granted credit to the gas station; notice there is no borrowing involved. No collateral has been pledged, (after all, the gasoline itself will be sold before the bill comes due) and no interest is collected; credit is granted on trust based on past performance, and on a sure belief that the public WILL buy the gasoline and make the cash available to pay the bill no matter what.
The bottom line is that this transaction is voluntary on both sides; the gas station needs the fuel, and cannot afford to buy such a large quantity with cash on hand. If cash was needed, the order would not be for 30,000 liters, but maybe for 3,000… and the delivery costs would be much higher. The wholesaler knows this as well, and is willing to grant terms, that is time to get paid, in return for getting a large order, a full truck load… month after month. Finally, if the gas station went to the bank to borrow the $25,000… then costs would be much higher, as interest must be paid to the bank, and collateral… NOT the gasoline… pledged.
The next question is what does the wholesaler do with the 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 through the nose to Monsieur Bank? Or, perhaps, send it along to the refinery as payment for the 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 the face value. Of course, the refiner may simply use it to pay for crude oil… and so on up the line.
Wherever the bill ends up when it matures, is where payment will be due. Specifically, if the wholesaler uses the bill to pay the refiner, he signs it over… and when the bill matures, the new holder of the bill, the refiner, will receive the face value from the gas station. If the crude supplier holds the bill, then payment will be made to the crude supplier, and so on. The great benefit here is that one payment, by the gas station, will take part in paying many obligations; instead of the gas station having to pay cash, the wholesaler having to pay cash, and the refiner having to pay cash.
Of course, the face value of the bill is not the same as the amount due from the wholesaler to the refiner, or from the refiner to the crude supplier. In theory, ’small change’ is used to clear up the differences… the mark up of each merchant in the chain. In practice, the wholesaler sells gas to may gas stations, and therefore has many bills open at any time. It is simple for the wholesaler to keep some in the till for his mark up, and forward the rest as required to clear the (much bigger) invoice from the refinery.
In effect, the bill has a limited and temporary monetary role. It plays the role of cash money, serving as a means of exchange, but only if there was a real consumer good that had a bill drawn against it. When the bill comes due, it is paid off and disappears… the opposite of printed money. As consumer demand waxes and wanes, so the supply of bills grows and shrinks with it. The monetary effect of the real bill is driven by consumer demand, not by a greedy banker’s or a corrupt politician’s decision!
The movement of the gasoline bill is vertical; this form of circulation is happening in the energy business today. This was reported on by Bill Koures and further expounded by Professor Fekete. The economics are too compelling for the industry not to make use of them… what is not happening is horizontal circulation… that is, gasoline bills are not (yet) used to pay businesses outside the petroleum industry, and they are not yet generally available to other merchants through a discount house that makes market in real bills. The more bills circulate, the easier it is for merchants to find ones with the best match to their needs, with respect to value and due dates.
Once bill circulation goes horizontal, benefits will accrue to society as a whole; merchants will benefit from the low discount rate, and will be able to balance seasonal demand swings by buying and selling bills through the services of the discount house. This translates to higher efficiency, and lowered costs for consumer products.
Perhaps it is now clear why the merchandise that the bill is drawn against must sell quickly and certainly; that is the way the bill gets paid! If the commodity the bill is drawn against ’stalls’ then the retailer must find other ways to pay his bill when it comes due… and any other way is more expensive than the bill, which has the lowest cost possible.
This is a very basic look at Real Bills; do read Professor Fekete’s Monetary Economics 101, Gold Standard University lectures, for much more on Adam Smith’s Real Bills Doctrine.
Rudy J. Fritsch
June 8th, 2010