Exclusive Interviews
Ingo Bischoff on Real Bills and Why They Are Not Inflationary
By Anthony Wile - March 06, 2011

Introduction: Ingo Bischoff is the president of the San Francisco School of Economics, a California non-profit corporation. He did his undergraduate work in Physics, Chemistry and Business Science and his graduate work in Economics. In his professional life, he was the CEO of a commercial printing and publishing company for twenty-eight years. After his retirement from commercial business, he formed the San Francisco School of Economics in 2006.

Daily Bell: Ingo Bischoff, we thank you for your time and sitting down with us today. Whenever we discuss Real Bills, we get massive amounts of feedback. People are fascinated by the concept. In this interview, we'd like to more fully establish the parameters and history of Real Bills so feedbackers and viewers will have a reference point for their discussions. Let's begin with a fundamental question. What is money?

Ingo Bischoff: To answer the question, I must explain how money evolved. As the "hand to mouth" existence during the "Hunt" gave way to agriculture and animal husbandry, surpluses developed. These surplus goods where exchanged via a "barter system". When the barter system proved too localized and lacking in a fixed standard of value, the "money system" evolved. The money system developed first along major trade routes before it became accepted more widely. To answer the question posed directly, "Money is a commodity with constant or near constant marginal utility". This means that one particular commodity is preferred over all others because of its "liquidity." As such it is suitable as an intermediate good in facilitating the exchange of other goods. The use of money removed the limitation of space and time, a characteristic of barter. The "money system" constituted a tremendous improvement over the "barter system."

Daily Bell: Why is gold money?

Ingo Bischoff: Gold is "Money", because it is the one commodity with constant or near constant marginal utility. Gold has been money for at least 2,500 years. That does not mean that early on and away from major trade routes, other commodities did not prove to have greater utility, and therefore functioned as money. However, as trade expanded, gold as "Money" became universally accepted. It is the physical and chemical properties of gold which renders it ideally suited as a standard of value. Today, contrary to popular assertion, still only gold is "Money."

While gold as a standard of value has persisted for several thousand years until today, Gold as a medium of exchange lost its usefulness when the demand for goods outstripped the ability of physical gold to finance the production of goods. Gold as a medium of exchange to separately finance each step in the production of consumption goods in a modern economy is completely unworkable. The solution was found by using Real Bills as "clearing instruments" to finance the production of consumption items.

These Real Bills were cleared at the end of a ninety-day period with the money received from the items sold to the consumer. Instead of circulating Real Bills with varying amounts and maturity dates directly, States' chartered banks acquired Real Bills at a discount and circulated denominated bank notes in their stead. To attach an accounting standard to these bank notes, the state bank charters' required that the bank notes be redeemable into "U.S. Dollars" as valued by the U.S. Congress. The provisions for providing the legal frame work to create a "commercial banking" system based on the "Real Bills Doctrine" are contained in Section 8 and Section 10 of Article I of the U.S. Constitution.

Daily Bell: Is silver money? Why not?

Ingo Bischoff: Silver was used as a monetary metal and its value as a ratio to gold was established by the U.S. Congress in the Coinage Act of 1792. Silver coins were suitable as "Money" for purchases in the "small." The congressionally established fixed value for silver came under pressure with the discovery of the Comstock Lode in Nevada in 1859. The Fourth Coinage Act, passed by the United States Congress in 1873, embraced the gold standard and demonetized silver altogether. However, silver still serves as a check on the value of gold. Because of its conductivity characteristics, silver is today primarily an industrial commodity. While the above ground inventory of gold is well known, the above ground inventory of silver is largely kept a mystery.

Daily Bell: What are Real Bills?

Ingo Bischoff: "Bills of Exchange" or "Real Bills" are commercial instruments which are regulated by the "Law of Bills and Notes." They are different from "two party" contracts enforceable under "Contract Law." Real Bills function as "clearing instruments." They are not "credit instruments", as is widely asserted. The "clearing" function performed by Real Bills can be compared to the clearing of transactions of purchases and sales of commodity contracts at the end of a trading day when all sales and all purchases are "cleared" against each other and the difference recorded on account. Real Bills are not cleared daily, but upon maturity at the end of a ninety-day period.

Daily Bell: How did Real Bills evolve?

Ingo Bischoff: "Goods Bills" or "Real Bills" evolved during the early Middle Age when they were used as "fair script" at large trade fairs, such as were periodically held at Lyon and Seville. The use of Real Bills was greatly advanced with the invention of "double entry" bookkeeping. The final improvement of "Real Bills" was realized through Acts by British Parliament in the early 18th Century which set aside "Common Law" practice in the enforcement of "two party" contracts by creating a "Law of Bills and Notes" which made "Real Bills" assignable and enforceable by "third parties."

Daily Bell: How did they work?

Ingo Bischoff: "Goods Bills" or "Real Bills" were issued at the entrance to the trade fair based on the declared value of goods the merchant or artisan brought to the medieval fair. These bills were used as "script" or "currency" to effect exchanges. When exiting the fair, the merchant or artisan was required to return the bills. The difference between the value of Real Bills issued and Real Bills returned was settled in gold coin. The growth of overland trade and ocean shipping, created greater use of Real Bills both for reasons of security and for facilitating the "back loading" of cargo vessels. With the invention of double entry bookkeeping, Venetian merchants took a lead in the use of Real Bills. The use of Real Bills was further extended by the development of the "Law of Bills and Notes" through enactments by the British Parliament in the 17th and 18th Century.

Daily Bell: Why are Real Bills important?

Ingo Bischoff: The use of "Real Bills" as "clearing instruments" is as important a development in the production and exchange of goods as is the advance from the "barter system" to the "money system." As the money system took hold, demand for goods expanded. Soon, the use of gold as a medium of exchange proved insufficient to finance the production of goods and also facilitate their exchange. Real Bills solved the problem by making available "social circulating capital" needed in the production of consumption goods. Only producers of consumption items which are sold within ninety days are acceptable to a drawer of Real Bills. It is the immediate demand by consumers which makes drawing and holding of Real Bills almost risk free. The production of consumption items represents 80% of all production of goods.

By "social circulating capital" is meant the "higher order" goods in warehouses which suppliers are perfectly willing to deliver to producers of "lower order" goods against the signature of acceptance on a "Real Bill" drawn by the supplier. The Real Bill is immediately negotiable by the supplier, and it can be discounted by any number of banks or individuals. The drawee or signer on the bill will pay to the holder the full amount shown on the Real Bill upon its maturity.

Daily Bell: Does the state (government) have any role in Real Bills?

Ingo Bischoff: The first successful and widely used currency in North America was the Pennsylvania Pound. It was created by the Bank of Philadelphia of which George Clymer and Benjamin Franklin, two signers of the U.S. Constitution, were principals. The Bank of Philadelphia acquired "Bills of Exchange" or "Real Bills" at discount. By inventorying the Real Bills of varying amounts and varying maturity dates, and circulating fixed denominated bank notes in their stead, the use of Real Bills was greatly improved.

The impeccable operation of the Bank of Philadelphia which was marked by the immediate withdrawal from circulation of excess currency to un-matured Real Bills held. This was the major reason that the value of the Pennsylvania Pound never fell below the value of gold and silver. This most remarkable fact was mentioned by Adam Smith in his book "The Wealth of Nations" published in 1776.

The "commercial banking" system that evolved in the United States sadly does not have the record of the impeccable operation of the Bank of Philadelphia in employing the Real Bills Doctrine. While the individual states issued "state bank charters" to authorize the creation of a redeemable U.S. Dollar currency against Real Bills and usually required a minimum of gold for capital stock, they often neglected to supervise the commercial banks they had chartered. The failure of close supervision frequently resulted in violations of provisions in the state bank charter, which involved the circulation of currency not "backed" by either the value of Real Bills or physical gold. The failure of providing supervision over state chartered banks constitutes a neglect of duty on the part of the states to insure compliance with constitutional requirements.

Daily Bell: Were they used all over the world?

Ingo Bischoff: "Bills of Exchange" were used to "clear" trade throughout the world. The clearance center for international "Bills of Exchange" was in London, UK. The success in facilitating international exchange of goods by means of "Bills of Exchange" lies in the statistic which shows that the volume of trade in real terms was larger in 1890 than it was in 1990.

Daily Bell: What banks interacted with Real Bills – investment banks or commercial banks?

Ingo Bischoff: While commercial banks offered some services, such as safe storage of valuables or the furnishing of personal references to their clients, the main function of the commercial bank was to create a redeemable currency against un-matured Real Bills in their possession. Commercial banks earn revenue by discounting Real Bills. In the conduct of their business, commercial banks have to constantly replenish their inventory of Real Bills. Real Bills expire after a ninety-day period when cleared with payment from the payer named on the bill.

A failure to pay on a Real Bill constitutes a loss to the holder. Remedy is not available under contract law. A willful failure to pay on a Real Bill ostracizes the offender from the bills market and spells the demise of his business. The bills market is not an open "outcry market" such as the commodity market. Instead, it consists of a community of businesses producing items for consumption goods, of private investors who seek to park idle cash for discount earnings and of commercial banks who seek revenue by discounting Real Bills. Real Bills are drawn only by private businesses in the manufacturing sector. Service businesses, whether private or governmental, will not find financing by means of Real Bills.

In contrast, "investment banks", or "investment trusts" as they are mostly known, are financial institutions which seek a return on the savings entrusted to them by their clients. They invest the "savings" of people for interest on debentures or for dividends on equities. They earn their money in relation to the return they garner for their clients. Investment banks do not require a charter from the State, nor are they authorized to create a currency.

By their very nature, bankers do not like to see idle currency sit in bank vaults. Commercial banks are by charter required to withdraw from circulation excess currency to the value of Real Bills. This necessitates that "idle" currency be held in the vaults of the bank until the volume of Real Bills acquired increases again. The problems in commercial banking can invariably be traced back to the use of "idle" currency for "investment purposes", mostly by speculating in real estate. "Borrowing short" and "lending long" is a recipe for disaster. Most bank runs and the eventual failure of banks were caused by indulging in such practice. Strong supervision by the State over commercial bank operations is essential to prevent rogue bankers from creating havoc.

Daily Bell: Why did central bankers dislike Real Bills?

Ingo Bischoff: To answer this question, I have to explain "central banking." Central banking involves the monetization of sovereign debt. Unlike a redeemable currency created against Real Bills, currency created by a central bank is "irredeemable" and monetizes government debt. The acceptance of central bank currency in exchanges is enforced through a "legal tender" provision. By the requirement to pay a federal income tax, taxpayers are used to guarantee the payment of interest and repayment of debt voted by federal politicians. Central bankers are close allies of the federal politicians who vote budget deficits, which are then monetized by the FED. In contrast, "commercial banks" exist on discounting Real Bills initiated and drawn by private, productive businesses.

The currency created against Real Bills is "redeemable" into a fixed quantity of gold. A redeemable currency is suitable to keep as savings since it can be exchanged for gold. The willingness of people to invest their gold savings determines the rate of interest paid for the use of people's savings. With the creation of a redeemable currency, commercial banks enable savers to have control over their savings. Since "irredeemable" central bank currency is monetized debt, it cannot serve as a means of savings. An irredeemable currency must always be "invested", regardless of the prevailing interest rate. The FED determines the prevailing interest rate through the conduct of Federal Open Market Operations. This involves a bidding process to purchase government debt from which average savers are excluded. Savers must accept the interest rate established through FOMOs. Central bankers dislike Real Bills, because their creation is entirely in the hands of private businessmen. Central bankers crave control over the issuance of currency which they do not have with Real Bills. Furthermore, Real Bills are drawn only when they can be cleared with a "redeemable" currency or with gold. The gold standard required under the Real Bills Doctrine strips central bankers of control over the interest rate.

Daily Bell: In America how did the advent of the Federal Reserve damage Real Bills?

Ingo Bischoff: Contrary to the widely held perception that the Federal Reserve Act was the result of lobbying and manipulations by the big money center banks, the Federal Reserve Act was really an attempt by the states to rein in the violation of good banking practices by the big money center banks and to preserve the application of the "Real Bills Doctrine" for commercial banking. While the publicized meeting of prominent bankers and politicians on Jekyll Island did in fact take place, the discussion amongst them was more defensive than offensive as regarded the pending banking legislation in the U.S. Congress. Many of the States, working through their U.S. Senators, attempted to put controls on the big New York City banks by establishing a reserve system that created a "redeemable" national currency based on the "Real Bills Doctrine."

When the big money center banks were unable to guarantee themselves control over the contemplated reserve system, they countered the congressional effort to strengthen commercial banking by supporting the push of the Progressive Movement for more "Democracy" in the early 1900s. This movement called for the establishment of an income tax and the popular elections of U.S. Senators. The bankers in New York sensed a benefit for themselves in the goals of the Progressive Movement at the time.

The "Income Tax" or 16th Amendment to the U.S. Constitution was ratified in February of 1913. The "Popular Election of U.S. Senators" or 17th Amendment was ratified in April of 1913. The Federal Reserve Act was passed by the Congress in December of 1913.

The Federal Reserve Act (FRA) established a system with twelve regional Federal Reserve Banks whose operations were overseen by a Federal Reserve Board answerable to the U.S. Congress. The original FRA of 1913 authorized a "redeemable" Federal Reserve Note to be created only against Real Bills and gold within the system. "Anticipation Bills" or U.S. Treasury debt instruments were specifically banned from monetization under the original 1913 FRA.

Of all the regional Federal Reserve Banks, the New York Federal Reserve Bank was twice as large as the next largest Federal Reserve Bank in Chicago. The influence and power of the big banks within the NY Fed was soon brought to bear on the other regional banks to fall in line with NY FED decisions. Benjamin Strong as president of the NY FED manipulated the members of the Federal Reserve Board to the point where he all but neutralized the oversight function of the Board.

When in the early 1920s the national economy experienced a recession, the NY FED under Benjamin Strong promptly violated the prohibition against the monetization of U.S. Treasury debt by initiating Federal Open Market Operations (FOMO). The other Federal Reserve Banks were silent about this violation of the FRA, as was the U.S. Congress. The NY FED continued with illegal FOMO until the effects of its rogue acts resulted in the bursting of the Florida real estate bubble and the collapse of the stock markets in 1929. When in 1933, banks no longer could or were willing to redeem Federal Reserve Notes for gold, Franklin D. Roosevelt obliged them by declaring a "bank holiday."

Instead of prosecuting the violation of the Federal Reserve Act and to pave the return to a "redeemable" currency, F.D.R. by Executive Order #6102 confiscated the savings of the American people and prohibited them from holding gold in the future. In January of 1934, the U.S. Congress passed an addition to Section 14 of the Federal Reserve Act which ex-post-facto legalized the rogue acts of the NY FED, in which it had engaged in since the early 1920s, and it authorized the monetization of "Anticipation Bills" or sovereign debt previously ineligible to be monetized. These acts of Congress would never have been possible without the ratification of the 16th and 17th Amendments.

With the prohibition of gold ownership, the Real Bills market was destroyed. Businessmen will simply not draw Real Bills that would only be settled with irredeemable currency. The destruction of the bills market spelled the demise of the commercial banking system. What today are called "commercial banks" are the carcasses of the old, real commercial banks, which have been authorized by the FED to create a "deposit currency" against the issuance of loans and mortgages. This deposit currency is converted into Federal Reserve Notes by the payments made on the loans and mortgages. In other words, today's commercial banks function merely as outlets for the distribution of irredeemable FED central bank fiat currency. Absent these outlets, the FED would have to resort to dropping Federal Reserve Notes from airplanes in order to bring them into circulation to be of any use in a productive economy. Today's commercial banks have nothing in common with real commercial banks, though many of the FED requirements mimic the operation of commercial banks employing the Real Bills Doctrine.

Daily Bell: What else damaged Real Bills?

Ingo Bischoff: The prohibition of gold ownership in 1933 prevented Real Bills from coming into existence. With the demise of Real Bills, the "wage fund" as part of Real Bills vanished as well. This plunged the productive economy in the 1930s into an economic depression from which the country could not escape despite the application of massive Keynesian pump priming.

The return to a commercial banking system employing Real Bills in the creation of a redeemable currency is the only answer to the present unemployment situation. The control over the disposition of excess currency and the supervision over commercial bank operations, while a problem in the past, would be of little problem in the age of the computer.

Daily Bell: Were Real Bills damaged in Europe as well? How?

Ingo Bischoff: By the end of the 19th Century, Germany had become the undisputed leader in the production of chemicals and manufacture of coloring dies. It held most patents for processes in these industries. When large gold reserves were discovered in British Transvaal in the 1880s, the Bank of England decided to withhold this gold from circulation by locking it away in their vaults. Britain did not want to support the thriving chemical industry in Germany by having gold move to Germany in settlement of "Bills of Exchange". The Germans retaliated in freeing some of their gold reserve by paying civil servants with an "irredeemable" currency.

Soon the French joined in the battle by copying the Germans in payment of their civil servants. All the wrangling over the free flow of gold in settlement of international Bills of Exchange ended in the conflagration of World War I. With the onset of the First World War, the Real Bills system in Europe was in shambles. The gold reserves of England were used to pay for war materials provided by the United States. Drastic war reparations demanded from the Germans by the Treaty of Versailles stripped Germany of all gold. When the British insisted on bilateral settlement of trade balances after the end of World War I, the world's trading nations never returned to the unfettered use of international Bills of Exchange.

Daily Bell: What amendments in the American constitution need to be undone in order to unlock Real Bills once again?

Ingo Bischoff: Most of the popularly elected senators in today's U.S. Senate are handmaidens of the large banks within the Federal Reserve System. With the ratification of the 17th Amendment, individual States as governing entities lost their seat at the table of power in the federal government. The States had always tried to protect commercial banking and the Real Bills Doctrine from subversion by central bankers.

It was such in 1811 with the attempt to get the Congress to renew the charter of the First Bank of the United States and particularly in 1836 in the attempt to renew the charter for the Second Bank of the United States. When the Federal Reserve Act of 1913 proved to be unfavorable to plans hatched by the central bank minded owners of the big New York banks, they simply bit their time and waited until their campaign contributions to popular elections of Senators yielded sufficient majorities in the U.S. Senate to pass favorable legislation. With the ratification of the 17th Amendment, the state legislatures no longer selected the U.S. Senators, nor could they recall them. A return to a commercial banking system employing the Real Bills Doctrine will require the repeal of the 17th Amendment, yet the Congress is unlikely to propose the necessary amendment to that effect.

This leaves the States to act on their own to make application to the U.S. Congress for calling an "Article V" convention to propose and ratify an amendment to repeal. With the repeal of the 17th Amendment, the repeal of the 16th Amendment, the other amendment which underpins FED central banking, will be a given. What is the chance for this to happen? I judge it as relatively good, given the increase in the number of conservative governors and conservative legislatures as a result of the last federal election.

Daily Bell: What would the benefit be to the economy were Real Bills to be offered privately?

Ingo Bischoff: I assume that by this question is meant, could Real Bills coexist with central banking? The answer is yes. They can, as long as the central bank currency is not protected by a "legal tender" provision. As mentioned before, private businessmen will draw Real Bills as long as they can be cleared with redeemable currency or with gold. As long as Federal Reserve Notes enjoy "legal tender" protection, Real Bills will not come into existence.

If on the other hand the question asks whether individuals can earn discounts by acquiring Real Bills, the answer is yes. Banks are not essential to the circulation of Real Bills, though a redeemable currency in their stead can vastly improve their circulation.

Again, Real Bills are only drawn by productive, private businesses. Governments and private service businesses have no part whatsoever in the creation of Real Bills. If the U.S. Government were to strip the Federal Reserve Note of its legal tender protection as regards the payment of private debt, a commercial banking system could return on a state-by-state level. Real Bills would be drawn by suppliers and discounted. Immediate employment opportunities in private industry would be the result. The redeemable currency would compete with Federal Reserve Notes for purchases in stores. Federal Reserve Notes would likely drop in value against the redeemable currency which would cause the migration of public sector employees to work in the private sector. Of course, the ideal is to have a redeemable "National Reserve" currency based on the Real Bills Doctrine similar to the redeemable "Federal Reserve" currency created under the original Federal Reserve Act of 1913.

Daily Bell: What supervision would government have to give Real Bills?

Ingo Bischoff: A "National Reserve" banking system employing the Real Bills Doctrine would have to provide for significantly improved independent oversight of commercial banking operations. Computer systems can easily provide solutions to all past problems encountered in the operations and oversight of commercial banking. With the repeal of the 17th Amendment, the voice of State governments will again be heard in the U.S. Congress, which will demand the sharp curtailment of the ambitions of central bankers to exercise control over the currency system.

Daily Bell: What are the accounting ramifications? Would accounting have to change?

Ingo Bischoff: The accounting standard for U.S. currency was set by the 1792 Coinage Act, which defined a "U.S. Dollar" to be 1/20.65 of an ounce of gold. This was the accounting standard until 1935 when the U.S. Congress changed the "U.S. Dollar" to be 1/35 of an ounce of gold. The last adjustment to the value of the U.S. Dollar before August 15, 1971 had the U.S. Congress define the "U.S. Dollar" to be 1/42.22 of an ounce of gold. That is the constitutionally set value of the "U.S. Dollar" today. With the suspension of redemption of U.S. Currency and Federal Reserve Notes on August 15, 1971, no redeemable major trading currency was left in the world.

The value of the Federal Reserve Note today can be determined by checking the "price of gold" in terms of USD/FRN on precious metals markets, then reversing it to read it as the value of the USD/FRN in terms of ounces of gold. The "floating" value of the USD/FRN makes it extremely difficult for businesses to value their capital positions and to maintain market share in foreign markets. The return to a commercial banking system requires that U.S. currency again be redeemable in a fixed quantity of gold. It does not matter whether a "U.S. Dollar" is valued to be 1/20.65, 1/35 or 1/42.22 of an ounce. Any reasonable amount of gold that could be struck into a workable coin would do. The quantity of gold contained within a minted coin, nor the overall quantity of gold in the world has little to do with the establishment of a fixed standard. It is the fixed standard itself that is important in accounting.

All prices are in fact a ratio of the fixed standard. Gold itself has no price, because it is the commodity that is used in setting the standard for a redeemable currency. In my opinion, it is best to accept the latest constitutionally established standard of 1/42.22 of an ounce of gold to be one "U.S. Dollar." Individual States could then immediately charter commercial banks and authorize the creation of redeemable U.S. Dollar currency. The new redeemable currency thus created could later be absorbed into a nationwide system, if and when the U.S. Congress gets around to passing the necessary legislation. For a redeemable currency to circulate parallel to an irredeemable FRN, it is necessary that the FRN be stripped of its legal tender protection at least as it applies for use in the payment of private debt.

The USD/FRN would be in effect a different currency with a "floating standard", while the new redeemable U.S. Dollar denominated currency would have a "fixed standard" in terms of quantities of gold. The Congress must also reconsider the obligation of the United States to guarantee the FRN. For accounting purposes, the FRN would have to be treated differently from the treatment of the redeemable currency. Would it be workable? I'd say yes. This is exactly what Horace Schacht, Finance Minister in the Weimar Republic did when he created the redeemable "Rentenmark" to circulate parallel with the highly inflated, irredeemable "Reichsmark", and it worked. It stabilized the German monetary system.

Daily Bell: So central banking does not have to cease?

Ingo Bischoff: Real Bills will not reappear until a redeemable currency can again be created against them. Central banking does not necessarily have to cease to exist for a commercial banking system to return. However, central bank currency cannot be made legal tender in payment of private debt at the same time that a redeemable currency is meant to circulate.

Daily Bell: Are Real Bills inflationary? Why not?

Ingo Bischoff: Real Bills in and of themselves are non-inflationary. Their volume can expand and contract without causing any inflation whatsoever. It must be remembered that Real Bills are not "credit instruments". They are "clearing instruments" which facilitate that consumption items get to the consumer without first having to pay separately for every step in the production process. The consumer's payment in gold coin or redeemable currency for purchase of the finished items is used to clear the Real Bills drawn to finance the production process along the way. It is the existing immediate demand by consumers for the consumption items coming to market that assures payment on Real Bills at maturity.

Real Bills can be used as a vehicle to create inflation by conspiring to create "double bills." This deception however is quickly discovered when the Real Bills mature. Any offender is immediately ostracized from the business and banking community which means the demise of his business. "Double bills" created by businesses are rarely a problem in the commercial banking system.

It is in banking operations where most problems in connection with Real Bills occur. Real Bills can be used by rogue bankers to create inflation using temporarily "idle" currency for investment purposes. This in essence amounts to the creation of "double bills" by the bankers. This sort of unethical practice is not easily detected. For that reason it is necessary that States closely supervise the operation of banks they chartered. Almost all problems in commercial banking involved the use of "idle" currency for long-term investment. This borrowing "short" to lend "long" frequently lead to disaster.

Daily Bell: Why have they attracted so much negative attention? Why are they unknown even to free-market economists?

Ingo Bischoff: It is utterly amazing how in a matter of a few generations something which was universally accepted and understood can become totally unknown. There was absolutely no doubt among the American colonists that gold was money. The principals of the Bank of Philadelphia which created the Pennsylvania Pound perfectly understood the function of Real Bills and how to improve their use by circulating paper currency in their stead. When F.D.R. contemplated the confiscation of the people's gold, 700 business professors and economists signed a letter to urge him not to do it. Five years later, not a single one of these people could be found to speak against F.D.R.'s implementation of the Keynesian theory.

As stated previously, the understanding of the function of Real Bills in a real commercial banking system is not in the interest of central bankers. The education establishment is so intimidated by the monetary elites that they dare not speak out against the interest of central bankers. Every large business school of a university has buildings or lecture facilities built with funds donated by large banks. The financial press and talking heads on TV and radio also will not go out on a limb to talk about something which has totally slipped from the consciousness and understanding of people.

I believe that the "Austrian" free-market economists missed the distinction between credit and clearing as they looked at the function of Real Bills. Books written by prominent bankers, who should know better, reveal a lack of understanding of the function of Real Bills. Yet, Real Bills were well understood a century ago, and they were the basis of the banking system in North America and the United States for 185 years. FED central banking has been with us for only 77 years. John Maynard Keynes well understood Real Bills when he took bets on how long the First World War would last. He also knew that his General Theory of Money and Banking could not stand the test of time. We have the proof now.

Daily Bell: What is the criticism of Real Bills from free-market quarters?

Ingo Bischoff: The criticism I seem to detect is that the free-market quarter views Real Bills as credit instruments and therefore deems them inflationary. Real Bills are not credit instruments and inherently are non-inflationary.

Daily Bell: Do Real Bills interact with the land tax you favor? How so?

Ingo Bischoff: I must correct you. I favor a "land value tax" which is fundamentally different from a "land tax". I have done a lot of thinking about the "land value tax" in connection with Real Bills and a redeemable currency. I have come to the conclusion that the founding fathers were much further ahead in their thinking than we give them credit.

The philosophical principles for the institution of a "land value tax" lie in the allodial title rights and duties under Anglo-Saxon law, which are included in each of the constitutions of the original thirteen states and further included in the constitutions of the rest of the thirty-seven states as provided by Article IV of the U.S. Constitution. Henry George in his book "Progress and Poverty" made a perfect case for the collection of a "land value tax" on the basis of equality and justice. However, he never alluded to the form in which the payment of this land value tax would be collected. The word "value" implies a standard. The mechanism by which "land" is valued is established with the county assessment and recording system enshrined in every state constitution.

"Land" is a factor in the production of goods, as are "Labor" and "Capital". Just as Labor receives Wages, and Capital receives Interest, Land is due a return in the form of Rent. The overall value of manufacturing materials supplied to the production cycle of consumption goods made by use of Real Bill reflects the value contributed by each of the three factors of production, Land, Labor and Capital. Since Real Bills when cleared furnish the compensation to all the factors involved in the production of the goods, the Rent in return for contribution by Land must be in the form of redeemable currency or gold. Therefore, I conclude that it is not sufficient to only compensate Labor and Capital with a redeemable currency or gold, but that it absolutely necessary to collect the full value of the contribution made by Land in the form of the "land value tax."

To do so, is much more important for the proper "discovery of prices" for goods in a "free market" distribution system than it is to garner revenue to cover the cost of government. A failure to fully collect the "land value tax", or worse to monetize land values by using "temporary excess currency" in commercial banks to speculate in real estate, does nothing but distort the prices of goods and harms the "free-market" distribution system. With the inability to discover true prices, the Real Bills market is harmed, which then has a detrimental effect on the commercial banking system, which circulates redeemable currency instead of the Real Bills.

I make this statement: A redeemable currency cannot long exist without the full collection of a "land value tax." Conversely, a "land value tax" where a "free-market" distribution system is desired, must be collected in the form of a redeemable currency or in gold.

Daily Bell: What other distortions have been caused in the economy by the lack of Real Bills?

Ingo Bischoff: A banking system based on the Real Bills Doctrine along with the collection of a "land value tax" is the most stable system to advance prosperity, bar none. The distortions caused by the absence of commercial banking employing the Real Bills Doctrine are all reflected in the ills brought on by central banking. Most unjust is the distribution of the central bank currency. Central bank currency cuts all connections to an ability to properly value the contribution made by each factor of production in the creation of wealth or in valuing services, be they private or governmental.

Daily Bell: Is it possible to have Real Bills without a gold standard?

Ingo Bischoff: No, it is not. As I mentioned before, no businessman will draw a Real Bill unless he knows that it will be paid either by a redeemable currency or by gold. He would never give up something of positive value, to in turn be paid back with something of negative value. A redeemable currency can only exist with a gold standard. "Redeemable currency" is the definition of a "gold standard". No gold standard, no Real Bills. It is as simple as that.

Daily Bell: Any other thoughts you want to add? Any further misperceptions you want to clear up?

Ingo Bischoff: No, thank you. Your questions have given me a plenty of opportunity to express my thoughts on the importance of Real Bills. Thank you very much for your enlightened questions.

Daily Bell: Thank you for this primer on Real Bills.

After Thoughts

Two points we would like to make. First of all, Ingo Bischoff has a different view of finance than we do. Read this interview and it becomes clear that he will tolerate a good deal of state interference in the financial markets and in fact intimates that Real Bills cannot function without certain government instrumentalities. He believes for instance that a broad-based accounting standard is necessary and that only the state can generate such an accounting standard or impose it. We ask, why is this so? Is the market itself incapable of generating and enforcing broad-based accounting facilities? We would suggest that those who participated in such an accounting standard would have infinitely more credibility than those who did not. In other words, the market itself can provide incentives for businesses to adopt standards. Afterall, it was the market that determined gold to be the ideal money instrument, why can't the same market determine accounting standards to govern it?

Having pointed this out, we wish to add that Ingo Bischoff is doing a service by resurrecting the conversation about Real Bills. If he is correct, Real Bills were apparently a meaningful part of financing long before the disease of modern central banking spread worldwide. When we contemplate how the Anglo-American power elite destroyed free-market finance piece by piece over the past century, we still have a hard time comprehending it. Even 20 years ago, the vast majority of people on the planet believed fiat-currency was money and that gold and silver were "barbaric relics." As far as Real Bills are concerned, they were entirely flushed down the memory hole.

It is amazing how fungible people's belief structures are even as regards something so fundamental. What the elite, one-world conspiracy shows us is that if one controls the media almost any belief structure can be inculcated within several generations' time. It is only thanks to modern communication that we are rediscovering the real money of the past and how free-markets actually worked before the Anglo-American elite began reconfiguring commerce to emphasize paper money and state-mandated central banking.

Even though we don't agree with everything Ingo Bischoff argues, he has certainly helped regenerate interest in the concept of Real Bills and makes an eloquent argument for their integration into the larger modern financial world. Our point to him and those who are reading this interview is that Real Bills need not be supported by statist nostrums to make a comeback. In the best of all possible worlds, the larger marketplace would default to a private-market gold and silver standard; Real Bills, to the degree the market demanded them, would likely make a comeback too.

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