Gold Standard Institute admits: gold useless w/o paper trading money -- What are Real Bills?

The latest issue of the Gold Standard Institute (http://www.goldstandardinstitute.net/GSI/wp-content/uploads/2010/06/TheGoldStandard15.pdf) helps the average confused member of the alt-economics community get to the heart of the matter.     Obviously, the GSI is devoted to the idea of money based on the gold standard.   Naive, Austrian-influenced, amature economists need to understand GSI's position before spouting off about gold as "the only sound money". 

For, you see, the GSI is perfectly upfront about the fact that direct trade in gold is not practical.  As they put it, for example: "Gold on its own cannot support international trade; Bill circulation is essential for a viable Gold Standard." 

The gold standard only works, then admit, when actual trade is in paper.   The paper, which they call Real Bills, is backed by gold, but the paper is essential. 

Real Bills vs Money

Now, the question becomes, what are Real Bills???    Unlike a paper money supply backed by gold, real bills are not issued by a central bank and are not permanent.  Rather, they are issued by private parties, and they have an expiration date. 

They are most like a personal check with an expiration date.  They would say something like "Redeem this bill of sale for $100 worth of gold on July 31st 2012 at XXX Bank".  In practice, that bill could then trade hands among various people right up until the redemption date.    

This is the meaning of Real Bills being "self liquidating".   Unlike a permanent paper money supply, Real Bills are created in response to real economic activity, and are liquidated at the commencement of that activity.  Here is how they describe it: "Bills are drawn against real goods, the goods are delivered, the Bills net out the trade. Then, after doing their job, after being paid off on their due date, the Bills disappear."

The Necessity of a Clearing House

The only thing they left out of their description is the necessary role of a clearing house.  The clearing house keeps track of accounts upon expiration of the bills.  If necessary, on the date when accounts are settled, actually physical gold would then trade hands.  But the whole point of Real Bills is to allow multilateral trades in paper certificates, rather than actual gold. 

The clearning house has to function as the gold storage vault, as well as an accounting service, to clear and pay accounts of settling day.  If Real Bills are drawn on multiple banks, the individual banks would have need of a central clearing house to clear their accounts.  In practice, that would work like the way cheques are cleared by multiple banks. 

Advantages of Real Bills

Because they aren't permanent, Real Bills can't be used to fund speculation.  It is also nice because they don't disrupt the productive economy with the inflationary or deflationary effects of a permanent money supply.   Real Bills are always matched perfectly to the real productive economy. 

Nor are they centrally-controlled.  Real Bills are like a democratically-issued money supply.   People issue Real Bills on the wealth they possess.  Under this system, the function of banks is simply accounting and wealth transfer.   Presumably, the banks are funded on a fee-for-service basis. 

Real Bills of Personal Credit in Practice

This was quite the amazing find for me, as it precisely summarized a system that I had independently came up with myself. In fact, it adds a number of key elements that make it better than what I had envisioned. The one thing their paper had not envisioned, that I had, is the vital role of the real bills clearing house in maintaining a book of customer ratings. It is essentially like an e-bay rating, or Amazon rating, a compilation of the opinions of the many people you have done business with.

http://www.mitra.biz/blog/archives/2005/03/couthored_paper.html

For dealing with times of monetary chaos, these little real bills of personal credit will be like gold. For a nation dealing with the basic problem that few people do anything economically productive, being all cubicle critters, the basic question for many of us will be: what can I do, what can I offer you? What exactly am I going to fill out on this slip of paper for my trading service?

Our new economy will be based much more heavily on personal services, much like the economies of old. Our standard of living going down means our wages will fall, which sounds real bad but has some nice upside. When wages fall, all kinds of economic services become feasible again that have been wiped out of the market in the last 30 years. Think of maids and housekeepers for example. 100 years ago, such services were quite common, but as the cost of labor skyrocketed, the service disappeared.

Thus, if you are a displaced cubicle worker, your service may be "Mending clothes", or "Cleaning house" and that may be a worthwhile economic trade. As a general rule, all the repair skills will roar back to life, as the cost of new and imported goods rises it will become sensible to keep repairing old things rather than always replacing them.

The Real Bill Economy, part 1

The history of real bills offers a potential solution to the difficulties of non-dollar commerce. A real bill is essentially a direct IOU, guaranteed by your own ability to produce. It is essentially a store of value for whatever you offer. The advantage is that it can be transferred to multiple owners. Thus, in effect, your IOU, representing your service, becomes part of a market, and you would not control who cashed it in.

Here is a practical example. Say you are a laborer, and you want to buy some food. In a pure barter economy, you could offer to work for the farmer in exchange for food. But what if the farmer had no need of your labor? Instead of refusing the sale, the farmer could accept from you a real bill for 8 hours of your labor. He wouldn't even have to use redeem the bill himself. Say the farmer needed to visit the doctor. He could pay with your real bill, signing it over to the doctor, who would then own your 8 hours of labor.

The ownership trail of real signatures would be the main safeguard against counterfeiting of real bills. You would never redeem a real bill that you yourself had not written, and a valid ownership chain would be easy to verify, in a case of multiple real bills being fabricated. As you can see, theft of real bills would be senseless, since, unlike fiat money, they had to be redeemed by their legitimate owner. A stolen or lost real bill would be worthless, unless returned to its owner.

A real bill is also given an expiration date, which guarantees both its worth and its marketability. The market would determine the validity of various expiration dates, primarily based on risk assessment. For example, a physical labor bill might have a weekly or monthly expiration date, whereas a doctor's or teacher's service bill might have a year-long or even multi-year expiration date, since such a professional is much less likely to "go out of business".

Specific expiration dates and real bill values would also depend upon your own personal skill, ability, and work ethic. If someone knows you are a lazy laborer, they are not likely to give you much in return for your 8-hour labor bill. Someone who is a known hard worker will command much more for their labor bill.

Character assessment would also play a role in real bill value. Such as, most obviously, your consistency in redeeming your outstanding bills faithfully. Defaulting on your real bills would quickly mean no one would accept them, thus taking you out of the real bill economy.

Since stolen real bills are worthless, defaulting on your own real bills would have serious consequences. Essentially, everyone would have to work faithfully, or face starvation.

But how would you know if some random person's real bill was worth anything or not? This is the role of the real bill clearing house. The clearing house would provide the verification and market service for real bills. Verification means the clearing house would track the performance of your real bills and make that performance available to the public, acting as a rating agency. Anyone desiring to do business with you could simply check your real bill rating. If your real bills have a certified 100% performance, they would be rock solid in trade or transaction, and your services would be in high demand. If you were lazy or unfaithful in writing or redeeming your real bills, no one would accept your bills and no one would want your services. Violating the terms of your own real bills could also be against the law, resulting in criminal penalties.

The clearing house would also provide a market for real bills, greatly facilitating general commerce. Upon receipt of a real bill, you wouldn't personally have to use that service or personally find a matching buyer. Rather, you would only have to give it to the clearing house. The clearing house would then match people who have the need for that real bill. With today's economy, it could all be done electronically.