Fred and Mason. This is a definition of a real bill, not a 
description of the doctrine. The doctrine holds that the issuance of 
money based on real bills is non-inflationary.
http://en.wikipedia.org/wiki/Real_bills_doctrine

Real bills are not money. Although they can, UNDER ORDINARY 
CIRCUMSTANCES, be exchanged for money, they are not money themselves. 
They are not generally accepted in exchange. If circumstances are not 
ordinary, they may not even be exchangeable for money. Whether a bank 
will discount the bills described by Fred depends on whether the 
bankers believe that the firm will earn sufficient profit or possess 
sufficient wealth to redeem the bills in money. The bills are real 
enough. But whether the events will occur that give the bills the 
market value that is assumed in Fred's definition is problematic.

To understand the doctrine, consider a bank that uses the asset "real 
bills," which it receives from a discounter, as excess reserves. It 
loans out new transferable deposits (or prints bank notes) based on 
its expectation of the real bills being paid in money by the firm 
that issued them. We must make some assumption about timing. If the 
real bill is expected to be paid in, say, 60 days; and if the 
borrower transfers his deposits today (or the bank note is redeemed), 
the bank will have to transfer reserves. Yet it has no new reserves 
to transfer. If it can persuade the bank demanding the transfer (or 
the redeemer of the note) to accept the firm's "real bill," then 
there is no problem. Otherwise, he has no additional reserves to 
cover the newly issued transferable deposits. New money has been 
issued without new reserves.

The new money is inflationary in the old sense of the term. Inflation 
used to mean an increase in the quantity of money. Thus, the doctrine 
in terms of the old meaning of inflation is simply fallacious.

But economists have come to use the term "inflation" in a new sense. 
They refer to it as a general increase in prices. The new money, if 
it is used to buy goods or resources, will certainly, other things 
equal, cause a general increase in prices in the SHORT RUN; since the 
borrower will bid resources in her direction. Other bidders will have 
to pay higher prices and they will pass those higher prices on to 
producers of consumer goods. Whether it causes inflation of prices in 
the LONG RUN (under the usual assumption of fixed types of consumer 
goods) depends on whether it enables purchasing power to be shifted 
in such a way that larger quantities of goods can be produced with 
the same resources than previously.

Those who promote the real bills doctrine on the basis of the newer 
meaning of the term "inflation" must be referring to the long run and 
they must be assuming that the new money is used to generate a 
sufficient amount of technological advance to offset the inflation of 
prices due to the new money.

The reasoning used to support the real bills doctrine expressed in 
terms of the newer meaning of inflation does not depend on the 
existence of real bills. The same effect could be achieved by an 
increase in the quantity of money on any basis, provided that the new 
money is used in the specified way.

What, then, can one conclude about the real bills doctrine? It 
achieves nothing more than to divert an economist's attention away 
from the more fundamental issues related to money and prices. It also 
tends to blur the dynamic aspect of economic analysis by blurring the 
time element that is necessary in order to analyze money and price 
issues properly.

The reasoning used in this analysis comes from Ludwig von Mises's 
Theory of Money and Credit and Human Action, although I cannot refer 
to a specific passage where he presents this argument in full. But 
the following passage from the former book is pertinent:

III.15.30

"It is one of the most remarkable phenomena in the history of 
political economy that this fundamental distinction between notes and 
bills could have passed unnoticed. It raises an important problem for 
investigators into the history of economic theory. And in solving 
this problem it will be their principal task to show how the 
beginnings of a recognition of the true state of affairs that are to 
be found even in the writings of the Classical School and were 
further developed by the Currency School, were destroyed instead of 
being continued by the work of those who came after.

http://www.econlib.org/library/Mises/msT6.html#III.15.31


Pat Gunning