Smith introduces the real bills doctrine against 
Hume’s quantity theory of money and hostility to 
banks. It explains how banks can take liquidity 
risks by granting credit (which had to be paid in 
90 days) and issuing notes (which are payable at 
demand). If the bank discounts real bills, the 
cash reserve (necessary to pay notes at demand) 
and he shareholders’ fund of the bank are 
consolidated. If it discounts fictitious bills, 
the cash reserve and the shareholders’ fund are encroached upon.

Again, Fullarton (1845) enriches the real bills 
doctrine to contradict the quantity theory of the 
Currency School. It is a part of the Banking 
School analysis of the functioning of the 
international gold standard system. The gold 
point mechanism, the lender of last resort 
function of the central bank and the managing of 
bank rate are the complementary components of 
Banking School analysis. Without the real bills 
doctrine, the Banking School’s criticism of the 
1844 Bank Act collapses. See Wicksell and Neil 
message. But remember that the Bank Act was an 
attempt to prevent the Bank taking liquidity risks.

Thornton’s criticism of the real bills doctrine 
is different from Ricardian criticism. The real 
bills doctrine developed by the American “credit 
school” at the end of the 19 century is distinct 
from the doctrine developed by the Banking School.

We must be careful when evaluating the real bills 
doctrine. I’m not convinced that Smith and 
Fullarton banking theories are totally irrelevant.

Jérôme de Boyer des Roches