The real bills doctrine (which may be found in Book II of The Wealth 
of Nations) is the doctrine that lending done on good quality real 
bills has no effect on the level of prices.  Example:  A manufacturer 
produces a good which is purchased on credit by a wholesaler.  The 
buyer accepts the bill, which generally (in the old days) had to be 
paid in 90 days. The manufacturer then takes the accepted bill to his 
banker, who discounts it, providing working capital for the 
manufacturer.  At the end of 90 days, the wholesaler pays the bill, 
the manufacturer pays the bank, and everyone is happy.  The whole 
process is "self financing."

Throughout history, many have argued that this process has no effect 
on the level of prices - an argument that Henry Thornton demolished 
in his Paper Credit of Great Britain.  The fallacies of the RBD are 
three:  a particular bill may be discounted multiple times, creating 
multiple increases of bank notes (or deposits); the money expansion 
itself drives up demand and, in the absence of an anchor such as 
gold, causes prices to rise; and the doctrine ignores the rate of 
interest charged on bills:  if the bill rate is below the expected 
rate of profit, the incentive to borrow more exists.

Neil T. Skaggs