Safecoin and 'The Real Bills Doctrine' of Adam Smith

Adam Smith from Scotland, was the inventor of ‘The Real Bills Doctrine’ something I expect most of you have no knowledge of. I dont pretend to have a great grasp on the the concept myself, but I feel it could be considered by the deep thinkers in this place, for consideration in the debate around the economics of Safecoin, especially in the event of a fiat collapse.

The modern thinker regarding ‘The Real Bills Doctrine’ would be Professor Antel E. Fekete …a pretty smart guy who invented his own number system

Prior to World War One, unemployment was non existent and small business thrived due to a phenomenon known as ‘Self Liquidating Credit’. Economists today deny it’s very existence…how surprising.

If we substitute Safecoin for Gold and Contracts for ‘Real Bills’ in this essay, I wonder how it reads…does it make any sense or spark some original thinking into how Safecoin could change the world, the same we we envisage the network itself to.

…but first some short background videos from the Prof:

Self-liquidating credit

Real Bills


Consumption as a source of credit

Adam Smith’s insight that consumption, next to savings, is another fundamental source of credit was one of the great discoveries of economics, comparable in importance to Carl Menger’s subsequent discovery of marginal utility as the source of value. We owe the concept of social circulating capital (SCC) to Adam Smith.

By this he meant that part of the flow of consumer goods in most urgent demand that is moving sufficiently fast to the ultimate consumer so that it will be removed from the market in 91 days (the length of the seasons of the year in our temperate zone). For example, items like bread, seasonal garments and firewood in winter will unquestionably be consumed in definite quantities and do thus belong to SCC; items like grain held for speculative gains, unsold garments left over from the previous season and firewood in summer do not.

Producers and distributors handling goods that form part of the SCC enjoy special privileges and have special responsibilities due to the special place their product occupies in the constellation of economic goods. They don’t have to face uncertainties and don’t have to carry risks all other producers and distributors have to face and carry. They do not finance their production under the relatively harsh terms of the interest-rate regime. They can finance it under the relatively more lenient terms of the discount-rate regime.

SCC has been compared to a great river that empties into the infinite ocean of consumption. The salinity of water undergoes important changes downstream as the river gets within earshot of the ocean. Fish habitat prospering in these waters changes. Similarly, important changes occur in the type of credit financing production and distribution of goods downstream as the ultimate consumer is getting ready to remove them from the market in less than 91 days. In particular, the gold coin need
not be saved in advance of production. Financing is done retroactively with the gold coin released by the ultimate consumer.

Drawing a bill

The wholesale merchant delivers the finished good to the retail merchant (or the higher-order producer delivers the semi-finished good to the lower-order producer).

Adam Smith observed that hardly ever does the latter pay with gold coins, and never does the former demand payment in gold coin. Invariably the former, called the drawer, bills the latter, called the acceptor or the drawee of the bill. The face value of the bill is payable in gold coin upon maturity, not more than 91 days later. The signature of the acceptor acknowledges receipt of goods listed on the face of the bill.

It also acknowledges his responsibility for payment. The bill so accepted is returned to the drawer. Only in the rarest of instances would the drawer keep the bill and present it for final payment upon maturity as observed by Adam Smith. More commonly, he would offer it to his own suppliers in payment when replenishing his inventory. They would be glad to take it because they know that they themselves could likewise use it when it is their turn to replenish their depleted inventory.

In other words, the bill goes into spontaneous monetary circulation. Paying the supplier with a maturing bill drawn on a third party is called discounting it since the face value is subject to discount by the number of days remaining to maturity. Discounting is accompanied by the endorsement of the bill on the back, signifying the last endorser′s transferring the title to bearer. When the bill matures, face value is typically paid by the drawer′s bank, often the first endorser of the bill.

To suggest that the drawer extends a loan to the drawee, and that the discount represents interest taken out of the loan up front, is a travesty as Adam Smith and Carl Menger would readily confirm. If anything it is the drawee who is in the stronger position, by virtue of being closer to the ultimate consumer on whose gold coin the whole transaction turns. After all, it is this gold coin that will liquidate a whole string of claims upon maturity.

As the bill is passed along from one endorser to the next, the underlying semi-finished good assumes ever greater marketability. The drawee is handling goods more marketable than that handled by the drawer. Put in this light, it is preposterous to suggest that the drawee is a debtor and the drawer is a
creditor. The transaction under consideration is definitely not one of borrowing. It is one of clearing: the process of canceling claims and counter-claims at maturity among various parties to the same deal.

Their relationship is one of cooperation between collaborators; not one of confrontation between creditors and debtors. Nor is savings the source of commercial credit. The true source is consumption. The intensity of the demand for consumer goods is the driving force, fully capable of
creating its own source of credit quite independently of savings. It is conceivable for commercial credit to exist even in the hypothetical absence of savings.

The error in confusing interest and discount, although quite common, could be fatal as I shall show below. The rate of interest is a measure of the propensity to save while the rate of discount is a measure of the propensity to consume. Although in either case the rate varies inversely with the propensity, yet the two rates spring from entirely different sources, and are shaped by entirely different forces.

How does discount arise?

Discount arises in the first place as an option of the retail merchant to prepay his bills. When due to overwhelming consumer demand he finds himself in the position that his till spills over with gold coins, he will offer to discount his bills, that is, to prepay face value discounted by the number of days left to maturity. Implicit in discounting is the discount rate at which the discount is calculated. The fact that the retail merchant insists on a concession in the form of a discount is not due to time preference. Rather, it exclusively is due to the fact that the alternative of buying a bill with the same maturity drawn on a fellow retail merchant at a lower price is available to him.

Adam Smith’s theory of commercial credit independent of savings was pejoratively named the Real Bills Doctrine by its detractors. They flatly denied the spontaneity of bill circulation. They vehemently insisted that the discount was due to time preference and nothing else. They condemned the whole scheme as a conspiracy, a backhanded way to inflate the money supply.

This criticism is plainly wrong: a real bill arises simultaneously with the emergence of new merchandise and it expires together with the removal of that merchandise from the market by the ultimate gold paying consumer. Inflation of the money supply does not enter into it. This fact makes the real bill the next best thing to the gold coin itself. In one sense it is even better: it earns a return in gold.

Existence of commercial banks is not a prerequisite to bill circulation. But if banks are given, then they cannot have better earning assets than real bills to cover sight liabilities. The demand for real bills is virtually unlimited, so that the banks can get ready cash by selling bills from portfolio if they run into unusual drain of gold.

Indeed, demand for real bills comes not only from other commercial banks experiencing unusual increase in their gold reserves. Demand also comes from anyone with gold obligations to be met at a future date. For example, issuers of bonds to mature during the next quarter do not accumulate gold itself in anticipation of their obligation. Rather, they accumulate real bills with the same maturity.

SCC is not a fixed quantity. It waxes and wanes together with changes in the propensity to consume. The appearance of marginalism a hundred years after the Wealth of Nations was published presented an opportunity to refine Adam Smith’s theory of commercial credit by introducing concepts such as the marginal item in SCC, the marginal retail merchant, the marginal productivity of SCC. In particular, the marginal retail merchant is seen as doing arbitrage between SCC and the bill market.

At the first sign of falling consumer demand he withdraws his standing order for marginal goods on his shelf and redeploys his capital in the bill market instead. Conversely, when consumer demand picks up again, he will liquidate part of his bill portfolio and orders new marginal merchandise displaying it on the shelves. Clearly, this arbitrage is the engine behind the variation of the discount rate. Note that the discount rate is much more nimble than the sluggish rate of interest. It depends
directly on the caprice of the consumer.

This observation challenges the traditional supply/demand equilibrium theory of price: changes in demand act not on the price but on the discount rate. The extension of Adam Smith’s thought to incorporate marginalism culminates in the theorem stating that the discount rate is equal to the
marginal productivity of SCC. An increase in marginal productivity means that the marginal item drops out from SCC so that the productivity of the new marginal item is relatively higher than that of the old was.

Conversely, a falling discount rate sends a telegraphic message to all producers and distributors to increase their offering: ‘consumer confidence’ is on the rise once again. Incidentally, this is the reason why the price of fuel is normally not higher in winter than it is in summer ─ predictions of
the supply/demand equilibrium theory of price notwithstanding.

Relevance of Adam Smith’s Real Bills Doctrine in our own times

The first casualties of the Guns of August one hundred years ago, in 1914, were the real bills financing, as they did, world trade in consumer goods. This was not in itself surprising. What was surprising, however, was the failure of real bills to reclaim their former paramount place in financing world trade after the cessation of hostilities in 1918. In retrospect it is abundantly clear that there was an unannounced political decision made behind closed doors to block the international trade in real bills.

Without such a decision real bills would have started circulating spontaneously. Real bill financing of trade is synonymous with multilateral trade. The victorious Entente powers wanted none of that. They wanted bilateral trade instead. They were scared stiff of German competition. They thought they could control German exports and imports that way. According to the terms of the peace treaty they had to lift their blockade on Germany but, at the same time, they could block the international bill
market to the same effect ─ and they did. Real bills were not allowed to make a comeback during the intervening one hundred years.

Scarcely did the victorious Entente powers realize that in blocking the bill market they were shooting themselves in the foot. Their action destroyed the Wage Fund, thereby causing horrendous unemployment and the Great Depression of the 1930’s. In the meantime a formidable official propaganda machinery was launched to discredit Adam Smith’s Real Bills Doctrine. Economists of the Age of Keynes, Austrians included, failed miserably to discharge their duty to search for and disseminate truth. It never occurred to them that there was a reason why ‘structural unemployment’ prior to World War I was unknown and non-existent.

Real bill trading effectively eliminated that threat.

Economists should have made the fact clear that the Great Depression was in effect caused by the destruction of the Wage Fund ─ a direct consequence of the unannounced decision to block international trade in real bills. Workers producing the great mass of consumer goods cannot wait three months for their wages to be paid, until after their product is sold for cash. The fact that they could be paid weekly (and the fact that there was no structural unemployment before World War I) was entirely due to the existence of the Wage Fund consisting of real bills in circulation.

The unannounced decision to block the bill market sealed the fate of the workers. The Wage Fund having thus been destroyed left no one around to advance the wages of the workers. Unprecedented unemployment ensued − following the unprecedented blocking of the bill market. Structural unemployment has been artificially created that was to plague the world for the next one hundred years.

A very high price was exacted for ignoring the wisdom of Adam Smith. The great damage caused by the forcible elimination of the bill market has gone unrecognized for a century. It all boils down to the fatal confusion between interest and discount, between bilateral and multilateral trade.

The way towards building a better world in the twenty-first century leads through the unconditional and full rehabilitation of Adam Smith’s Real Bills Doctrine. Starting with the most marketable staple goods: food, fuel and fodder, real bill financing of world trade must be reintroduced. Since real bills must mature in gold coins (it would be preposterous if they were made to mature in an instrument of lesser marketability– and irredeemable currency notoriously has badly impaired marketability), gold coin circulation must also be restored.

Only then will future generations be able to look back on our insane experiment with global irredeemable currency in the twentieth century as a brief reactionary episode, trying to expunge the wisdom of Adam Smith from the consciousness of mankind.

June 5, 2014.

Money Creation


SAFE coin would be the first real replacement for gold? If you have enough gold you invite invasion, but its not the case with SAFE, its also instantaneously portable or transmittable, and store-able at almost zero cost. It could bring back some of the advantages associated with gold like its use in self liquidating credit as above. During the 2008 crash so many stores closed up over lack of access to short term credit.

I have not watched these videos yet, but digital assets are unlike any asset which was available when Adam Smith was alive.

Digital assets which can be transferred negate the role of credit. Credit will still have very practical uses for facilitating inventory building etc, but it would no longer be needed to bridge the gap between the promise of asset exchange and delivery of assets.

This is huge in terms of how banks and our monetary systems work, particularly between borders.

Banks use credit clearing to exchange asssets with one another. They then go through a settlement process periodically (daily usually) to deliver on the promises (credit). This typically requires a centralised agency (central bank) to do this efficiently, as trucks moving tenners about between private banks is tediously inefficient and failure of settlement may only become apparent after an extended period.

So, what do digital assets do for us here? It removes the need for central banks to complete the settlement process - settlement occurs with every transaction, instead of periodically, as asset transfer is as cheap/fast as credit extension.

What else? It removes the need for a chain of banks to have a shared central bank account. With digital assets, everyone can perform the same settlement process, so banks can operate easily as independents.

That is not all though. If everyone can access the same settlement process (exchanging digit assets) then why use a bank at all? A bank traditionally offered security to entice people to use their vaults, but that use case becomes an edge case with digital assets which can be stored securely without banks.

This changes everything. It removes the need for central banks. It removes the need for private banks, for anything beyond providing loans. It supersedes fiat money in general, as it is far less flexible due to relying on banks to exchange it (digitally).

Sure, fiat is currently more stable. Sure, fiat could also be made digital. However, stability will come with time and a currency which is spied on and stops at a border is less preferable to one which isn’t/doesn’t. Competition will then push digital assets to the forefront.

This journey is just beginning and it will change the monetary system forever.


Yes, please take the time to understand Self Liquidating Credit and report back on it’s relevance (if any) to the systems possible with the safenetwork

The majority of the people on this planet do not have any money to speak of, they need credit to get started. If we don’t need banks, then we need a system that can facilitate trade which includes credit.

I put this out there as the system that was working very well prior to the bankers taking control of the entire system…and has very conveniently been swept under the carpet…never happened.

I’m seeing a lot of talk around digital contracts and DAC’s etc, but there is no system I am aware of that is anywhere near being a proven workable ecosystem…just bits and pieces.


Im going to study up on the real bill doctrine. Its the first I have heard of it.

Im not up on eco theory but I thought that one function of banks, the reason that they exist, was to aggregate money so larger projects could be done. It use to be that little people put money in banks, banks reviewed plans for big projects , loaned the money. When the project returned the money plus interest, the interest was redistributed to the little people. That whole system seems to have broken down.
We use to get 5.25% now we get .01% and they have gotten even bigger salaries.

We still put money in banks but they dont give anything or very little, back, and they expect us to bail them out when they make a mistake. They are not held responsible for making bad loans, ie not reviewing the projects with an eye towards success.

It seems the level above safecoin or bitcoin and DAO in general is how to aggregate the the small sums owned by individuals into larger projects. I guess that is the role of ethereum and their smart contracts.

There seems to be room and a need for safecoins, Proof of resource, and ethereum a way to aggregate resouces. The problem I see with bitcoin is that the work in the proof of work is not usefull work. Its work for work sake. Work that produces a resource seems a better way to go. The resource what we own is a representation of the work that we did to get the resource, build the server system.

Now, does anyone have any extra time they can give me so I can learn all the I need to learn and read up on:-) Time is the ultimate resource.


I think you’ll find all you need in the professors Money and Credit section of his site.

We just need to remember that he’s coming from a gold standard point of view, which will never be pubicly reinstated, but if we think gold = safecoin, real bills = smart contracts and banks = DAO’s and/ or Exchanges, there just might be the basis for a worldwide trading system in there.

The professor states here, that it’s all about consumer goods and how critical the supply chain is.

I read a report on supply chains a couple of years ago and the authors came to the conclusion that if the European Union failed, the worldwide supply chain would grind to a halt within 2 weeks and would be impossible to resurrect…scary stuff.

I’ll see your Adam Smith’s Real Bills, and raise you a Graziani triplet of economies: barter (gold standard), credit (Real Bills / bill of exchange) and monetary (bank issued lending). After reading your Real Bills piece, this one is a snip to understand!

I’m not sure of the implications though :slight_smile:

Edit: while I’m at it, this is a good one too. Explains how unlimited amounts of money is created by private banks, not central banks who only control interest rates, and is not restrained by the fractional reserve requirements as we’ve been lead to believe!

Ah nice catch…Steve Keen and a timely and potent article that clears a few things up about modern ‘money’. I learned from him how ‘Fractional Reserve Banking’ is a relic…banks only need to be solvent and are not restricted on the amount of loans/ money they can issue/ create.

That doesn’t rule out a world in which gold is used as the basis for commerce of course: it just says that that’s not a monetary economy

or…That doesn’t rule out a world in which Safecoin is used as the basis for commerce of course :wink:

The only way to satisfy those three conditions is to have payments made by means of promises of a third agent, the typical third agent being nowadays a bank

So with Bitcoin a trustless third party…a triple signed receipt. With Safecoin,. you hold it/ you own it (I think) …no third party and so does not qualify as ‘money’ as far as Graziani is concerned…effectively a commodity albeit an integral one…oil!

A system of ‘Real Oil Bills’ haha the plot thickens, I wonder if Keen has studied Crypto currencies as yet. He might be a good one to alert about SAFE.


I wonder if Keen has studied Crypto currencies as yet. He might be a good one to alert about SAFE

I would guess yes, and he’s on twitter:

Edit: interesting blog by Steve Keen:

For sure… and he’s a big fan of Minsky ala ‘The Minksky Moment’

1 Like

I find this aspect particularly interesting and a lot of this is related to the “Quick Question” thread. I’m no economist, but would say my views are roughly in allignment with Adam Smith (from what I have read). My main reason for proposing the alternative system (B) was (to me) a logical statement made by him concerning charity: I would have to paraphrase it to:

“The provision for the Weak/vulnerable is too important a thing to rely on benevolence alone.”

The political objection to this is the coercive nature of tax.
The option I suggested removes this objection.

Smith also believed in the efficacy of trusting the judgements of the common man, over the various economic intellectuals or “experts” with their agendas. My proposal would be exactly the “common man” economics Smith is talking about - definitely not the expert view.
We also quarrel in a Left/Right very polarised fashion - what’s wrong with the more equitable middle ground? Why aren’t we meeting minds and finding solutions to objections, rather than shouting our opposite opinions?
I’m suggesting we don’t allign to previous/current experts in this regard but implement a new social/economic model for the common man, agreed among ourselves - by our society.

He was Scottish as well, whereas I’m sure the free market system was some wicked sassanach invention.
Just trying all angles now…… :smiley:


All good…after reading the Professors take on the ‘Real Bills Doctrine’, do you have any comment on whether ‘Self liquidating credit’ has any potential as an overlay market system on Safecoin?

Yes, I will have, but I was so wrapped up in the other thread, I only noticed this post this morning and found it full of interesting stuff. (I’m on a bit of a mission to persuade Maidsafe to down tools and delay the project, so one or two objections from the community to fend off… :wink:) I quickly skimmed it and just replied “for now” as I’m of to work - just for half day though. Cheers will reply later-really interesting stuff.

When initiating what I feel is an important topic regarding an important network, I sometimes like to remind myself to be awake to potential division before it occurs:


Hi Chris, just got back and watched/read your stuff. Your question was how would all this work with safecoin.
I’ll answer as best I can from my understanding of things (as a non coder or economist). I may only be able to break things down a bit in order for a more technical or qualified person to grasp the processes at work and then build on it to give you a better answer? I might be able to give some clues or spark something that others might pick up on…… that’s probably the extent that I can help. Sounds like one for Janitor or someone.

The mechanism appears to be:

A bills B, in other words :

A sends a parcel to B

B signs the parcel
B sends signed parcel to A

A retains the parcel

The parcel will be “opened” after 91 days

Opening the parcel simultaneously:

1 Causes “whoever is holding the parcel” to be paid the “original value” inside it by B
2 Causes the parcel to be destroyed

B can initiate a self destruct of the parcel at any time, the holder being given the value

A can pass the parcel to anybody else (say C) within the 91 days

A signs parcel and sends to C etc

It appears to be as simple as an ABC situation, with a process akin to a game of pass the parcel. I would also probably more think of bitcoin as the gold/value and safecoin/smart contract as the bills.

If you are talking more about where all this fits into the economic debate (as I now think you were) then if I refer back to the Model A) against Model B) thing,
A) is a totally free market economy reliant on charity and B) the same but replacing charity with an equitable tax system

All the ideas of the Prof/Adam Smith are consistent with Model B

The Austrian economics/Mises etc crowd are consistent with Model A

Both models can incorporate the idea of real bills. That is because “real bills” fall into the “ economic” aspect. Both A) and B) have an “economic” aspect. B) also has a social aspect incorporated into the economic aspect, whereas A) relies on charity

The idea of “free bills” is consistent with the fundamental goals/ethics of Maidsafe I believe.
The concept of “Discount” is also consistent and seems a much better mechanism than using interest on loans via banks to create credit.
The issue I see is some form of time-stamping mechanism would need to be involved somewhere along the line.

Thanks for your contribution, it’s pretty deep stuff. We assume that finished goods will just be there for us on the shelf when required…‘just in time’

To have an alternative supply chain mechanism built on this network would be a great backup and it needs to work on a local basis.

I’m going to dig and try to get a clearer picture of the mechanism, maybe I can get the Prof excited about safecoin in place of gold…

Ahhh…I think I got you. If you take my option B) model and add on the “technical implementation of the “real bill” mechanism, then I would propose this as a workable eco-system.
To create credit, instead of banks charging interest, (the mechanism by which credit is created by banks): Credit is instead created by way of Discount on signed Bills of trade or “Real Bills.” Effectively these are like limited life-span Safecoins/smart contracts to the value of the Bill (in Bitcoin or safecoin or other).
The whole safecoin model is in fact the same principle as the Real Bill model except Safecoin don’t have a use by date.
The idea is that these Bills can be traded freely like cash between different links/traders in the production chain.
in the Real Bill system the source of “credit” ” is “consuming”. This is achieved by having the value of the Bill decrease either in incremental steps through time, or with each transaction – it loses value – this is the Discount. This encourages trade in the Bill, as it will be passed among traders in exchange for goods or to pay a supplier quickly – it encourages trade or “consuming”.

Lets say someone sells bananas retail (A) who in turn has a wholesale supplier, (B) who in turn is supplied by an importer © who in turn is supplied by an exporter.(D)

Say B is holding a Bill signed by A) to the value of 1000 safecoin, (It is essentially a 1000 Safecoin Bill in other words) -which was in exchange for 500 bananas.

Let’s say B now needs some “credit” to buy 1000 bananas from C) @ 1 safecoin per banana

B signs the Bill and passes to C) in return for 1000 bananas

B is incentivised to pass the Bill in any case as it is de-valuing.

A) Has 500 bananas
B) has a 1000 bananas
C) has a 1000 Safecoin Bill
D) has shed loads of bananas

Now think of it the other way round:

Imagine D) could do with some Safecoin to pay his farmers:

He could sign a Real Bill for 2000 bananas in exchange for 1000 Safecoin with C)
Instead of 1000 Safecoin written on the Bill, it is now 2000 bananas,
It is essentially a 2000 banana Bill. :smile:

A) has 500 bananas
B) has 1000 bananas
C) has a 1000 Safecoin Bill and a 2000 Banana Bill
D) has paid the workers in Safecoin.

Where it gets interesting is when the price of either Safecoin or Bananas goes up or down. This affects the value of the Bills.

If there is a bumper banana crop and banana prices fall, then the value of a banana bill drops, relative to the Safecoin Bill. The same would be true if Safecoin price rose.

If there was a banana shortage, the value of a banana Bill would increase relative to a Safecoin Bill. The same would be true if Safecoin price fell.

This facilitates credit liquidity in the market for Bills as they can be traded against one another. If you extend the principle out to other “goods” then you can see how a whole credit eco-system can develop.

That is my understanding anyway, I may have misunderstood something.

Don’t ask me how you depreciate a 2000 banana bill incrementally :smile:
I think I’ve misunderstood an aspect somewhere, maybe someone can help?
You get the gist anyway?

1 Like

Certainly have…reaching for a panadol.

I don’t really want to get involved with the system A/B scenario from the other thread in here though, just complicates things and no way do I want to distract the devs.

If we can stick with the straight up analysis of the doctrine as it stands and assess it’s suitability to the network as we know it…that would be awesome.

Your explanation is number 1 so far… :slight_smile:

Absolutely, no problem, that wasn’t actually my intention in the last post - just got in the habit as it helped me divide the 2 economic models in my head. Whatever model is adopted, it will apply equally - there is no difference A or B. and I’ve said all I have to say on the other matter. :smile:
I just find it easy to say a or b, rather than free market economy etc…it all just gets so confusing in conversation… I thought I defined the A and B as…

however it was unclear in last post. I’ve actually stopped campaigning as no need I’m sure devs have got the gist by now. If I use A or B again, this will be my definition as shorthand for Right/Left everything. :smile: