The Anti-Bullionists Wanted an Elastic Money Supply Linked to the Discounting of Bills of Exchange

This elasticity of the money supply was channeled through the bank discount of bills of exchange issued against the increase in the supply of real goods (Torrens 1812, p. 127). Therefore, it was assumed that when discounting those bills, the banking industry was just providing new currency to those individuals who had increased their transactions demand for money to acquire newly produced goods.

This conception of the elasticity of the money supply linked to the discounting of bills of exchange was later known as the Real Bills Doctrine (Mints 1945, p. 25), but its origins can be traced back even before the Bullionist Controversy in the writings of Adam Smith ([1776] 1904, p. 287; Arnon 2011, pp. 40–45). However, Smith’s version of the Real Bills Doctrine presupposed a regime of monetary convertibility and free banking competition that was lacking in the version espoused by the antibullionists: whereas Smith tried to describe a mechanism of self-regulating bank liquidity within an institutional framework characterized by free banking and metallic money, the antibullionists tried to exculpate the monetary policy of the Bank of England of any responsibility for the inflation in England during the Restriction Period (Glasner 1992). The antibullionists’ version of the Real Bills Doctrine was specially problematic because money supply was ultimately not subject to the demand for money but to the demand for credit by those with sufficient collateral, and that demand for credit could endogenously be manipulated by the banking system itself through changes in its discount rate (something that, as we will see, moderate bullionists explicitly criticized).

—Juan Ramón Rallo, “The Issue of Free Banking During the Bullionist Controversy,” Journal of the History of Economic Thought 41, no. 1 (March 2019): 105-106.