Editing Inflation (section)

==== Before 1936 ====
{{main|Real bills doctrine}}

The [[price revolution]] from ca. 1550–1700 caused several thinkers to present what is now considered to be early formulations of the [[quantity theory of money]] (QTM). Other contemporary authors attributed rising price levels to the debasement of national coinages. Later research has shown that also growing output of [[Central Europe]]an silver mines and an increase in the [[velocity of money]] because of innovations in the payment technology, in particular the increased use of [[bill of exchange|bills of exchange]], contributed to the price revolution.<ref name=Dimand>{{cite book|last1=Dimand |first1=Robert W. |chapter=Monetary Economics, History of |title=The New Palgrave Dictionary of Economics |date=2016 |pages=1–13 |doi=10.1057/978-1-349-95121-5_2721-1 |chapter-url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_2721-1 |publisher=Palgrave Macmillan UK |isbn=978-1-349-95121-5 |language=en}}</ref>

An alternative theory, the [[real bills doctrine]] (RBD), originated in the 17th and 18th century, receiving its first authoritative exposition in [[Adam Smith]]'s ''[[The Wealth of Nations]]''.<ref>{{cite journal |last1=Green |first1=Roy |title=Real Bills Doctrine |journal=The New Palgrave Dictionary of Economics |date=2018 |pages=11328–11330 |doi=10.1057/978-1-349-95189-5_1614|isbn=978-1-349-95188-8 }}</ref> It asserts that banks should issue their money in exchange for short-term real bills of adequate value. As long as banks only issue a dollar in exchange for assets worth at least a dollar, the issuing bank's assets will naturally move in step with its issuance of money, and the money will hold its value. Should the bank fail to get or maintain assets of adequate value, then the bank's money will lose value, just as any financial security will lose value if its asset backing diminishes. The real bills doctrine (also known as the backing theory) thus asserts that inflation results when money outruns its issuer's assets. The quantity theory of money, in contrast, claims that inflation results when money outruns the economy's production of goods.

During the 19th century, three different schools debated these questions: The [[British Currency School]] upheld a quantity theory view, believing that the [[Bank of England]]'s issues of bank notes should vary one-for-one with the bank's gold reserves. In contrast to this, the [[British Banking School]] followed the real bills doctrine, recommending that the bank's operations should be governed by the needs of trade: Banks should be able to issue currency against bills of trading, i.e. "real bills" that they buy from merchants. A third group, the Free Banking School, held that competitive private banks would not overissue, even though a monopolist central bank could be believed to do it.<ref>{{cite journal |last1=Schwartz |first1=Anna J. |title=Banking School, Currency School, Free Banking School |journal=The New Palgrave Dictionary of Economics |date=2018 |pages=694–700 |doi=10.1057/978-1-349-95189-5_263|isbn=978-1-349-95188-8 }}</ref>

The debate between currency, or quantity theory, and banking schools during the 19th century prefigures current questions about the credibility of money in the present. In the 19th century, the banking schools had greater influence in policy in the United States and Great Britain, while the [[British Currency School|currency schools]] had more influence "on the continent", that is in non-British countries, particularly in the [[Latin Monetary Union]] and the [[Scandinavian Monetary Union]].

During the Bullionist Controversy during the [[Napoleonic Wars]], [[David Ricardo]] argued that the Bank of England had engaged in over-issue of bank notes, leading to commodity price increases. In the late 19th century, supporters of the quantity theory of money led by [[Irving Fisher]] debated with supporters of [[bimetallism]]. Later, [[Knut Wicksell]] sought to explain price movements as the result of real shocks rather than movements in money supply, resounding statements from the real bills doctrine.<ref name=Dimand/>

In 2019, monetary historians [[Thomas M. Humphrey]] and [[Richard Timberlake]] published "Gold, the Real Bills Doctrine, and the Fed: Sources of Monetary Disorder 1922–1938".<ref>{{cite book |last1=Humphrey |first1=Thomas M. |last2=Timberlake |first2=Richard H. |title=Gold, the Real Bills Doctrine, and the Fed : sources of monetary disorder 1922–1938 |date=2019 |publisher=Cato Institute |location=Washington, D.C. |isbn=978-1-948647-13-7 |edition=First}}</ref>