Real Bills Revisited

"... until the opening of a branch of the Bank of England in Manchester, nine-tenths of the total payments in Lancashire were made in bills.”

Ludwig von Mises, 1924

Bitcredit Protocol is designed to serve the real economy, the productive businesses which create our wealth, by facilitating financing and payment with bitcoin redeemable credit money, called "bitcredit". The supply of bitcredit is strictly limited by the circulating stock of e-bills, electronic bills of exchange drawn and paid by businesses which in turn is limited by the value of circulating goods already produced and B2B services already rendered. It is a natural, self-limiting mechanism for adjusting the money supply in lockstep with economic activity, industry and commerce. 

A modernised, Neo-Austrian Real Bills Doctrine is a core element of this solution. Bitcredit seeks to fix the defects in the historic bill discounting practices, as criticised by the early Austrian School of Economics. 

Present vs. future money

When traditional banks discounted real bills they created paper money indistinguishable from gold certificates payable on demand. Likewise, the practice of crediting discounted amounts to demand deposits conflates credit money with outright money. This seemingly small difference is the source of contagious bank runs when currency holders lose trust in their paper. 

Decentralisation vs. centralisation

Direct money creation by banks shows a tendency to centralisation. Banks decide who gets money and who does not. With increasing issuance, the requirement for trust increases. Bank default morphs from being the bank's problem to being the creditors', the whole economy's. The basis of issuance in Bitcredit Protocol is any two businesses freely deciding to enter a credit relationship. The wildcat mint therefore merely enhances pre-existing credit.

Bitcredit Protocol completely decentralises credit money issuance, atomically: each e-bill has its own payer. Bitcredit mints mitigate trust through their verifiable guarantee capital and clowder net. There will be no more bank runs, as Bitcredit is kept in end users non-custodial wallets, just like Bitcoin.

Discount vs. interest

When a central bank - with monopoly power and legal tender laws - issues an excessive amount in bank notes out of the thin air of government debt this increases the supply of money, interest rates decline. Such issuance has no natural limit, it results in inflation and leads to destructive boom-bust cycles. 

But even private money creation can be corrupted, as shown by the Crisis of 1763. When credit money is created merely on the creditworthiness of bankers, on so-called financial bills of exchange, it is inflationary and the system will ultimately collapse, just like fiat.

Decentralised liquidity

A complete monetary system which relies on electronic commercal bills of exchange for the backing of credit money issuance benefits form their excellent liquidity. Upon a sale of an e-bill by a wildcat, its multiple prior signatures are enhanced by the wildcat's verifiable guarantee capital, which makes it a sound short-term investment to deal with any liquidity issue which may arise but without the real value risk inherent in fiat instruments like e-bills.

The Bitcredit Solution

(a) Firstly, Bitcredit Protocol mints can only create money for verifiable real value in circulation, i.e. e-bills issued in payment of goods and B2B services already produced as input for the production and supply chain. This indispensable rule firmly roots Bitcredit supply in the objective economic reality: the medium of exchange tracks what can be exchanged. 

(b) Second, this replaces the hubris of monetary policy of central planners with a free market mechanism: as the volume of e-bills sent to mints increases and decreases, their minting fee will rise or fall accordingly which naturally regulates Bitcredit supply. 

In summary, Bitcredit mints are responsible and liable by their guarantee capital to prevent excessive credit money issue. They must verify every real e-bill's backing by the invoice paid and the delivery confirmation attached encrypted to any eligible bill.

Read on: Monetary Elasticity