Two kinds of credit exist in the world, and they belong to different categories entirely. A bill of exchange, the instrument whose principles trace back to Roman chirographs and Chinese flying money of the Tang dynasty, then through Islamic hawala and Renaissance Italy before financing global commerce through 1914, came into being when a merchant shipped goods and ceased to exist when those goods reached their buyer. A government bond technically matures in ten or thirty years, but governments possess both theoretical capacity and historical precedent for retiring principal through budget surpluses. The categorical distinction lies elsewhere: bills are backed by specific goods in transit generating the revenue to retire them, while government bonds are backed only by coercive extraction from future taxpayers. Even when governments could retire debt, the absence of self-liquidating collateral means they issue new bonds to pay off the old, adding accumulated interest to the balance, so the debt is reborn larger with each cycle and dies only through default or the slow destruction of the currency in which it is denominated. Modern finance treats these instruments as points on a single spectrum, differing only in duration and risk, but the distinction between them is categorical. One creates temporary liquidity that vanishes when its purpose is fulfilled; the other creates permanent claims on future production that grow without limit. The consequences of confusing them are now measured in hundreds of trillions of dollars of outstanding debt that compounds endlessly.
The mechanism of self-liquidation is physical and specific. A wool merchant in London accepts a bill drawn by a Yorkshire manufacturer who has shipped a consignment of cloth. The bill is a written, unconditional promise to pay 100 pounds in gold coin 91 days from the date of acceptance. The manufacturer, preferring present money to a 91-day claim, sells the bill to a discount house for 98 pounds, the two-pound gap representing the price of time preference as determined by competition among the dozen-odd London discount houses bidding for the business. As the bill circulates over the following weeks, each new holder endorses it, adding his personal guarantee that the obligation will be honored at maturity. When the 91 days have passed, the wool merchant has sold his cloth to retailers across London, who have sold it piece by piece to consumers paying in gold coin. The revenue from those retail sales is the money that pays the bill. The merchant remits 100 pounds to the final holder as every endorser's guarantee expires uncalled. The instrument ceases to exist. The credit that financed the entire chain from Yorkshire spinning mill to London consumer has destroyed itself, leaving behind neither residual obligation nor compounding interest.
Carl Menger explained in 1892 that money emerged from individual action without central design, the most saleable goods displacing less saleable ones through repeated voluntary exchange until markets converged on a single medium. The bill of exchange arose through analogous logic. Merchants in thirteenth-century Italian city-states, trading across distances that made physical payment impractical, independently converged on the practice of drawing written orders to pay. Acceptance conventions and discount markets crystallized as merchants needed assurance of creditworthiness and as specialized intermediaries began competing for the business of purchasing bills below face value. The endorsement chain, in which every holder added his personal guarantee, developed because merchants who backed unreliable paper suffered both financial and reputational destruction. No legislature ordained any of these features. The entire architecture of commercial credit assembled itself from the purposeful actions of individual traders solving individual commercial problems, exactly as Menger's theory of institutional emergence would predict.
The praxeological structure of each credit instrument reveals the categorical divide. A bill of exchange crystallizes two intersecting voluntary actions: the seller, who has shipped real goods, prefers present money to a 91-day claim; the investor who discounts the bill prefers the 91-day return to present liquidity. Both parties act voluntarily because each expects to benefit from the exchange. The endorsement chain extends this voluntarism outward, each endorser accepting personal liability in exchange for the commercial advantage of circulating the instrument. A government bond rests on a different foundation. The bondholder's own action is voluntary: he purchases a financial instrument on the open market, expecting yield. But the revenue stream he is purchasing is not voluntary at all. The politician who signed the bond pledged the future tax revenue of millions who were never consulted and may not yet have been born. The taxpayer whose labor will service this debt never agreed to the obligation and bears the entire burden while the politician who created it bears none. Every party in a bill transaction acts voluntarily and consents to the risk. A government bond interposes coercion at its foundation: those who issue and purchase it benefit, while the taxpayer who services it pays under compulsion. The bill dies when goods sell. The bond lives until coercive extraction fails.
Ludwig von Mises formalized this categorical distinction in The Theory of Money and Credit. He drew a line between commodity credit, in which existing savings transfer from lender to borrower and total purchasing power remains unchanged, and circulation credit, in which banks create new purchasing power from nothing by issuing fiduciary media unbacked by reserves. A bill of exchange discounted by an investor who parts with his own funds falls on the commodity side: the investor foregoes present consumption so that the manufacturer can receive it, leaving the aggregate money supply unaffected. A government security purchased by a central bank with newly created reserves falls on the circulation side: purchasing power is manufactured ex nihilo and injected into the economy, setting the distortion of the production structure in motion. Mises understood that the confusion of these two categories was the enabling condition for every inflationary episode in modern history, because governments unable to distinguish between credit backed by goods in transit and credit conjured from political will could inflate without limit and did.
Antal Fekete, writing within the tradition he called the New Austrian School, revived and sharpened Adam Smith's concept of circulating capital into something the mainstream Austrians had ignored: social circulating capital, the stock of consumer goods in most urgent demand and practically guaranteed to sell in the immediate term. A real bill of exchange is a financial claim on this circulating capital. The cloth moving from Yorkshire to London is social circulating capital; the bill drawn against it is the financial expression of that physical movement. When the cloth sells, the bill dies. The elegance of this system lies in its automatic regulation. When consumer demand rises, more goods enter the production pipeline, more bills are drawn, and the credit layer expands without any central authority directing it. When demand falls, fewer goods move, fewer bills are drawn, existing bills mature and are retired, and the credit layer contracts on its own. The discount rate, set by competition among discount houses, is the organic price signal: rising when credit is overextended, falling when it is scarce, transmitting the dispersed commercial knowledge of thousands of merchants into a single number that coordinates the entire credit system. Fekete identified gold as the ultimate extinguisher of debt in this architecture: bills mature into gold coin, and that payment is the terminal event. Government bonds mature into new government bonds. The distinction is absolute.
Central bank interest rates are an administered substitute for the discount rate that once coordinated credit creation with productive activity, set by political appointees who cannot possess the dispersed commercial information that the discount market aggregated through thousands of independent participants. The consequence extends beyond distorted price signals. Self-liquidating credit placed capital allocation in the hands of producers deciding, bill by bill, which commerce deserved financing; perpetual government debt transfers that power to politicians spending other people's money on projects selected by political criteria. The Cantillon effect operates under any credit expansion, including bill discounting, but under central bank bond monetization the first recipients of new purchasing power are governments and their preferred borrowers, directing resources to the politically connected at the expense of those who produce.
An honest treatment must acknowledge the tension within Austrian economics itself. Mises addressed this directly in Chapter 17 of The Theory of Money and Credit: when a bank discounts a commercial bill by crediting the seller's account with a new deposit, the bank creates fiduciary media regardless of the real goods backing the bill. Rothbard pressed this argument further, condemning all fractional reserve bill-discounting as indistinguishable in principle from any other fiduciary media expansion. Fekete countered with a critical distinction: when a bank issues banknotes against a discounted bill, the bill disappears into the bank's vault while the goods continue moving through the supply chain toward consumers. The banknote circulates as a temporary claim on those goods in transit, extinguished when the goods sell and the bill matures. Bills are categorically different from money, carrying definite maturities and extinguishing themselves upon settlement. The clearing function of bills does not constitute money creation but coordinates the temporal gap between production and consumption. The debate is real and unresolved among serious economists. But the structural point survives regardless: even granting the Rothbard-Mises critique in full, the credit expansion produced by discounting a bill backed by goods in transit self-liquidates in 91 days when those goods reach the consumer. The credit expansion produced by monetizing government bonds never self-liquidates at all. One form of expansion corrects itself; the other compounds forever.
The form of credit an economy uses determines the form of society it produces. The bill of exchange was the credit instrument of a society organized around production; the government bond is the credit instrument of a society organized around extraction. Governments destroyed the bill market in 1914 when the outbreak of war triggered a cascade of failures that permanently displaced commercial credit in favor of sovereign borrowing, and nothing in the century since has restored what was lost. The instrument that died is now being reconstructed in code: electronic bills of exchange denominated in bitcoin, settling on a censorship-resistant network and preserving the temporal architecture that makes credit self-liquidating. Producers have always found ways to extend credit that finances real goods and destroys itself when those goods find their buyer, because the logic of the instrument follows from the nature of production itself. Goods move through time from producer to consumer. Any credit that faithfully tracks this movement inherits a built-in death date, the one property that separates honest credit from the immortal debt now consuming the global economy at compound interest.