Thursday, November 12, 2009

Can Paper Store Wealth?

Thomas Jefferson himself was quoted as saying "Paper is poverty". Milton Friedman disagreed, saying anything can be money. In fact, Friedman argued in his book "The Optimum Quantity of Money" that if the Federal Reserve did not allow the quantity of money to drop by 1/3 that the Great Depression, as we know it, couldn't have occurred.

So who's right?

Both are right. But Friedman makes arguments on how to keep a paper system afloat, while Jefferson sees paper as inherently flawed. Jefferson's long-term view of government can be well understood by his quote “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure.”

In essence, Jefferson understands that gov't, regardless of the intentions, will become corrupt and/or ineffective. Paper money may work for a while, but eventually greed and power will overpower the systems inherent flaw - the ability to print whenever you want. Jefferson may not have the economic stature of Friedman, but he understood something Friedman didn't - something academics can't seem to grasp - that human nature will over come the best designed systems. More regulations, more oversight, more laws will never fix an inherently flawed system. Paper money is flawed.

But wait, you ask - "Wouldn't the Great Depression have been just as bad if Jefferson was in power, because he never would have advocated devaluing the dollar by 50% as the Federal Reserve did in 1934?"

The question is moot, because Jefferson never would have allowed the Federal Reserve to exist in the first place. And if it wasn't for the FEDS easy money policy of credit creation in the 1920's, the Great Depression never would have occurred.

Jefferson passed away before Lord Acton wrote "Power tends to corrupt, and absolute power corrupts absolutely.", but I believe Jefferson would have whole heartedly embraced the phrase. Intellectuals and academics, like Friedman, believe they can put rules and laws in place to keep powerful institutions from corrupting themselves and society.

Based on what we have seen through the course of human history, the economic genius of Friedman fails the most basic test, that of man's love of power and self righteousness.


  1. What do you think of this idea: Economists are to Scientists as Astrologers are to Astronomers?


    Perhaps economists are like doctors in the time before the 20th century, doing much more harm than good. Let us bleed the patient to release the "bad humors" and the patient will be A-okay. Never seemed to work out very well for the patient.

    On a different topic one area that I think you and I might part company is free trade. I am not a big fan of it. For one thing it seems to promise the proverbial "free lunch" which I have never believed in. I most likely am no properly informed, but it seems to me that free trade is underpined mostly by the 18th century idea of comparative advantage which was developed by David Ricardo. Seems to me like a pretty weak foundation for an idea that seems to be destoying the world at an accelerationing rate, and I don't mean environmental destruction either.

    All the best to you and yours,

  2. I like the first idea - Economists are to Scientists as Astrologers are to Astronomers.

    I definitely support free trade, but it raises a fascinating tax problem. Corporations shipping finished goods to us from other countries don't pay US corporate taxes - so the benefit of free trade has to be mutual free trade, not a one-way road into the largest economy. When the Chinese banned pork, if I was President, I would have threatened an across the board 200% tariff until they backed off.

    Have a great birthday!

  3. Thanks I will do my best!

    I invented that astrology analogy myself - and I am proud of it.