December 6, 2012
Isaac Newton, the father of classical mechanics and progenitor of nearly every technology we use today, was easily one of the top 10 most influential minds in all of human history…so much so that even Albert Einstein kept a picture of Newton in his study.
Newton’s achievements were so momentous that when he died in 1727, he was buried with the honors normally reserved for a king. His body lay in state for four days at Westminster Abby, and his pallbearers included two dukes, three earls, and the Lord Chancellor.
Yet as accomplished as he was, Newton credited the brilliant scientists and philosophers who came before him, acknowledging that his insights would not have been remotely possible without the foundations laid by great thinkers– Archimedes, da Vinci, Descartes, etc.
In a personal letter to a colleague in 1676, Newton famously remarked “If I have seen further it is by standing on [the] shoulders of giants.”*
No doubt, all great ideas flourish by expanding upon the works of others. Unfortunately, so do terrible ones. And one of the worst ideas in history that continues to play out today is the grand experiment of fiat money.
The idea is simple. Rather than allowing money to be scarce and have intrinsic value, our fiat system grants power to a tiny elite to conjure money out of thin air. Presumably, if the ones in control are smart, honest guys, then everything should be fine.
Fiat was a total failure right from the beginning. When unbacked paper currency was originally introduced in the 11th century by Emperor Renzong of the S’ung dynasty, nasty inflation quickly followed.
The Yuan dynasty later adopted the same tactic of printing paper money without restriction, and they, too, suffered severe hyperinflation.
In fact, upon visiting China from Europe, Marco Polo remarked in his writings with incredulity how ‘[a]ll these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver… and indeed everybody takes them readily. . .”
For Marco Polo, this was unheard of. In the Europe of his time, the gold Florin was the major medium of exchange, not paper. And the Florin famously held its metal content at precisely 54 grains of fine gold for nearly three centuries.
It took a few hundred years, but the fiat idea eventually spread to the west. Today, fiat is the global standard; just as in Yuan China, paper is readily accepted as money, and future historians will likely look back on us the same incredulity as Marco Polo viewed the Yuan.
Nevertheless, we have our own ‘brilliant scientists’ championing this bad idea. We award our most esteemed prizes for intellectual achievement to men like Paul Krugman and Joseph Stiglitz who tell us that the path to prosperity is for one person to conjure trillions of dollars out of thin air… or to impose capital controls, raise taxes, or spend more money.
Like Newton, they’re merely building upon the foundations laid by men who came before them. Unlike Newton, they take bad ideas and make them worse, squatting on the shoulders of [intellectual] midgets like John Maynard Keynes, whose works include such gems as:
“Can America spend its way into recovery? Why, obviously!”
“[M]oney borrowed and spent will revive the economy.”
“[E]arthquakes, even wars… serve to increase wealth…”
“[To] fill old bottles with bank notes, bury them at suitable depths in disused coal mines. . . and leave it to private enterprise… to dig the notes up again… is not so different from gold mining…”
It borders on the absurd… as if it were all written as part of a satire. Yet in one of the most intellectually dishonest statements ever made, Paul Krugman recently wrote that “Keynesians have been right about everything.”
This is incredibly dangerous thinking. And it’s important to never forget that, despite how normal things may ‘feel’ on the surface, the economic engines deep below are steered by these same people who worship at the cult of bad ideas.
* The ‘shoulders of giants’ phrase is not originally Newton’s, and when he wrote it to his contemporary and rival Robert Hooke, it was in half-jest, half-humility.