Paul Krugman believes, like John Maynard Keynes did, that “even perfectly useless spending would give the economy a much-needed boost”, and that Keynes’s idea of digging a bunch of holes, throwing paper currency down them, filling them in, and then digging them up again to retrieve the notes is “Clever stuff”.
He agrees with Keynes’s opinion that gold is a “barbarous relic” and believes that enlightened humans recognize the superiority of currency created out of thin air and existing either as notes from a printing press or digits punched into a computer, but he thinks that Bitcoin is even more of a “joke” than gold because it “consists of nothing but strings of digits” — just like most dollars in existence.
He asserts that the great classical economist Adam Smith himself understood “the virtues of paper currency” and thought of of gold as “dead stock”, leaving readers with the false impression that Smith’s thinking on the matter was just like Keynes’s. But let’s just see what Smith is talking about when he uses the term “dead stock” in context, shall we?
That part of his capital which a dealer is obliged to keep by him unemployed and in ready money, for answering occasional demands, is so much dead stock, which, so long as it remains in this situation, produces nothing, either to him or to his country. The judicious operations of banking enable him to convert this dead stock into active and productive stock; into materials to work upon; into tools to work with; and into provisions and subsistence to work for; into stock which produces something both to himself and to his country. The gold and silver money which circulates in any country, and by means of which, the produce of its land and labour is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock; into stock which produces something to the country.
So Smith actually extolled the virtues of was paper currency backed by gold, and all he meant by “dead stock” was money that was idle rather than being reinvested. He was making a point about the very useful role banks serve in the economy in this regard.
Finally, Krugman throws this out:
Talk to gold bugs and they’ll tell you that paper money comes from governments, which can’t be trusted not to debase their currencies. The odd thing, however, is that for all the talk of currency debasement, such debasement is getting very hard to find.
A “gold bug” is, of course, the standard derogatory term to describe anyone who thinks the “barbarous relic” is not the primary market commodity chosen as currency by different peoples around the world for thousands of years, but the fiat currency Krugman praises.
As for Krugman’s inability to find any currency debasement, Bob Wenzel reminds us that “the decline in the value of the dollar has been so great that in now costs $23.54 to buy what would have cost only $1.00 in 1913, the year the Federal Reserve was launched.”
Surely a 96% loss of purchasing power qualifies as “debasement”?
Enlightened economists of the future will look back at the current grand global experiment with fiat currencies and regard governments’ efforts to create wealth by running a printing press or punching buttons on a computer keyboard as the true “barbarous relic”.