My Tao - A Bird in the Hand

The expression that a bird in the hand is worth two in the bush portrays a simple truth. The promise of something is never as good as possession of that same thing. It doesn't matter who issues the promise, or how securely anchored the promise is, the mere separation between owner and possession waters out the value of the promise.

This explains why gold coins are always and everywhere more worth than paper notes with identical face value. Gold and paper may circulate for a while at par, but paper notes will in the end loose value against coins. This is because any separation between owners and their possessions involves risk. There is always the risk of default on a promise.

This is the natural law that Andrew Dickson White is referring to in his book on fiat money inflation. The Assignat issued by the revolutionary government of France in 1790s was securely anchored in real-estate and guaranteed by the government, yet even with an interest bearing coupon, it never circulated at par with gold. The Assignat lost value against gold right from the start, simply due to the fact that it was credit rather than money. The holders could not have known at the very start to what extent the government would abuse the trust of its subjects, so the initial below par exchange rate was purely due to the inherent weakness of credit relative to money.

This is similar to my personal experience with some real-estate that I owned in Norway. As long as I lived in the house I owned, I was perfectly happy with it. However, once I moved to Portugal, my physical separation from my property became increasingly painful. What had once felt like a solid possession, morphed into a risky bet on the Norwegian housing market. The relief I felt when I finally sold the house was enormous.

The lesson in all of this is that we must never separate ourselves too much from our possessions. Given a choice, direct possession takes precedence over credit. Physical closeness beats remoteness.

By Andrew Kraker - originally posted to Flickr as Pretty bird, CC BY 2.0, Link