December 2008 Graduate Commencement Remarks

John Anderson

Dr. John E. Anderson, Baird Family Professor of Economics and Associate Dean of the College of Business Administration, delivered these remarks for the graduate commencement ceremony.

Dollars and Diplomas: What Makes Pieces of Paper so Valuable?


Chancellor Perlman, colleagues, graduates, and guests...

It is a real privilege for me to participate in the inaugural graduate commencement at UNL. I came to UNL in 1991 for a number of reasons, but primary among them was the motivation that I wanted to be more deeply involved in research and graduate education. The University has afforded me the marvelous opportunity to do just that, and the most satisfying result is that I have been able to train and mentor graduate students that are now spread across the globe, teaching, researching, and mentoring their own students.

As we engage in graduate education we create families of scholars, and as academics are fond of doing, I have traced my academic roots. Professor Colin Wright at Claremont Graduate University supervised my doctoral committee. He wrote for the famous University of Chicago professor Arnold Harberger, who in turn studied under another highly respected Chicago economist Lloyd Metzler. Metzler was a Harvard-trained Keynesian economist who pioneered the use of mathematical methods in economics. In tracing my academic roots in this way I have come to appreciate my intellectual heritage. I recommend that each of you doctoral graduates trace your academic roots and go as far back as you can. It is wonderfully satisfying to discover your academic lineage and come to appreciate the legacy of trust that has been placed in you.

Your graduation today comes amidst historic economic events. Most notable is the turmoil in the financial markets, resulting in a $700 billion rescue package for the financial industry. The intense financial and economic news coverage highlights questions of how the government creates new money and what determines the value of the U.S. dollar. In my remarks today I want to examine what makes simple pieces of paper that we call dollar bills valuable and I want to draw a parallel to the valuable pieces of paper that our graduates receive today in the form of their diplomas.

As you think about the U.S. dollar and what determines its value, remember that our dollars are mere pieces of paper with no intrinsic value at all. The reality is that ultimately our entire financial and economic system is built on a network of trust relationships.

A natural question that arises is, "Where do the Treasury and the FED get the additional money needed to implement a rescue plan?" Essentially the Treasury borrows the money as it sells U.S. Treasury bonds. People looking for a safe way to preserve their wealth want to buy these bonds. These bonds, however, are simply promises of the U.S. Treasury to pay the money back with interest in the future. People have trust in those promises, making them valuable. During the most turbulent days of our recent financial crisis people wanting to buy those short-term bonds bid the prices up to the point where the return, or interest rate, went negative. People were willing to pay a price, rather than receive a return, in order to gain the security of Treasury bills in the midst of the crisis, placing immense trust in the U.S. Treasury at a time of crisis. And the FED, for its part, then creates money as it engages in open market operations buying some of those Treasury securities, injecting dollars into the financial system.

What serves as money in an economy has varied widely over time and across cultures. Long ago, most monies were commodity monies. The government declared a certain commodity, such as gold or silver, to be used as money. More colorful examples of commodity monies include large stone wheels used as money in Micronesian island economies, strung beads made of shells called wampum in North American indigenous communities, and bronze and copper cowrie imitations manufactured in China at the end of the Stone Age. Even when money is a tangible commodity such as gold, however, the intrinsic value of the money is based on trust. After all, what really makes gold valuable? While it has utilitarian uses, ultimately gold has value because of its limited supply and the willingness of people to trust it as a medium of exchange, unit of account, and store of value — the traditional three-part definition of money.

In our own economy we once used gold or silver coins and paper currency that was commodity backed. Indeed, the question of whether the dollar was backed only by gold or alternatively by silver was once very important to Nebraskans. Recall William Jennings Bryan's famous Cross of Gold speech delivered in 1896. Bryan was advocating the free coinage of silver at a ratio of silver to gold of 16 to 1. In today's terminology we might call this a 19th Century "bailout plan" that would have increased the money supply and rescued cash-poor and debt-burdened farmers. Nearly a hundred years later, the U.S. made the transition from the dollar being a commodity-backed money to a fiat money in 1971 when we cut the link between the dollar and gold. Fiat money is money that simply declared as such by a government. If it is paper currency, then as a commodity it is literally worth the paper it is printed on, and no more. Yet, as money it is far more valuable than it is worth as paper.

The Federal Reserve Notes that you carry in your wallet or purse are backed by nothing but a promise of the Federal Reserve Bank. And, the value of that dollar bill is simply determined by the willingness of people and merchants to accept that paper in exchange for their goods and services. Hence, the value of the paper currency is simply based on the trust that people have in the Federal Reserve System to manage the money supply.

Fundamentally, your dollar bill simply represents a set of relationships based on trust. You may not be accustomed to thinking of dollars as trust relationships, but that is what they really are. A twenty dollar bill is a statement of faith in Ben Bernanke and his successors and the Federal Reserve that they will manage the money supply and the financial system responsibly.

In much the same way as money works, the diploma you have earned and receive today is a relationship based on trust. The diploma is a mere piece of paper, with very little value as paper. But it represents a network of trust relationships that is highly valuable. When you came to UNL to pursue your graduate education, you placed your trust in the faculty of your chosen field. You trusted that faculty to be scholars at the forefront of their fields, to be effective communicators of their expertise, and ultimately you trusted that your degree would have sufficient value to justify the blood, sweat and tears necessary to earn the degree. On this point I suspect that many of you agree today with the writer of Ecclesiastes who said, "Of making many books there is no end, and much study is a weariness of the flesh." (Ecclesiastes 12:12)

In turn, your professors have trust in you and the knowledge and applied ability you have acquired under their direction. Your department and college, indeed the entire university, expresses trust in you as they grant you this diploma. We trust that you have mastered your discipline. In fact, we grant many of you a degree that explicitly says you are now a master of arts or a master of science in your discipline. We trust that you will represent us well. Our reputation rides on your success. The coin of the academic realm is reputation, and today we stake our reputations on you. I speak for all of your professors when I say that the most rewarding aspect of our profession is that we are now vested in you in a deep way, and we will do everything we can to help you succeed. As a result, there is a profound sense of trust that we have developed in you and we take delight in sending you off today, confident that you will take that which has been entrusted to you and invest it well.

In conclusion, I want you to recognize that your diploma is not a mere piece of paper. It represents a network of trust relationships that are immensely valuable. Like a dollar bill, it has no intrinsic value, but also like a dollar bill it is extremely valuable as the trust relationships it represents are deep and profound.

Best wishes to each of you for happiness, fulfillment, and success in your endeavors. Congratulations on your academic achievement today.