Thanks to Cynthia for this Frugal Baby Tip!
Paula says: Don't laugh but I just got a Terry/Flannel diaper and I don't know which side goes in and which goes out. I put the flannel next to her skin but my husband says the terry is more absorbent and it should go on the inside.
It's not silly to ask at all. The theory is that the flannel goes next to the skin as it absorbs faster than terry, therefore your baby's skin will be drier as the wetness will go right through the flannel to the very absorbant terry.
However, the idea that Laura shared with us months ago about the terry "grabbing" onto poop better is an excellent suggestion for babies with loose stools, like newborns. I guess it's one of those things as it depends on what's more important, soft flannel which is drier against the skin, or containing monster poop blow-outs...