Ted Cruz’s golden answer
Lost amid all the freworks in that CNBC debate of the GOP presidential candidates was the answer Texas Senator Ted Cruz gave to a question about the Federal Reserve, advocating that the dollar be tied to gold. Other than Ron Paul, who has long been a goldstandard advocate, and his senator son, Rand, no other presidential candidate has pushed serious monetary reform since yours truly ran 16 years ago. This is stunning, given the immense damage our central bank has inficted on the U.S. and the global economy. In fact, few economists, politicians or pundits are even aware of the harm that’s been done.
A country can “get it right” on policies concerning spending, taxes and regulation but experience economic trouble if its approach to money is wrong.
The reason monetary policy is so fundamental is that the way we live and progress is through the transactions we carry out with one another countless times a day. Life would be chaotic and our standard of living far lower if weights and measures weren’t fxed—60 minutes in an hour, 16 ounces in a pound and 12 inches in a foot. We assume, for instance, that a gallon of gasoline is the same volume each day.
What most observers don’t understand—thanks to John Maynard Keynes—is that the same concept is true for money: It works best when it has a fxed value. Money makes the buying and selling of things infnitely easier. But when money’s value is unmoored, the economy functions badly. Certain sectors beneft— a weak dollar always creates a potent but false commodities boom—but most are hurt because productive investment shrinks. Investors and business executives don’t know what the value of the money will be when it’s time to be paid back—a 100-cent dollar, a 10-cent dollar, etc. Uncertainty always dampens risk-taking. Without robust risk-taking an economy stagnates—and so do people’s standard of living.
Since the early 2000s the policies of the Fed have been toxic, frst weakening the greenback and then, since 2013, inadvertently strengthening it. Like a watch that runs either too fast or too slow, a yo-yoing dollar is disruptive, hurting innovation and the creation of new businesses.
For a variety of reasons that have held true for thousands of years, a gold standard works better than any other system, including the no-standard system we have today. The basic reason for this is that the yellow metal keeps its intrinsic value better than anything else on earth. In that sense it’s to stable value what Polaris is to direction ( read Nathan Lewis’ 2013 book, Gold: The Monetary Polaris, Canyon Maple Publishing). A change in the dollar price of gold refects changing perceptions of the worth now and in the future of the greenback. By the way, the dollar was tied to gold in the U.S. for 180 years, and that worked well. If Richard Nixon hadn’t severed the dollar’s link to gold in the early 1970s and we had maintained our goldstandard average growth rates, the U.S. economy would be 50% bigger than it is today. A country doesn’t need a pile of gold to make a gold-based arrangement work any more than a builder needs to have a warehouse full of measuring tapes to construct a skyscraper. Gold is like a measuring cup in a kitchen. Tying a currency to it means that a country’s money will have a stable value.
Alas, there are numerous false myths surrounding the idea of a gold standard—e.g., it would restrict the money supply, thereby hurting growth. But the opposite is true: The money supply would grow or contract to meet the actual needs of the economy.
Senator Cruz’s endorsement hardly means that the dollar will soon be fxed to what Keynes wrongfully called the “barbarous relic.” But it will help start a much needed discussion and debate—and, critically, an education in how a gold standard actually operates and what needs to be done to have it function properly.
The sad fact is that hardly anyone today would know how to operate a gold standard. The U.S. certainly didn’t