Ted Cruz’s golden an­swer

Forbes - - Inside Scoop - BY STEVE FORBES, EDITOR-IN-CHIEF

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

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