During Tuesday night’s GOP debate, which mostly stuck to the economy, one note in particular appeared to strike viewers as odd. Judging by some reactions I saw on social media, Ted Cruz’s support for “sound money” came across like one of those “buy gold!” advertisements on cable TV.
It needn’t be that way, though Cruz needs to flesh out what he meant when he said one of the Federal Reserve’s main jobs should be “keeping our money tied to a stable level of gold.” At other times he stuck to the broader phrasing of “sound money,” although he also noted at one point that “we had a gold standard under Bretton Woods, we had it for about 170 years of our nation’s history, and enjoyed booming economic growth and lower inflation than we have had with the (Federal Reserve) now.”
That’s not entirely true. There were some wild economic swings and periods of rampant inflation during our nation’s varied history with the gold standard, though it was better under the Bretton Woods system of fixed international exchange rates from 1944 to 1971. And the official rate of inflation remains lower than many of us expected as the Fed engaged in quantitative easing.
But there is something to be said for sound money in general. Much ink is spilled and many airwaves filled with lamentations the American middle class was much stronger from the end of World War until sometime in the 1970s than it has been since. Few people attribute that to monetary policy, perhaps because it’s so poorly understood.
It’ll be hard to know if Cruz is any better informed until we know more about what he proposes to do. Still, the Texas senator was right to name sound money as one of the three levers, along with lower taxes and lighter regulation, that have been effective in the past.
Unless they’ve studied the economic history of the time, Americans under age 40 don’t grasp just how devastating U.S. monetary policy was during the 1970s. Inflation averaged 1.7 percent a year during the Eisenhower, Kennedy and Johnson administrations. It averaged 7.5 percent annually during the Nixon-Ford-Carter years and hit double digits from 1979-81. That wrought mortgage rates in the mid- to high teens and the “stagflation” of simultaneously high inflation and unemployment.
That’s not the situation now, but we do suffer for the benign neglect of the dollar. If you care about income inequality, for example, you should know the Fed’s weak-dollar policy is why your savings account or CDs earn virtually no return, while returns have been stronger for stocks and other riskier investments more common among higher earners. At the same time, a number of household essentials have grown pricier as the dollar has weakened.
Some observers insist a weak dollar makes our manufacturers more competitive, but other factors, including energy prices, are at least as influential. Reducing currency volatility would force producers to focus on other ways they can be more competitive with rivals both foreign and domestic, which is better for growth in the long run.
So Cruz was right to argue that sound money would contribute to a stronger economy. Now we need to know how he’d bring it about.
About the Author
