On Ted Cruz and the soundness of ‘sound money’

Ted Cruz addresses Georgia Republicans in Athens, May 2015. (AJC Photo / Hyosub Shin)

Ted Cruz addresses Georgia Republicans in Athens, May 2015. (AJC Photo / Hyosub Shin)

In last night’s debate about the economy, which (unlike the CNBC debate last month) had the benefit of sticking mostly to topics about the economy, there was one note in particular that appeared to strike viewers as odd. Judging by some of the reactions I saw on social media, Ted Cruz’s support for “sound money” came across as tantamount to one of those gold advertisements you saw all the time on cable television a few years ago.

It needn’t be that way, though Cruz needs to flesh out what he meant when he said, during his answer to a question about bailouts, that 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 “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 Fed now.”

That’s not entirely true: There were some wild economic swings and periods of inflation prior to the demise of the Bretton Woods monetary system under Nixon, and inflation has remained lower than many of us expected as the Fed engaged in quantitative easing over the past several years. However, there is something to be said for sound money in general, even if it’s unclear what exactly Cruz proposes to do about it. The “gold standard” has been employed in different ways in the past, and any return to something along the lines of it (for example, gold itself need not be the object to which exchange rates are tied) would have to be adapted to the way the world has changed.

Still, the Texas senator was right to name sound money as one of the three levers (along with taxes and regulation) that were used effectively by Coolidge during the 1920s, Kennedy during the ’60s and Reagan during the ’80s. Unless they’ve studied the economic history of the time, Americans my age and younger don’t have a good grasp of just how devastatingly bad  U.S. monetary policy was during the 1970s and early ’80s. Inflation rates, which had averaged 1.7 percent a year during the Eisenhower, Kennedy and Johnson administrations, averaged 7.5 percent during the Nixon-Ford-Carter years and were in the double digits from 1979-81. That meant rapidly rising prices and mortgage rates in the mid- to high teens, all while the economy disproved the Keynesian theory that high inflation was part of a trade-off that brought us lower unemployment rates. Instead, we suffered from high levels of each in what came to be known as “stagflation.”

That’s not the situation now, but we do suffer in ways for the benign neglect of the dollar by our policy makers. If you care about income inequality, you should know the Fed’s policy of keeping the dollar down is why your savings account (and similar tools, such as CDs) earns virtually nothing in the way of a return, while returns have been stronger for stocks and other riskier investments that middle- and low-income Americans generally don’t own unless they have retirement accounts such as 401(k)s. And it’s not as if stock-market returns, when adjusted for inflation, have been home runs for all but the very wealthiest Americans, either.

Some observers insist a weak dollar is vital if our manufacturers are to be competitive, but plenty of other factors, including energy prices, are at least as influential. Taking currency volatility out of the equation 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. And getting back to lower energy prices, they are one reason inflation looks as tame as it does. A number of other household essentials have continued to grow more expensive in recent years, in large part because a dollar doesn’t go as far as it once did. That’s not good for growth.

So Cruz was right to argue that sound money would contribute to a stronger economy. But we need to know what, exactly, he would do to ensure we have it.

Reader Comments 0

24 comments
Uncle-Billy
Uncle-Billy

What does "sound money" mean? Inflation has been very low for a 

low for a long time. The Fed cannot even get it up to 2% which

which is its target. Its target excludes food and fuel which are known to be very volatile. With them included over the last year the rate has been 0.3%.--The dollar, which was already strong against the currencies of our major trading partners has got stronger. So our trade balance, already in deficit by $500 billion per year is likely to get even larger. A trade deficit is a dollar for dollar subtraction from GDP.--Rates on Treasury debt are low but they are higher than most other developed countries especially at the long end (i.e. 20-30 years) where the Fed has very little control.--Not long ago people were worried about what would happen when the Chinese began to sell off their holdings of US Treasury debt. Well, it has been happening for awhile now without noticeable effect. There is a great appetite for US Treasury debt. That is why rates are low.--So why is there any concern over "sound money?"

Uncle-Billy
Uncle-Billy

@Kyle_Wingfield @Uncle-Billy I did not say that imports are bad. What I said is that when imports exceed exports by a large amount (currently $500 billion) that amount is transferred from producers in the US to producers abroad. A part of the reason for this negative trade balance is that the US Dollar is very strong vis a vis the currencies of other currencies of other countries. This is the very definition of a "strong currency." Nothing in Mr. McTeer's article contradicts this. So why are you and Cruz worried about the dollar?


http://www.huffingtonpost.com/dean-baker/the-trade-deficit-and-the_b_7539710.html

FIGMO2
FIGMO2

In what sense is the money in our pockets and bank accounts fully ‘ours’? Did we earn it by our own autonomous efforts? Could we have inherited it without the assistance of probate courts? Do we save it without the support of bank regulators? Could we spend it if there were no public officials to coordinate the efforts and pool the resources of the community in which we live? Without taxes, there would be no liberty. Without taxes there would be no property. Without taxes, few of us would have any assets worth defending. [It is] a dim fiction that some people enjoy and exercise their rights without placing any burden whatsoever on the public… There is no liberty without dependency.---Cass Sunstein

Not to worry. That feller up ^^^ there had Obama offer up HisIRA, or was it MyIRA... to encourage all the OTHER irrational folks to save for the government's rainy day fund. It was in THEIR (who is "THEIR"?) best interest to do so.

Hard to save what you don't have.  

RoadScholar
RoadScholar

Rafe: " Just a suggestion that the interest rates might rise sends Wall Street into a frenzy and seems to influence the Fed to hold rates as they are..."

That is where America is on everything. Just look at the reaction to the Starbucks' "naked" red cup!


"Cruz did a good job also on pointing out how illegal immigration is keeping wages from increasing."

Didn't Trump state that wages were too high in the last debate...that we have to be more competitive on the world market? Someone else stated "The middle class  makes  too much"? Are those the people we need to lead America?

LilBarryBailout
LilBarryBailout

The person who IS leading America has imported millions of low wage workers and pushed Americans out of formerly good-paying jobs.

So what was your point again?

lvg
lvg

When the Fed is printing funny money to pump up the economy with no benchmark for valuing it and when the Fed has been the top buyer of US bonds, and the Chinese are moving into being the world's banker, something really bad will eventually happen particularly if chinese and Saudis cash in those US t-bills all at once. Has any candidate stated how to overcome that ?  Isn't this the number one national security issue?

LilBarryBailout
LilBarryBailout

Seems like there's reason for foreigners not cashing in all their dollar-denominated investments--we'd have to print even more money to pay them off, devaluing the currency and their investments at the same time.

EGSheppard
EGSheppard

Energy prices drove inflation from 1974 to the early 1980s, following the incredible price increases imposed by OPEC on oil, which started in 1973.  And the rate of job growth went down under Reagan, not up as it was supposed to do following his 1981 tax cuts.

Kyle_Wingfield
Kyle_Wingfield moderator

@EGSheppard "Energy prices drove inflation from 1974 to the early 1980s"

Actually, if you look at the data for CPI excluding food and energy, you see inflation began to rise in the late 1960s, as Bretton Woods was beginning to fall apart, didn't move in concert with oil prices during the 1970s, and began to fall sharply in 1982-83 after the Fed's tightening -- even as oil prices remained far above their pre-OPEC crisis trend: http://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths (you have to adjust the time frame yourself at the link)

Here's the oil chart: http://www.macrotrends.net/1369/crude-oil-price-history-chart

As for job growth, it's a bit misleading because the monetary actions took longer than the tax changes. Once they were both in place and the 1982 recession broke, job growth took off: http://data.bls.gov/timeseries/LNS12300000 (again, you have to adjust the time frame yourself)

xxxzzz
xxxzzz

@EGSheppard Democrats created inflation.  JFK and LBJ wanted a war without paying for it, so they used inflation to drive up tax receipts.

RafeHollister
RafeHollister

Not sure why AJC let me, a non subscriber, in today, but thanks.  


I am glad that you noticed Cruz's sound money philosophy.   We do need some guidelines for the Fed to use in setting interest rates other than politics and seat of the pants assumptions.  The Fed chair seems to have over the years become more concerned with propping up the economy  and appeasing Wall Street versus protecting the dollar and ensuring our dollars do not become worthless.  Just a suggestion that the interest rates might rise sends Wall Street into a frenzy and seems to influence the Fed to hold rates as they are.  That is not what should be happening.


Stocks have benefited those willing to take a small risk.  I finally convinced my mother to give up on shopping banks for .25% more on CD's.  I put her in Southern Company and she was absolutely thrilled when she got her first dividend check.  So much more money for so small a risk. First time in years she got a significant check.   But, I realize many have no tolerance for any risk whatsoever, so at some point the Fed is going to have to move the rates higher to more correctly reflect the inflation we see everyday as we shop.


Cruz did a good job also on pointing out how illegal immigration is keeping wages from increasing.  Someone followed that point today with an ad showing Barbara Jordan decrying illegal immigration and the effects on the economy back in the seventies. Guess we haven't learned that more job seekers and fewer jobs yields less in wages.

Kyle_Wingfield
Kyle_Wingfield moderator

@RafeHollister "Not sure why AJC let me, a non subscriber, in today, but thanks."

Everyone gets to view several articles each month even without subscribing.

RafeHollister
RafeHollister

@Kyle_Wingfield @RafeHollister Well, not that it matters, but I have been told numerous times in the last few days that I am over the five articles allowed and therefore not allowed to read your column. Today boom, I'm in.  Just seems inconsistent to me.  Maybe the liberal wonks are just practicing affirmative action today, letting some poor conservatives in, haha.

LilBarryBailout
LilBarryBailout

I've noticed in several media outlets that leftists are now touting stocks as the obvious investment for retirement purposes. Can't have folks blaming Obama or the Fed for the impact of their policies.

Funny how they didn't have this "Eureka" moment when privatizing part of Social Security was being debated, and I expect they'll forget it the next time that discussion occurs.

Kyle_Wingfield
Kyle_Wingfield moderator

@LilBarryBailout Hmmm, I haven't seen that happening but that would be a turn of events. If you see those kinds of stories again, or can re-find the ones you've already seen, please shoot them my way.

Visual_Cortex
Visual_Cortex

@LilBarryBailout

How you get from "stocks can be good retirement investments" to "dismantle Social Security as we know it," I guess, only your hairdresser knows for sure.

Oh, and your vox link says absolutely zero to support your assertion.

bu2
bu2

Inflation hit 18% during the Carter years.  Along with hour long gas lines, inability to get credit and high unemployment.  Its understandable that Obama's desire to create a 2nd and 3rd Carter administration drew a lot fewer votes among those old enough to remember Carter.

Visual_Cortex
Visual_Cortex

@bu2

This article of faith among the vast majority of fundamentally dishonest "conservatives" that inflation was somehow a Carter-generated problem is, thankfully, not on display in Kyle's piece, and for that, I do thank Kyle.

xxxzzz
xxxzzz

@Visual_Cortex @bu2 While president Nixon added wage and price controls because it got to the outrageous 5%.  Under Carter it got as high as 18%.  Carter didn't create it-JFK and LBJ did.  He just turned it into a disastrous problem.