At Wednesday night’s GOP presidential debate, Sen. Ted Cruz (R-TX) called for returning to a policy idea that died in 1933 and has gone unmourned ever since.
“We need sound money,” Cruz said when asked about Federal Reserve policy by CNBC’s Rick Santelli. “And I think the Fed should get out of the business of trying to juice our economy and simply be focused on sound money and monetary stability, ideally tied to gold.”
American money hasn’t been based on the price of gold since the early months of Franklin Roosevelt’s presidency. Returning to a “gold standard,” as the policy was known, would send the broader economy into the kind of jittery and deadly tremors usually seen only in lab mice who’ve been fed cocaine.
The idea of “sound money,” as the libertarian crowd that worships the gold standard prefers to call it, is that it takes away the Fed’s ability to manage the value of a dollar. The supposed benefit of this is that your money’s worth is more real because it is pegged to a shiny, rare metal.
But when you let the market for gold determine the value of every piece of paper money in every person’s pocket on any given day, you leave your entire economy exposed to catastrophe. The gold standard forced governments around the world to restrict monetary policy just as markets crashed in the late 1920s, which helped turn a crash into the Great Depression.
The reason gold standard proponents favor the coded language of “sound money” is partly that everyone agrees the gold standard was terrible. “Economics is often a contentious subject, but economists agree about the gold standard — it is a barbarous relic that belongs in the dustbin of history,” The Atlantic’s Matt O’Brien put it in 2012.
Such consensus is indeed unusual, but it’s not hard to see where it comes from here. By moving off the gold standard, America gained the ability to manage inflation much more acutely. That’s important because volatile inflation makes the price of everyday goods and services bounce around wildly, which undermines economic security for consumers. Since the point of having an economy is to furnish economic security or even prosperity to as many people as possible, a long-dead policy idea that would turn family budgeting into a hopeless exercise in futility seems like a tough sell.
To boost his sales job on Wednesday, Cruz linked his criticisms of the Fed directly to issues of economic inequality.
“You know, it’s interesting, you look at on Wall Street, the Fed is doing great. It’s driving up stock prices. Wall Street is doing great,” he said, before noting the historically high disparity in earnings between the richest in the country and everyone else.
Indeed, income and wealth inequality stand at levels not seen since Cruz’s gold standard was still a common policy worldwide. It’s a particularly acute problem across racial lines: The median black household’s net worth was $11,000 in 2013, less than 8 percent of the $141,900 median net worth for white families.
Closing such a vast racial wealth gap would require robust, multifaceted public policy approaches. A stronger job market is only one piece, but it’s an important one. Higher working-class wages and more people finding work instead of looking for it would at least establish a floor from which families could start building assets.
The Fed has a major role to play in establishing that kind of economic launchpad. Chopping off the Federal Reserve’s hands and making the dollar dependent on the price of gold again isn’t how you deliver the kind of stability that promotes business investments that create jobs.
Progressive Fed critics have a different set of recommendations. They note that the laws that empowered the Fed require it to fulfill a “dual mandate.” It must make policy that will both manage inflation to keep prices stable and deliver what’s called “full employment” — not a zero percent unemployment rate, but an economy where everyone who seeks a job can find one somewhere. Progressive critics argue the Fed has ignored its employment mandate for decades and focused only on inflation, resulting in policy that directly benefits financial markets but barely moves the needle for working people.
Progressive Fed-watcher Mike Konczal has argued for that the Fed’s credibility should be based more on Main Street measures of prosperity than interest rates. Such a standard would encourage the central bank to let inflation rise much more aggressively when it would help consumers, and discourage it from raising rates to combat inflation in ways that depress wage growth. Progressive economist Thomas Palley has called for a sweeping overhaul of the Fed’s approach, including using Fed powers to furnish the infrastructure investments that Congress has stymied in recent years.
It’s not all on-paper wonkery. Progressive activists are going to the bankers’ doorstep. When Fed officials had their annual meeting in Jackson Hole, WY, this summer, a group called Fed Up was there to meet them. Their campaign has a simple immediate goal — convincing the Fed not to raise interest rates later this year as most forecasters expect it to do — but hopes to develop into a long-term presence that can bring modern ideas closer to the forefront of conversations about how to fix the Federal Reserve.