Last week at a hearing before the Congressional Joint Economic Committee, JEC member Sen. Ted Cruz, who has — to great notice and some predictable attacks from the left — proposed restoring the gold standard, asked several very sophisticated questions of Fed Chair Janet Yellen.
Cruz’s questioning was effusively praised by Scott Sumner, David Beckworth, and Norbert Michel, among others, as reported in the Washington Examiner‘s “Cruz steps outside GOP orthodoxy with free-market criticism of Fed.”
For a Republican, Ted Cruz has a unique criticism of the Federal Reserve.
The conservative Texas senator and contender for the GOP presidential nomination argues that the central bank is responsible for causing the financial crisis and recession because it kept money too tight in 2008.
Cruz’s criticism of the Fed is nearly the opposite of the one typically voiced by Republicans, who generally fault Chairwoman Janet Yellen and her predecessor Ben Bernanke for their efforts to ease money. …
Yet Cruz’s criticism of the Fed, while unheard of on the national political stage, is a sophisticated one, shared by some prominent and credible economists, including supply-siders, libertarians and even members of the Federal Reserve system.[…]
Yellen, although used to obscure or hostile questions from members of Congress, seemed taken off-guard.
The second exchange between Sen. Cruz and Chair Yellen, drew effusive praise of Cruz in The New York Sun, which wrote, in “Ted Cruz Takes The Lead”:
Congratulations are in order for Senator Ted Cruz for his questioning of the Federal Reserve’s chairman, Janet Yellen, at this week’s hearing of the Joint Economic Committee. The Texan had not been on the Committee’s list for the hearing, understandable given the pressures of his presidential campaign. That he made a point of being there signals an instinct to lead on of the most strategic economic issue facing the country — the soundness of the American dollar.
The key question Mr. Cruz asked is whether Mrs. Yellen agrees with her predecessor Paul Volcker that the absence of a cooperatively managed rules-based monetary system has not been a great success. Mr. Volcker offered that assessment in a speech to the Bretton Woods Committee in May 2014; it was first reported in a Wall Street Journal op-ed piece by the editor of the Sun and, given Mr. Volcker’s stature, was an important moment in the debate over monetary reform.
The Sun is perfectly correct in identifying this as “an important moment in the debate over monetary reform.” Moreover, the Sun went on to observe:
America has experienced but one presidential election that focused on the monetary system. That was in 1896, when William Jennings Bryan, the Democrat, ran on an inflation platform against the Republican’s William McKinley. The winner, McKinley (subject of a brilliant new book by Karl Rove) went on to sign the Gold Standard Act of 1900, which set the stage for the great advances in the first three generations of the 20th Century. That’s the long game that Senator Cruz is now leading.
I might suggest in a mere quibble that the (especially) 1892 presidential race between gold standard proponent and progressive Democrat Grover Cleveland against President Harrison and the 1980 presidential race between good money Republican Ronald Reagan and easy money Democrat Jimmy Carter both presented significant focus on the monetary system. That said, I am in complete accord with the Sun’s key points: the significance of this issue, and moment, and Sen. Cruz’s leadership in this long game: to reestablish the “rules of the game” when it comes to monetary policy.
The uncorrected transcript of the Hearing presents this portion of the exchange as follows. It is well worth reading in its entirety.
I want to shift to a different Fed chairman, which is Paul Volcker, who said in a speech before the Breton Woods Committee last year, quote, “By now I think we can agree that the absence of an official rules-based cooperatively managed monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth.” Chairman Volcker went on to say, “The United States in particular had in the 1970s an unhappy decade of inflation ending in stagflation. The major Latin American debt crisis followed in the 1980s. There was a serious banking crisis late in that decade, followed by a new Mexican crisis. And then the really big and damaging Asian crisis. Less than a decade later, it was capped by the financial crisis of the 2007 through 2009 period and the Great Recession. Not a pretty picture.” Now you have said, quote, “It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule.”
Do you agree with Chairman Volcker’s characterization that, quote, “the absence of an official rules-based cooperatively managed monetary system has not been a great success” and has not been “a pretty picture”?
Well you have pointed to a large number of very damaging financial crises, and in that sense I do believe it was very important for us to take steps to have a stronger financial system, and one that is less crisis prone. I don’t think that Former Chairman Volcker was proposing a rule-based monetary policy in the sense of following a simple mechanical rule. And I guess I would argue that many countries do have in essence rule-based monetary policy in the sense that most countries have inflation targeting regimes, and transparent monetary policies where the central banks are independent and spell out and are accountable to achieve an inflation objective.
And the Federal Reserve has very much strengthened its transparency as to what our goals are, what our strategy is 16 for trying to achieve those goals, and provided the public with very detailed forecasts of what policies we think are appropriate to achieve the goals that Congress has assigned to us, including a 2 percent inflation objective. And over the last 20 years, inflation has been highly stable, around 2 percent. So in that sense, even though we may not follow the Taylor Rule, or some simple mathematical formula, I believe we do have a rules-based monetary policy in the United States, or at least a systematic policy in the United States and many other countries, most other countries do as well.
Ralph Benko, internationally published weekly columnist, co-author of The 21st Century Gold Standard, lead co-editor of the Gerald Malsbary translation from Latin to English of Copernicus’s Essay on Money, is American Principles Project’s Senior Advisor, Economics.