Ted Cruz: The GOP’s Sound Money Candidate

March 29, 2016

by Jeff Bell


Sen. Ted Cruz (R-TX) (photo credit: Gage Skidmore)

Sen. Ted Cruz (R-TX) (photo credit: Gage Skidmore)

This column from The Daily Caller last week is a great defense of Ted Cruz on the gold standard:

Mr. Cruz has been excoriated for seemingly incompatible statements concerning the U.S. central bank, the Federal Reserve. On the one hand, he has advocated exploring a return to the gold standard, seemingly questioning the Fed’s purpose. On the other hand, he has accused the Fed of implicitly creating the Great Recession by not intervening strongly enough in 2008 to prevent the crash. How can someone want the Fed to do more sometimes, but call into question its existence at other times?

I do not want to put words in Mr. Cruz’s mouth, but in light of the increased public realization of the Fed’s role, it’s important to understand these positions are not inherently contradictory. Mr. Cruz’s critiques make sense if viewed in the context of the inherent knowledge problem monetary policy confronts.

In economics, the knowledge problem is an idea closely associated with the writings of Nobel laureate F. A. Hayek. Applied to monetary policy, the knowledge problem impels the question: how can monetary policymakers know what supply of money will best achieve economic stability? Because, under central banking, the production of money is not subject to market forces, we cannot rely on the usual mechanisms of supply and demand to ensure there is enough money in the economy to satisfy demand for it.

Theoretically, an omniscient central bank would meet changes in money demand with offsetting changes in supply. If the public’s money demand spikes, without an increase in the money supply, a painful recession — rising unemployment and falling income across the economy — can result. But the public’s money demand is not stable, and it is incredibly difficult to predict. How can central bankers, even with sophisticated statistical tools at their disposal, know enough to supply sufficient money to keep the economy at its maximum potential?

Simply put, they can’t. Even monetary policy experts get it wrong, and when they do, the consequences can be disastrous. We saw this in 2008 when, according to Mr. Cruz, the Fed failed to expand the money supply rapidly enough to prevent a recession. But how does this apply to Mr. Cruz’s comments on the gold standard? While there’s no such thing as the gold standard — several monetary systems can be filed under that label — the relevant point is that a gold standard is one way to overcome the monetary knowledge problem, by introducing market mechanisms to regulate the money supply.

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You can read the full article here.

Jeff Bell is the Policy Director of the American Principles Project.


Jeff Bell is the policy director at American Principles Project.

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