Senator Ted Cruz Really Wants to Return to the Gold Standard... Has He Heard of the Great Depression?

Republican Presidential hopeful  Ted Cruz  speaks during the CNBC Republican Presidential Debate, October 28, 2015 at the Coo
Republican Presidential hopeful Ted Cruz speaks during the CNBC Republican Presidential Debate, October 28, 2015 at the Coors Event Center at the University of Colorado in Boulder, Colorado. AFP PHOTO/ ROBYN BECK (Photo credit should read ROBYN BECK/AFP/Getty Images)

"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." -- Senator Ted Cruz

Ted Cruz, in his campaign for demagogue-in-chief, expressed a nostalgic desire to return to the gold standard during Tuesday night's Republican debate. In an article in The Atlantic magazine circa 2012, the gold standard was termed "the world's worst economic idea!"

In fact, returning to "a metallic basis for the U.S. currency," which means that the value of the dollar would be fixed at a set exchange rate relative to gold ounces, was endorsed in the 2012 Republican party platform.

As with so many conservative policies, it is simply bad economics!

Radical conservatives, such as Cruz, and libertarians believe gold to be a hedge against inflation. It is curious to be concerned about inflation at a time when it is at historic lows and short-term interests rates are at zero, making borrowing money just about free.

But economists today generally agree that the gold standard exacerbated and prolonged the Great Depression. They acknowledge that those countries that abandoned it earliest in the 1930s were the first to recover.

Writing in the New York Times in 2012, former Reagan and George H. W. Bush policy adviser Bruce Bartlett stated:

A survey of a panel of 41 prominent economists earlier this year by the University of Chicago business school found no support for a gold standard, including by those who had served in Republican administrations, including Edward P. Lazear of Stanford and Richard Schmalensee of the Massachusetts Institute of Technology.

When returning to the gold standard was first broached by conservatives in the early 1980s, the idea was not as absurd as it is today. Again, according to Bruce Bartlett: "The Consumer Price Index rose 13.3 percent in 1979 and 12.5 percent in 1980, before falling to a still-high 8.9 percent in 1981."

At the time Federal Reserve Chairman Paul Volcker, appointed by President Jimmy Carter, raised interest rates high enough to break the back of inflation, paving the way for the job gains and economic growth during the Reagan administration.

Today, on the other hand, the problem is falling prices rather than inflation. With deflationary conditions, people hoard their money because prices will be cheaper tomorrow than today. Consequently, people don't spend and the economy, in which 70 percent of GDP is represented by personal consumption, stagnates.

Writing in The Atlantic, Matthew O'Brien opines:

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. As University of Chicago professor Richard Thaler points out, exactly zero economists endorsed the idea in a recent poll. What makes it such an idea non grata?...

Why would anyone want to go back to the bad old days? The gold standard limited central banks from printing money when economies needed central banks to print money, and limited governments from running deficits when economies needed governments to run deficits. It was a devilish device for turning recessions into depressions. The answer is that some people aren't worried about depressions. Some people are worried about inflation. Even when none exists.

The gold standard is a solution in search of a problem. Actually, it's worse than that. It's a problem in search of a problem. Prices would have to fall a great deal if we adopted the gold standard today. In other words, it would turn the imagined problem of price stability into a real problem of price stability. And, of course, this ensuing deflation would send the economy into a death spiral due to still high levels of household debt.

The main idea is that a return to the gold standard does not allow the government the flexibility of printing money during times of recession, which is necessary for stimulating the economy, and the funding of government deficits that could "prime the pump" for an expansion. The idea of priming the pump during economic recessions is the linchpin of Keynesian economics.

Conservatives, such as Cruz, do not believe in Keynesian economics to begin with. They also do not endorse the fed's policy of attempting to lower long-term interest rates by the buying of long-term bonds, otherwise known "quantitative easing."

So Cruz and other ideologues do not agree with monetary or Keynesian policies, which limits them in times of economic contractions. Reducing one's policy alternatives to a proven failure like supply-side economics, meaning tax cuts for the wealthy, is not a virtue and this policy has been shown to be mainly effective at creating enormous deficits along with no statistically significant economic growth.

Radical conservatives, such as Cruz, want to take us back to the pre-New Deal 1920s in terms of social and economic policies, and effectively, re-create the conditions for "greater economic instability, higher unemployment and longer recessions," as observed by Bruce Bartlett!