Question

"Ted Cruz calls for the gold standard" Reem Nasr, CNBC Wednesday, 28 Oct 20 15 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,' he said during the Republican presidential debate." Explain in terms of an economist the assumptions that underlie this policy position and the argument an economist would make to support this position (using appropriate graphs). Then, explain the argument an economist would make against this position

Answer 1

Here Ted Cruz is talking about the gold standard of currency i.e the idea of tying the value of currency to that of gold. The assumption usually made in such an argument is that the now Fiat currency has nothing tangible to back up it's value. Here it is also assumed that inflation levels and the monetary policies wreak havoc with the value of Fiat currency and hence the value would be more stable and predictable when tied to something more tangible like gold. Here it is also argued that the stock of paper money can be increased arbitrarily and hence it's supply is excessively elastic.

The arguments against the gold standard are many. The most basic being the ability of Fiat currency to respond to economic shocks. In times of uncertainty, people hoard gold. It can be seen that during the most recent financial crises the gold prices soared and fell sharply once the overall economic environment improved. Under the gold standard as noted by President Roosevelt hoarding gold during the great depression had a direct impact on monetary flow, hurting commerce and exacerbating recessions.

When using a gold standard as store of value for the currency. The currency becomes deflationary over time rather than inflationary. Now the consumers will be able to buy more goods with the same amount of money. This is seen as favoring the consumers rather than the producers.