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If the decision were up to me to choose between current Federal Reserve governor Jerome Powell or Stanford University economics professor John Taylor as the next Federal Reserve Chief, I would choose Taylor. At least, of the two, Taylor has a rule named after him.
According to the “Taylor Rule,” the Federal Funds rate would be a much higher 3.5% today, not a measly 1%. But the rule isn’t exactly cut and dried. “Its components include the gap between inflation and its target, between economic output and its target, and the ‘neutral’ real (inflation-adjusted) interest rate, which keeps the economy at full employment and inflation stable,” writes Greg Ip in the WSJ. That’s a mouthful. One can only imagine how the rule could be misinterpreted by the high priests working in government.
A better approach would be to focus on sound money, pure and simple, by tying the value of a dollar to an ounce of gold. Today an ounce of gold costs $1,275. That’s it. No rules to interpret just like there’s no need to interpret time throughout your day. There’s 60 seconds in a minute, and 60 minutes in an hour, that’s it. With a gold standard, you know the value of your dollars every second of the day.
Unstable currencies are like viruses in your computer–they corrupt those “bits” of information. Destructive bubbles result, such as the housing frenzy preceding the 2008-2009 crisis. In 2001, a barrel of oil cost little more than $20. Then the U.S. Treasury Department and the Federal Reserve deliberately began weakening the dollar in the mistaken belief that this would stimulate more exports and economic growth. Petroleum rocketed to more than $100 a barrel. Other commodities behaved in similar fashion. These surges didn’t come about because of natural demand but because of a declining dollar. Nevertheless, most people took to heart the message that the rising prices seemed to convey: All these things were becoming dearer. The misinformation conveyed by prices resulted in hundreds of billions of dollars being misinvested, particularly in the building of houses.
Everyone understands the basic need for fixed weights and measures in daily life: the amount of liquid in a gallon, the number of ounces in a pound, the number of minutes in an hour. None of these amounts fluctuate; they are unchanging.
Just as we use a scale to measure something’s weight, we use money to measure the value of products and services. If the measuring rod itself becomes unstable, the smooth functioning of an economy is disrupted, just as our lives would be if the number of minutes in an hour constantly fluctuated.
What’s the best way to achieve a stable currency? By linking the currency to gold. Obviously, with gold we’re not going to get a precise measurement, but as Lewis demonstrates in his concise and deeply learned history, gold has maintained its intrinsic monetary value better than anything else for 5,000 years. Silver did the same until the mid-1800s, but for several reasons it then drifted decisively away from paralleling the value of gold, which is why most of the major countries of the world moved solely to a gold standard.
The fluctuating price of gold today doesn’t reflect the real value of the yellow metal but, rather, the fluctuating value of various currencies.
