By Bernard Hickey
In 1896 a US politician called Williams Jennings Bryan gave a speech that became known as the 'Cross of Gold' speech. In the speech, which helped win him the Democractic nomination for President, he decried America's fixation with staying on the gold standard.
Back then, financial crises were common and triggered massive economic disruption.
Wages were slashed, unemployment jumped and poverty inceased whenever there was a market slump. Many, including Bryan, blamed the hard connection between the money supply and the amount of physical gold in America.
The economy appeared hamstrung by the supply of gold.
Whenever economic output grew faster than physical gold supplies the economy juddered to a halt, or worse.
Bryan's speech to the Democratic National Convention in Chicago in July 1896 was electrifying. He challenged the orthodoxy about how money worked, how economies should be run and why 'sound money' doesn't necessarily make everyone better off in the long run.
Many compare the Euro-zone to the gold standard in that it is forcing those Southern European economies to crunch their workforces and wages lower to restore competitiveness, rather than let their currencies devalue and let inflation help them out.
Greece, Portugal, Spain and Italy are being crucified on the European project's own 'cross of gold' of the Eurozone standard. Unemployment is at depression levels and it seems the only way their economies can adjust is to slash wages.
But what about here in New Zealand?
We don't have a gold standard, but increasingly we have our own 'cross of gold' in our now strictly enforced inflation targeting regime.
New Reserve Bank Governor Graeme Wheeler is an inflation-fighting hawk who is determined to lock inflation down to around 2%, effectively pushing it below the upper end of the 2-3% range where it has sat for the last decade or so under previous Governor Alan Bollard.
This week Wheeler made few comments about the damaging effects on employment and the current account deficit of a high New Zealand dollar.
His entire focus was keeping inflation down, as his Policy Targets Agreement with Finance Minister Bill English specifies, and as the Reserve Bank Act of 1989 directs.
Markets interpreted his lack of concern about the currency and high unemployment as a hawkish signal that he is unprepared to cut rates to boost the economy.
Wheeler's hands-off approach to using other tools such as Loan to Value Ratio targets also suggests that he will use the blunt instrument of a higher Official Cash Rate to puncture any housing bubble.
As a consequence, the New Zealand dollar spiked up to 74.4 on the Trade Weighted Index, its highest level since August 2011 and just 1% below its post-float high. This is despite a spike up in our unemployment rate to 7.3% and a sharp slowdown in our economy in the second half of 2012.
New Zealand's obsession with strict inflation targeting and its hands-off approach to the New Zealand dollar is our own 'Cross of Gold' that is crucifying the economy.
Exporters, workers and ultimately the economy are paying for this adherence to the theory that low inflation cures all ills.
We've had low inflation for two decades, as did the rest of the developed world. But all it did was encourage a deregulation of the financial system, spark an explosion of debt and unleash floods of hot money around the planet.
It's time to shed this obsession with the magical powers of low inflation and look at other ways to run monetary policy.
As Bryan said: "You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold."
This piece first appeared in the Herald on Sunday. It is used here with permission.