On January 16th of this year, President Donald Trump formally nominated Dr. Judy Shelton to the Federal Reserve Board of Governors. Her nomination languished until mid-July, when it was advanced by the Senate Banking Committee. Now, it appears that Dr. Shelton is nearing confirmation by the full Senate.
The Senate’s lack of dispatch up to this point can be forgiven, provided that they quickly confirm Dr. Shelton. The case for her confirmation is twofold. First, Dr. Shelton is undeniably qualified to serve on the Board of Governors. More importantly, she would inject a jolt of heterogeneity into the Federal Reserve, an organization that is too content with groupthink. That is why Dr. Shelton has been the victim of a media onslaught, with the standard headline calling her “controversial” and newspapers printing screeds with feral titles like “God Help Us if Judy Shelton Joins the Fed.”
Dr. Shelton’s general competence is manifest. She has a Ph.D. in Economics, a credential that the chairman of the Federal Reserve cannot claim, and a long history of work in academia, the private sector, and the public sector. Her intellectual output includes the prescient 1989 book The Coming Soviet Crash, which predicted that the Soviet Union would collapse even as mainstream economists championed it as indefatigable. She has also been consulted as an expert by several congressional committees.
Finally, Dr. Shelton was the United States director of the European Bank for Reconstruction and Development, where she helped provide loans for emerging economies and pushed for a greater organizational commitment to the free market.
A Powerful Contrarian Voice:
The strongest case for Dr. Shelton’s confirmation is the strength of her contrarian convictions. She has long supported an international gold standard wherein U.S. dollars would be pegged to gold, and foreign currencies would—in turn—be pegged to the dollar. Domestically, Dr. Shelton does not want to make all dollars convertible into gold with the stroke of a pen; she aims to “incorporate some aspect of a gold or silver link to a future debt instrument to add intrinsic value.” Both of these ideas are outside of the mainstream philosophy of the Federal Reserve, which is currently issuing new money at a rate matched only by the inflationary 1970s.
Theoretically, a domestic gold standard is an unimpeachable proposition. Consider Adam Smith’s definition of money as a medium of exchange that allows people to trade with one another even if they do not have a double coincidence of wants. For example, a florist can trade with a professor of economics even if the florist does not want a lecture on the division of labor, which would be impossible without an intermediating agent. Money must also be valuable in its own right, as this conception of value propels people to give up their labor and goods for money, and other people to—in turn—accept that money in trade. Absent some sort of intrinsic value, media of exchange would have never been determined in the first place; people would not forfeit things that they value—i.e., their labor and property—unless presented directly with something else of value.
Practically speaking, society has at least partially convinced itself that government-issued paper is valuable in its own right, which is why a hairdresser will accept a $20 bill for an hour of his labor. This “trust” in paper money is a function of the U.S. canceling the gold standard and subsequently mandating that practically-worthless paper money be “legal tender for all debts public and private.” However, Americans are not wholly committed to paper money, as its value diminishes with every passing year—something that did not occur under the domestic gold standard of 1789 to 1933. This instability leads to changing prices and, for many Americans, tangible consequences. Examples include skyrocketing education and healthcare costs, as well as home prices.
One of Dr. Shelton’s critics compared an economist who supports the gold standard to a doctor who uses leeches, a charge that betrays a dearth of historical understanding. Gold was at the center of the Bretton-Woods Agreement, an international money order predicated on a gold-backed dollar. The agreement is so recent that it existed when President-elect Joe Biden was in political office.
More importantly for our purposes, Bretton-Woods supported tremendous economic growth, which was the norm across the domestic gold-standard period. Such prosperity is to be expected, as economic stability—including stability of prices—is conducive to long-term economic planning and growth-stimulating capital projects.
In brief, Dr. Shelton would offer her fellow Federal Reserve governors an informed, moderate defense of the gold standard, which is a reasonable proposition decried as heretical only by those who seek to insulate themselves from deep thought. The worst case scenario is that Dr. Shelton would be “dead weight,” as the Board of Governors has seven members and the Open Market Committee—which sets interest rates—has twelve.
The upside of a Shelton confirmation is that she would challenge the governors’ way of thinking and challenge the homogeneity that has prevailed over the past several decades. For example, she could dissuade the Federal Reserve from engaging in junk-bond purchases or adopting novel approaches to monetary policy, which have had poor consequences overseas.
In Response to Other Criticism:
Some critics have lambasted Dr. Shelton for supporting higher interest rates under former President Barack Obama and lower ones under Trump. However, policy advocacy does not occur in a vacuum, and this simplistic criticism ignores economic and political undercurrents—namely, the Federal Reserve’s decade of arbitrary and impulsive decisions.
Under Obama, the Federal Reserve supported the anemic economy recovery with a near-zero federal funds rate (i.e., the rate at which the Fed wants banks to loan to one another on an overnight basis). Some economists, namely those in the Austrian School, see this approach as fundamentally misguided. They contend that, in a recession, economic actors should liquidate bad investments, regenerate their cash balances, and make new investments once ample opportunities arise. Otherwise, the bad investments will persist, depriving more sound enterprises of capital and spurring long-term economic stagnation. In the short run, however, the Federal Reserve’s easy-money policies masked the effects of Obama’s poor fiscal policies.
When Trump took office, the effective funds rate was still at 0.65%. Then, as Trump implemented his generally free-market agenda and the economy improved, the Federal Reserve began hiking the funds rate. They contended that the improving economic conditions under Trump would lead to higher inflation, as the Phillips Curve postulates, thus rationalizing handicapping a growing economy with unpredictable policy. True to form, each time the Federal Reserve raised the funds rate, the stock market tumbled and the economic outlook dimmed.
With regards to Dr. Shelton, she did not contradict herself by supporting higher rates under Obama and lower ones under Trump—she navigated turbulent waters by standing athwart the careless policies of the Federal Reserve. A simple thought experiment illustrates this point: Was it rational for the effective funds rate to be at 2.40% in January 2019, when the unemployment rate was 4.0%, and 0.65% in January 2017, when the unemployment was 4.7%? Even though unemployment was down by just 17.5%, the funds rate increased by 369%.
Dr. Shelton is an exceptionally-qualified nominee with an unconventional intellectual approach, two attributes that the Federal Reserve would benefit from immensely. Furthermore, her detractors are misguided in their critiques of her candidacy: the gold standard is not a relic of history, but instead a harbinger of stability and prosperity that was phased out only recently.
That said, the Senate should confirm Dr. Shelton with dispatch. She may go down as one of Trump’s best appointments.
*The views expressed in this article solely represent the views of the author, not the views of the Chicago Thinker.