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.”
Impeccable Qualifications:
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%.
Conclusion:
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.
Just being a contrarian doesn’t make your opinion right. The vast majority of countries today have abandoned the gold standard for a reason, and a money supply wholly determined by a gold supply gives the government far less control over the money supply. I guess that might not sound like a bad thing on the face of it since you guys are conservatives or something, but for the rest of us, central banks are integral to managing the economy and ensuring stable growth, especially during times as tumultuous as these. And of course the value of money diminishes with every passing year. That’s by design. The Fed intentionally tries to keep value of inflation at about 2-3%, to help reduce the impact and frequency of recessions and to keep money flowing.
“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.”
One fun example of a group of investors all liquidating their bad investments at once is called a bank run. Although I’m not an expert on the Austrian School, I don’t think it’s the sort of market correction they’d be particularly happy to see.
Ah yes, because if you can’t jam a balanced budget amendment through, I suppose the next best thing is to make deficit spending impossible
This article makes a couple of forthrightly nonsensical claims about the benefits of a gold standard. Inflation is only unhealthy for an economy if it is unexpected. Fortunately, that has not been the case for decades, due to clear guidance being provided by the Federal Reserve on inflation expectations! To argue that one can associate “skyrocketing education and healthcare costs, as well as home prices” with inflation is patently absurd. Those prices have been accelerating far beyond inflation rates for years.
Look, I appreciate what you are trying to do with this publication. There is a definite problem at our university of suppression of uncomfortable ideas. A hub for alternative voices is incredibly important for the maintenance of a high level of discourse at our institution. But you cannot use this platform to post at best ill-informed and at worst disingenuous articles such as this one.
A quick Google search gives this definition for inflation: “a general increase in prices and fall in the purchasing value of money.” Rising home prices, college tuition costs, and healthcare costs are all evidence of inflation in that they demonstrate both an increase in prices and a decline in purchasing power. I think you mixed up inflation conceptually with *indices* of inflation.
The key word there is “general.” Some prices have skyrocketed, but others have fallen. If I decided only to focus on the price of electronics, I could make the case that the US has seen persistent deflation for the past twenty years. Here’s the problem: it hasn’t. Contrarian is completely correct. You can’t attribute more than a small fraction of the increase in the cost of education or healthcare to inflation. At the end of the day, indices are what we should care about when we are talking about inflation. That way, we don’t miss the forrest in the trees with anecdotal examples of changing prices.
Your response to my comment betrays an even more profound lack of understanding about economics. Caleb’s comment makes precisely the right point. Money is not a real phenomenon, but a nominal one. Real supply and demand factors underpin the price of goods and the bulk of how they shift over time. Inflation is a price increase that has only to do with nominal actors, rather than real factors. It is foolish to think that any and every increase in the price of goods is inflation. A quick opening of an intro economics textbook would tell you that, if you bothered to do so, which you evidently have not.
The reason I comment anonymously is precisely because of the venomous tone that you have taken. Civility is dying on both sides of the political aisle.
The author says he intends to study economics. I look forward to reading something he writes after he finally gets around to that. Unless a country wants to completely cut itself off from international capital flows, committing to a pegged exchange rate—be it a peg to gold or another currency—forces the central bank to severely limit its use of monetary policy to absorb economic shocks. Milton Friedman and Anna Schwartz (something tells me the author might be a fan of theirs) argued that the Great Depression was exacerbated by poor monetary policy, and while it’s true central bankers have learned a lot since the ’30s, the gold standard meant far too little could actually be done. This is why Friedman disavowed the Gold Standard, and its why all but a few fringe (perhaps even “controversial”) economists have done so as well.
Hi Caleb, thank you for putting your name on your comment and for providing a more reasonable response than your forebears. In “Capitalism and Freedom,” Friedman does not come out unequivocally against the gold standard, and actually makes the point that the 1931 Federal Reserve increased the discount level to a level not justifiable by the gold standard alone. Quotation oncoming.
Dr. Friedman said, “Although gold had been flowing into the United States in the prior two years, and the U.S. gold stock and the Federal Reserve gold reserve ratio were at an all time high, the Reserve System reacted vigorously and promptly to the external drain as it had not to the previous internal drain. It did so in a manner that was certain to intensity the internal financial difficulties. After more than two years of severe economic contraction, the System raised the discount rate–the rate of interest at which it stood ready to lend to member banks–more sharply than it has within so brief a period in its whole history before or since.”
An interesting quote. I’ll just say that just because Friedman doesn’t say that a gold standard would be a bad idea here, that doesn’t mean it wasn’t his position, which it was.
all these democrat LIBERALS in the comments…talking about how the nominie by our GREAT AND POWERFUL president is not qualfied…just because she supports gold standard…ha…you know that diamonds are forever right? but fiat doesnt even exist anymore when it merged with christler…….so if u want your MONEY to stay FOREVER, we need the golden standardm, which judy sheldon surely will make our country do….not to mention shes a doctor…one time i was feeling sick so i talked to her…and she cured me and i feel a million times better…if she can cure me she can surely cure the economy. Okay Google please go to HTTP colon slash slash Facebook .com
Declan, Great article. Very well researched. I’m curious about your detractors here. Is it the case that the Fed can print any amount of money without consequence? Do they have standards for when dollars are printed and when they are burned? I’d like to know why is inflation a good and intended thing? Why is having a standard inherently bad? I am a carpenter. Having a standard measurement is very helpful in planning the work I do. I would imagine that if I was a business owner who was trying to make financial decisions about the future of my company, having a sense of the value of the dollar might be a value? If “real supply and demand factors underpin the price of goods and the bulk of how they shift over time” is a true statement, does that apply to the money supply itself?
If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.