Make Monetary Policy Great Again: Confirm Judy Shelton

More than a year ago, President Donald Trump announced that he would nominate Dr. Judy Shelton -- the U.S. director for the European Bank for Reconstruction and Development -- to the Federal Reserve Board of Governors. On 16 January 2020, he formally submitted her name to the United States Senate.

The pick immediately drew controversy, principally because Shelton supports a return to the gold standard. This concern is illogical for reasons both economic and strategic, but it has allowed the mainstream media -- which detests unorthodox ideas, even if they are rooted in millennia of historical practice -- to paint her as an uncouth flat-earther. In reality, Shelton is one of the president's best nominees yet and she would provide a check against the irrational actor that is the Fed.

Dr. Judy Shelton

Shelton's nomination is Trump's third attempt at filling the same Fed seat. In November 2017 and September 2018, respectively, Trump sent to the Senate his first two choices for the Fed: Dr. Marvin Goodfriend of Carnegie Mellon, who has since passed away, and Dr. Nellie Liang of the Brookings Institution. (Liang, specifically, would have occupied the Shelton seat.) These nominations were conventional, but both expired due to Senate inaction.

Trump, angered by the Fed's since-aborted policy of raising interest rates, nixed the approach of appointing establishmentarians. He declared that he would instead nominate two firebrands: Herman Cain, a businessman who chaired the Kansas City Federal Reserve Bank, and Stephen Moore, an economic commentator and fellow at the Heritage Foundation. Even though they had the support of yours truly, these men were seen as too political for the Fed and Trump never dispatched their nominations to the Senate.

Hence Shelton's candidacy. Despite her doctorate in economics and governmental experience, she was shaping up to be a confirmation failure as recently as February 2020. A POLITICO headline blared, "Trump's Fed nomination in doubt after 'very aggressive' hearing." And the subtitle gloated, "Shelton's failure to win confirmation would be Trump's fifth Fed pick to go down."

Thankfully, the latest from the New York Times indicates a rejuvenated Shelton candidacy: "Trump's Hot-Button Fed Pick Faces Senate Committee Vote This Week." The Washington Post says Shelton is "expected" to make it past the Senate Banking Committee, which would give her a real chance at confirmation.

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America is better off now that Shelton is back in the running. She is qualified and willing to challenge established orthodoxy, and she will be the consumer's best advocate at the Fed -- whether that is her intention or not.

First, it is obvious that Shelton is ready and able to serve as a Fed governor. She is an intellectual with a bachelor's degree in education from Portland State and an MBA and Ph.D. in business administration from the University of Utah. Shelton's professional experience is just as impressive: She was a fellow at Stanford's Hoover Institution, an economic advisor to several presidential campaigns, and a key figure at several sound-money initiatives. This is not to mention Shelton's past two years as the top American at the EBRD.

Second, Shelton would be a brilliant counterweight to the prevailing forces at the Fed. She has been willing to call a spade a spade ever since she predicted the economic collapse of the Soviet Union in February 1989. (In the same year, Noble winner Paul Samuelson cited communist Russia as proof that command economies can thrive.)

Unsurprisingly, the ivory-tower elites and their mainstream-media sycophants detest Shelton's honesty and proclivity for cutting against the grain. They particularly despite two of her positions: support for a gold standard and purported antagonism to an independent Fed.

The Post reports, "Shelton has maintained that the country should link the U.S. dollar to gold, silver or some other benchmark so that its value fluctuates less. The gold standard was abandoned by American economists and policymakers decades ago." The Times is more aggressive, noting that "mainstream economists see [the gold standard] as a nonstarter because it would be so economically harmful."

Admittedly, backing the dollar with gold would be difficult, at least in the short term. Money production would be constrained and businesses, expecting to be awash with liquidity, would have to be more efficient in utilizing scarce resources. Some would fail. Recessions would be a period of mass liquidation instead of an opportunity for government to redistribute wealth to economically-unproductive enterprises.

The long-term effect of a gold standard, however, would be positive. A dollar redirected from a bad enterprise to an effective one is a dollar well spent. Productivity would surge and our economy would become more stable.

A gold-backed dollar also makes sense on a philosophical level. As John Tamny notes in a piece for RealClearMarkets, money is intended to be the intermediary that facilitates the trade of disparate goods. We trade goods (including our labor) for money, which -- in turn -- allows us to obtain things that we want and value. However, in order for money to function, it must be valuable for the parties involved. Otherwise, no one would accept it as a substitute for tangible goods and services.

Gold is the obvious choice because it is scarce, usable in industry, and desired by all. While no one in the modern world wants to carry around bags of coins and bullion, gold is eminently practicable as a money unit if represented by paper IOUs (i.e., what dollars used to be). Most people would not exchange the IOUs for actual metal, but the prospect of redemption would ensure monetary restraint.

The other option is what we have now: fiat money that does not hold any real value. The dollar lost 95% of its purchasing power between 1900 and 2000, compared to practically no net change between 1800 and 1900. For measure, the Fed was created in 1913, the domestic gold standard was canceled in 1933, and the international gold standard was canceled in 1971.

When the domestic gold standard was canceled in 1933, the Fed's best and brightest took over monetary policy -- the advent of the so-called Ph.D. standard. The consequences have been disastrous, as I note in a March 2020 editorial:

It was not until 1933, when Franklin Delano Roosevelt delinked the dollar from gold and abrogated gold dollar-based contracts, that the value of the dollar started to plunge. By 1950, the dollar was worth only 54% of what it was worth in 1933. Roosevelt, however, allowed for the 'gold window,' wherein foreign governments could exchange their dollars for gold.

The collapse of the dollar as an exchange for value was furthered by Lyndon Johnson's cancelation of the silver standard in the 1960s and Richard Nixon's nullification of the gold window. By 1974, the dollar was worth 63% of what it was worth in 1964, and by 1984, the dollar had lost 70% of the value it held in 1964.

These data make it clear that dollars are no longer a commodity capable of holding their value. Instead, they are short-term scrip that must be spent as quickly as possible or invested to avoid precipitous declines in purchasing power.

If the purpose of money is to provide an intermediary between goods that is desired by all, our experiment with fiat currency (i.e., money without a connection to real value) has failed. Mainstream economists refuse to note this because it would concede their own fallibility. Nonetheless, they are right on one count: A quick shift to a gold standard would be disruptive.

Thankfully, Shelton's plan does not consist of immediately buying millions of ounces of gold, establishing an exchange rate between dollars and gold, and opening the floodgates for redemption. Nathan Lewis -- writing for Forbes -- observes:

Shelton seems most attracted to a nonthreatening incremental approach, including, for example, the introduction of certain issues of Treasury bonds with a gold link, perhaps in the form of principal payment in a certain amount of physical gold bullion on the option of the bondholder. This would be somewhat analogous to today's Treasury Inflation Protected Securities, or bonds issued by other countries (Mexico and Brazil for example) which are denominated in local currencies but contain a U.S. dollar link.

Shelton's advocacy for monetary sanity, while important, is only part of her appeal. Later in their article on Shelton's nomination, the Post observes,

Shelton also has advocated for closer connections between the central bank and the White House, despite the fact that the Fed stakes much of its reputation on being politically independent. Shelton was an adviser to Trump's 2016 presidential bid and has said the Fed's power over the economy needs to be reined in.

The Post clearly disapproves of Shelton's perspective. However, far from capitulating to the powers that be, she speaks truth to the most corrosive component of the Beltway establishment: the monetary elite.

The greatest fallacy of the past century is that currency is best coordinated by the "experts." As James Grant and the Austrian economists have demonstrated time and time again, the Ph.D. standard triggered a collapse in the value of the dollar and a century of monetary instability. More recently, the Fed caused an artificial run-up in asset prices by ensuring cheap credit and artificially pushing down yields on Treasury bonds.

Case studies make it even more obvious that business as usual is untenable. As I note in a June 2019 editorial, the Fed "raised the federal funds rate, which determines U.S. interest rates, from .5-.75% all the way to 2.25-2.50% following the inauguration of President Donald Trump." This led to a December 2018 plunge in the Dow Jones Industrial Average, a surging yield for one-month Treasury bonds, and a collapsing 10-year yield.

The Fed induced a short-lived, but scarring, economic panic tantamount to the early days of the Great Depression. Then, it reduced the federal funds rate to 1.00-1.25% by March 3rd, and down to 0-0.25% in response to the coronavirus pandemic. The economic semi-catastrophe they spurred at the end of 2018 was all for naught.

As James Grant notes in Vol. 38, No. 12 of Grant's Interest Rate Observer, the Fed has moved onto bigger and better things: In March alone, they bought $2 trillion of Treasuries and mortgages, developed facilities for buying corporate debt, invested in junk bonds, and more. Further, as Grant notes in Vol. 38, No. 10, "The current monetary situation, featuring the lowest interest rates and the fastest M-3 growth, is unlike any on record" with the "broadest measure of money supply ... zipping along at a 20% to 25% annual rate."

Shelton is correct to assert that "the Fed's power over the economy needs to be reined in," as the Post puts it. Though the president should not be able to order the production of money at whim, monetary policy -- as I have demonstrated -- is hardly an exact science. Connecting it with the political process would ensure more accountability for irresponsible technocrats promulgating arbitrary decrees.

Finally, Shelton would be the consumer's number-one advocate on the Federal Reserve Board. If she singlehandedly set monetary policy, which would not be the case, the average Joe would not have his spending power and investment account pillaged year after year by inflation. Some would argue that inflation is down significantly since the Carter years, but it still pushes people away from the safety of Treasury bonds and toward the volatility -- and potentially steep losses -- of the stock market.

Only the government, which collects capital-gains taxes without recognizing Fed-induced declines in purchasing power, benefits from the monetary elites' 2%-per-year inflation target.

Additionally, Shelton would assist the average American by opposing the Fed's manifold programs for economic "recovery," which include purchasing junk bonds and providing liquidity to inefficient businesses. These schemes enable the long-term survival of businesses ill-equipped for providing consumers with goods and services. They also waste scarce resources by sustaining economically-unproductive enterprises, prolonging recessions and hamstringing periods of growth -- limiting wages and output.

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Even if we were to accept that Shelton and her policies are off-kilter, such a concession would not be an argument against her confirmation. She would be one of seven governors and one of twelve members of the Open Market Committee, which sets the federal funds rate. Trump's other nominee, Dr. Christopher Waller, is a conventional economist who works for the Federal Reserve Bank of St. Louis, and he does not appear inclined to follow Shelton's lead on policy. Therefore, in the worst scenario imaginable, Shelton would offer a goofy perspective and it would be rejected by her colleagues.

In reality, Shelton's approach to monetary policy is rational and the Fed desperately needs her perspective. This is doubly true amid the Fed's unprecedented production of money, expansion of their own power and responsibilities, and enlargement of their balance sheet amid an ever-decreasing reserve ratio (as observed in Vol. 38, No. 13 of Grant's).

The full Senate should confirm Shelton as quickly as possible and institute a set of brakes against the Fed's irrational and arbitrary policies.

All unsigned FDL Review content is the product of Declan M. Hurley.