Judy Shelton, a goldbug who bends to fit Trump
The Fed benefits from alternative thinking, but Ms. Shelton’s has flaws
Ever since the world left the gold standard, a die-hard band of goldbugs has demanded the U.S. return. President Trump just said he intends to nominate one of them, Judy Shelton, to be a Federal Reserve governor.
Mainstream economists consider the gold standard, which pegs a currency to a fixed amount of gold, impractical—and dangerous. That isn’t a strike against Ms. Shelton’s candidacy. Mainstream economists have no monopoly on the truth, and alternative viewpoints should improve central bank decisions. Alan Greenspan was once a goldbug, and he served the Fed with distinction.
The problem is with how Ms. Shelton makes her case. She has attacked the current system for things it hasn’t done, such as creating inflation, and credited the gold standard for things it doesn’t do, like taking control of interest rates away from central bankers.
She has shifted her policy advice with the political winds.
That may help her candidacy but diminish her credibility inside the Fed, which prides itself on political independence.
There is no single “gold standard.” Early sovereigns minted coins in gold and silver. Prior to the creation of the Federal Reserve, private American banks issued currency convertible on demand to gold or silver. After the Fed came into existence, it too guaranteed the convertibility of its notes to gold.
The U.S. left the gold standard in 1933 but returned in modified form under the Bretton Woods Agreement from 1944 to 1971, which fixed the dollar to gold and other currencies to the dollar. Only central banks, not private citizens, could convert dollars to gold.
The appeal of the gold standard lay in tying the money supply to the gold available to back it, making high inflation impossible.
When all countries were on gold, it made exchange rates stable and predictable.
To goldbugs, though, the gold standard’s main appeal is ideological. Without it, they argue, governments can goose the currency printing press to create jobs or wage wars.
“A gold standard brakes runaway government spending,” Ms. Shelton wrote in 2011. “It allows individuals to defeat governments that dilute the value of money.”
When Barack Obama was president she, like many goldbugs, accused the Fed of printing money to finance Mr. Obama’s deficits. Inflation, she wrote in 2011, would “inevitably result.”
Goldbugs also claim the gold standard takes away politicians’ and unelected central bankers’ control of interest rates, which they consider antithetical to free markets.
“How can a dozen, slightly less than a dozen, people meeting eight times a year, decide what the cost of capital should be versus some kind of organically, market supply determined rate?” Ms. Shelton told the Financial Times this year.
“We might as well resurrect Gosplan,” the Soviet economic planning agency, she said.
But it is a myth to claim the gold standard obviated discretion.
Someone had to decide which metals would back the currency, and at what price, and how much gold had to be kept in reserve per unit of currency (the gold-cover ratio).
Even on gold, central bankers still had to decide interest rates. Whereas those decisions are now guided by inflation, unemployment and growth, back then they were also guided by the amount of gold in reserve. If gold was fleeing to other countries or stashed under people’s mattresses, the central bank had to raise interest rates to bring it back.
That sometimes risked enormous damage on the domestic economy. In such situations, politicians and unelected central bankers could, and did, devalue or suspend convertibility, as Franklin Roosevelt did in 1933 and Richard Nixon did in 1971.
When Mr. Obama was president, Ms. Shelton complained the Fed was financing his deficits, impoverishing savers and devaluing the dollar to help exports: “That’s not competing. It’s cheating.” She railed against loose monetary policy even as the price of gold fell from more than $1,700 per ounce in late 2012 to $1,100 in late 2016. That, most goldbugs would say, means monetary policy was too tight, not too loose.
Now that Mr. Trump is president, her views have shifted. Having accused the Fed, under Mr. Obama, “of catering to the political class,” she now says it should support Mr. Trump’s agenda by cutting interest rates to “ensure maximum access to capital.”
She says the Fed should stop paying banks interest on their reserves at the Fed which, via arbitrage, would drive savers’ returns on money-market funds and bank deposits to zero.
Mr. Obama never called on the Fed to target a weaker dollar (as Ms. Shelton intimated); Mr. Trump has done so, repeatedly. Yet Ms. Shelton has applauded, and says it is other central banks that are cheating by easing monetary policy.
All this is at odds with the facts on the ground: Compared to when Mr. Trump took office, the dollar is lower against the euro and yen and roughly stable against China’s yuan. The price of gold has risen from $1,200 to $1,400, which goldbugs would ordinarily interpret as proof monetary policy is too loose, not too tight.
The Fed could benefit from fresh, alternative thinking that is rigorously argued, grounded in evidence and free of political bias. Based on her public comments, it isn’t clear Ms. Shelton is the one to offer it.