With President Donald Trump’s two previous nominees to the Federal Reserve Board of Governors—Stephen Moore and Herman Cain—having withdrawn in the face of stiff resistance in the Senate, the president has nominated two economists—Judy Shelton and Christopher Waller—to those posts.
Waller’s nomination seems safe. He’s an insider, the current executive vice president of the Federal Reserve Bank of St. Louis. Shelton, on the other hand, is encountering some resistance because she’s an unconventional choice. Her opponents condescendingly scorn her as a “goldbug,” because of her minority viewpoint that the dollar should be backed by gold.
Ip diplomatically starts off with two balancing statements, the first true (in certain contexts), the second an indisputable truism: “Mainstream economists consider the gold standard ... impractical—and dangerous,” and “Mainstream economists have no monopoly on truth.”
Is a gold standard “impractical”? Yes, it is today, but it shouldn’t be. A gold standard is unsustainable, thus impractical, in a country such as ours where the government doesn’t control spending and balance its budget. Gold is “honest” money. Is it “dangerous”? Yes, but only to power structures that depend on fiat money (i.e., money unbacked by anything of real nonmonetary value) for their perpetuation.
One reason why Shelton favors a gold standard is that it has a virtue that Ip acknowledged in his article: “When all countries were on gold, it made exchange rates stable and predictable.” Indeed, a multinational gold regime facilitates free and fair trade—a Trump policy goal that most politicians at least pay lip service to. Contrariwise, spasmodic exchange rate fluctuations complicate and undermine free trade.
At the midpoint, Ip’s article becomes problematical. He writes, “To goldbugs ... the gold standard’s main appeal is ideological.” Why “ideological”? Aren’t ideologies belief systems that people cling to even when confronted by overwhelming evidence that what they crave doesn’t work as advertised (see “socialism”)? Advocates of a gold standard do so for reasons of benevolence. They want a currency that'll hold its purchasing power and that makes it harder for government to absorb and commandeer private functions through the printing press. The monetary ideologues today are those who advocate fiat currencies that transfer economic power from Main Street to the governing elite.
Ip chides Shelton for having “accused the Fed of printing money to finance Mr. Obama’s deficits.” That sounds like a fairly accurate accusation to me.
As for Shelton’s 2011 declaration that inflation would “inevitably result” from the Fed’s money creation, she appears to have been wrong in the short term, but may prove to be tragically correct in the long term.
In the long term, though, it’s possible that the chickens of the multi-trillion expansion of the Fed’s balance sheet during the QE years will ultimately come home to roost in dollar depreciation. Then, the dollar may lose its status as the global reserve currency and domestic prices might soar. Let’s all hope it doesn’t, but we need people on the Federal Reserve Board who, like Shelton, want to avoid a return to the destructive inflation of the 1970s.
I agree with Ip that Shelton appears to be somewhat partisan. He also writes, though, that the Fed “prides itself on political independence.” Does anybody really believe that the Fed is above partisan politics? After pursuing ZIRP-like policies to the very end of the Obama presidency before finally starting to raise rates shortly after Trump became president, how can anyone believe that the Fed is free of partisan sympathies?
Shelton is 100 percent correct when she questions why a dozen people (the Federal Reserve Board of Governors) should set the prices of capital (interest rates) any more than they should set the price of cars, houses, or bubble gum. Markets can do that and do it better—as they did before there even was a Federal Reserve system. Shelton opposes policies that would be more at home in a centrally planned economy. That alone is reason enough to confirm her.