Why Fed fans fear Shelton

by Richard Schulman

Judy Shelton’s favorable regard for the earlier international gold standard is a strong point in her favor. Her views on this matter are also a principal reason why Fed fans fear Shelton. The gold standard worked best without central bank involvement. In fact, in its heyday, the US Federal Reserve didn’t even exist.

An international gold standard prevailed among key industrial countries from the 1870s to 1914. It gave an unprecedented boost to trade, investment, economic growth, and rising standards of living. The reason it did so was that investors and entrepreneurs didn’t have to worry that foreign investments would turn ruinous because of exchange rate fluctuations. All the major foreign currencies were redeemable in a fixed weight of gold and thus interchangeable with each other at unchanging rates. As a consequence, monetary flows went to financing trade and productive investment rather than currency and interest-rate speculation.

Good vs. bad globalization

The gold standard era thus brought about a period of good globalization as opposed to the mixed good and bad globalization that has accompanied fluctuating currency rates and capricious central bank policies. Productive investments prefer a rule-based monetary order. Speculative investments thrive on shifting central bank policies. These favor insiders and clever investment bankers in financial centers rather than inventors and entrepreneurs.

Productive investment is what made the US economy number one in the world, as this FEE makes vividly clear by comparing the economies of US states to foreign countries:

America’s largest state economy is California, which produced more than $3 trillion of economic output in 2019, more than India’s GDP last year of $2.9 trillion. Consider this: California has a labor force of 19.5 million compared to India’s labor force of 519 million…Amazingly, India required a labor force 26 times larger than California’s (and larger than the entire US population) to produce roughly the same economic output last year! That’s a testament to the superior, world-class productivity of the American worker.

Why Fed fans hate Shelton

The Wall Street Journal (Feb. 14, 2020) excellently captured the point in an op ed by Joseph Sternberg titled “Why the Economics Establishment Hates Judy Shelton. They fear she may be right about the gold standard and the causes of declining productivity growth.” He writes:

Why has productivity growth proved so hard to sustain in developed economies for the past generation?… We were supposed to get richer once we freed monetary and fiscal authorities from the shackles of gold…. Ms. Shelton has warned for decades that exchange-rate chaos and chronic domestic mispricing of capital by central banks (the two phenomena are inextricably linked) have made it impossible for investors to discern how best to allocate their money…. Economists…have studied the extent to which capital mispricing by central banks…depresses productivity growth… Ms. Shelton’s…vigorous public defense of monetary stability as a solution to the productivity puzzle challenges defenders of today’s orthodoxy…

History vs. mythology

Most of what the New York Times and other Fed fans claim about the gold standard era is as mythical as the same newspaper’s claim that the founding identity of the US was its commitment in 1619 to slavery.

An accurate re-telling of US monetary history, including the gold standard period, is here. An inquiry into whether the Federal Reserve has been a failure (spoiler alert: it has) is here. While Cato’s George Selgin, the author of both articles, doubts that the conditions that made the gold standard era possible could be created again, he underlines its virtues and refutes the false history that Fed fans have put out to try to discredit it.

Democrats, who don’t seem to have one independent thinker in their midst, will likely be voting unanimously against Dr. Shelton’s appointment to the Fed Board. While we respect the independence-mindedness of Republicans, it would be put to bad use if displayed in voting down this excellent presidential appointment that deserves their approval.