Thursday, February 13, 2020

Expect the Gold Standard to be Thrown Under the Bus Today

Judy Shelton
President Trump's latest nominees to the Federal Reserve Board of Governors, Judy Shelton and Christopher Waller, are scheduled to appear Thursday in the Dirksen Senate Office Building at 9:00 AM ET before the Senate Committee on Banking, Housing, and Urban Affairs for a hearing on their nominations.

Waller, executive vice president and director of research at the Federal Reserve Bank of St. Louis, is expected to cruise through the hearing. He is a mainstream Keynesian technocrat (privately I call him a typical Keynesian crackpot).

Shelton is a completely different story.

During the last couple of days, four major newspapers have come out with opinions on her nomination.

Johannes Schmidt at The Washington Examiner says:
It would be 'crazy' for the Senate not to confirm Judy Shelton
The Wall Street Journal editorial board backs up the Schmidt's perspective:
Judy Shelton finally gets her day in the Senate on Thursday, and if anyone has a coherent argument for denying her confirmation to a seat on the Federal Reserve Board of Governors we haven’t heard it. The caterwauling over her nomination confirms why her intellectual diversity is needed at the Fed...Ms. Shelton is clearly qualified for the Fed role.
Karl W. Smith at Bloomberg News on the other hand says:
Despite some unorthodox and occasionally disconcerting rhetoric, President Donald Trump has mostly succeeded in making both his party and the Federal Reserve more attentive to the needs of the working class. If Judy Shelton is confirmed to the bank’s board of governors, that progress would be at risk.
The New York Times editorial board writes: 
His latest nominee is Judy Shelton, an economist who has carefully cultivated the president by advising his 2016 campaign, staying at his hotels and loudly supporting low interest rates...
Republican senators know that Ms. Shelton’s views are problematic. Senator Kevin Cramer of North Dakota said he planned to vote for her, adding, “I wouldn’t want five members like her.”
Why would you want one?
Of course, all these papers and their regular contributors write from a Keynesian perspective and hold that the Fed should be manipulating the money supply and interest rates. 

It has been a long time since the great economist Henry Hazlitt wrote editorials for The New York Times.

The problem is that Fed money manipulation doesn't work, as I explained in the belly of the beast, the New York Fed headquarters (SEE: The Fed Flunks: My Speech at the New York Federal Reserve Bank).

A 100% gold standard does make sense.

As Percy Greaves wrote in Mises Made Easier:
The gold standard greatly limits the ability of banks and political authorities to manipulate short-term market interest rates, the quantity of money and purchasing power of the monetary unit. It thus acts as a detriment of the trade cycle.
That is it would end the Fed-created boom-bust business cycles that in the long-run benefit no one but the crony class closest to power--Fed power.

Shelton has on occasion claimed that she is in favor of a gold standard and that is why the establishment class which is supported by the cronies is concerned about her.

But it is not at all clear what she means by the gold standard.

Consider this remarkable exchange between Business Insider reporter Gina Heeb and Shelton about the gold standard.

Heeb puts in a strong effort to get a straight answer out of Shelton about the gold standard. In the end, Heeb draws out that either Shelton doesn't understand what the gold standard is or she doesn't want to talk about it:

Heeb: You support the gold standard, but I haven't seen a lot of details about how it would be implemented.
Shelton: First of all, whenever you see that, please, please try to figure out what do people mean when they attribute that to me. Do they mean a gold standard where… We only have 261 million ounces, so I don't understand. Do people really think that I'm saying that somehow about 300 or 350 billion or so - I'd have to calculate it out -- but not a big chunk. Is that what they're talking about or are they talking about where during like the classical international standard? I mean the government didn't stand ready to convert. All they did is look at what Thomas Jefferson wrote on the establishment of a money unit. The United States you just declare, what is your measurement? What do we call the US dollar? He did it as so many grains of silver or so many grains of gold. And you just define it. Bretton Woods was something completely different where only a foreign central bank had the right to convert dollars into gold.
I'm not sure what people mean when they attribute that to me or what they think I'm suggesting. What I said is that it's a good way to look at the virtues of what you want your monetary system to provide, in terms of a monetary integrity or price signal clarity or international system of sorts that sovereign countries can voluntarily agree to abide by. What do you want and do you have a universal reference or benchmark? So that other countries could voluntarily agree to abide by certain rules on currency relationships. It doesn't have to be gold. Gold is the cliche. But if someone wants to suggest something different, I've heard people say sand or water or oil. I just haven't seen anything better than gold.
After that odd Shelton response, Heeb circles back to try to pin Shelton down in terms of the common understanding of the gold standard.
Heeb: You're not in favor of pegging a currency to the price of gold?
But Shelton is having none of it and goes off on another circular dance  including a discussion of a price rule, which is a major stretch to introduce when one is discussing the gold standard:
Shelton: When you say pegging, what do you mean by that? What are you asking me?
Heeb: When a currency is defined in terms of -
Shelton: I'm sure I've never said that the Fed should have a price rule to ratchet up or down interest rates in accordance with the daily price of gold. But I'm sure that if anything I would have said a price rule I don't think is a good idea. I've never suggested that. I'm not badmouthing the gold standard. I'm saying look to see what you like about prior systems that have worked and see if we could develop a future system that would incorporate the virtues of things that worked in the past.
Heeb tries a third time:
Heeb: But you haven't favored a system in which the value of a currency is defined in terms of the price of gold?
Shelton: I'm just saying that it's way too easy to toss out the term. When the government overspends you could say, oh we should just have a gold standard. Because then you have some discipline because then there's kind of a fiscal price to pay. You could lose gold and then that shrinks your money supply and then that puts the brakes on if you're overinflating or whatever you're doing wrong. I mean there's lots of aspects to it, but you really have to be careful about what you mean to just say, oh, you favor the gold standard.
I would just say if you're talking about the classical International gold standard like Alan Greenspan, like Robert Mundell, the Nobel Prize winner, I recognize the virtues of when we had an international voluntary currency system that honored the sovereignty of countries and that was based on their own self-discipline and not say like we have problems with the euro because if one country kind of blows it - whether it's Greece or Italy or Portugal - it doesn't threaten the whole system. Those are those are things we should be talking about.
I don't recognize anything here in her babbling as a sound defense of the gold standard. On top, of that, she has at various times, depending on who is in power, called for the Fed to manipulate interest rates higher and at other times lower. No sound gold standard advocate would do anything of the sort. A sound gold standard advocate would say that the Fed has no business manipulating interest rates either higher or lower.

She could be either confused or an opportunist.

My guess she is both.

And thus in her attempt to get her nomination beyond committee and on to the Senate floor, I expect she will be even more distorting about her views on the gold standard than when Gina Heeb questioned her. I fully expect her to throw the gold standard completely under the bus.

Whether the vote to confirm her passes the Senate committee, I don't care one way or the other, she has made clear she is going to play like a Keynesian in favor of Fed money supply and interest rate manipulations.

But damn her attack, to prove she is one of them, on the gold standard that will surely be coming before the committee.



  1. There is no reason for the FED to exist if the gold standard prevails. Shelton is campaigning to be a FED board member and it would be senseless for her to advocate a gold standard. Members of the FED are not going to abolish the most powerful and lucrative job they are ever likely to have. The tragic absurdity of Greenspan is a case in point.

    1. Precisely. The only thing a political animal like Shelton can do is, like Greenspan (the Undertaker) give the idea of monetary freedom a bad name.