Judy Shelton, Trump's Next Fed Choice, Favors a Gold Standard and Free Trade

Bloomberg reports White House Considers Economist Judy Shelton for Fed Board

The White House is considering conservative economist Judy Shelton to fill one of the two vacancies on the Federal Reserve Board of Governors that President Donald Trump has struggled to fill.

She’s currently U.S. executive director for the European Bank for Reconstruction and Development, and previously worked for the Sound Money Project, which was founded to promote awareness about monetary stability and financial privacy.

Case for Monetary Regime Change

On April 21, Judy Shelton had an ope-ed in the Wall Street Journal: The Case for Monetary Regime Change.

Since President Trump announced his intention to nominate Herman Cain and Stephen Moore to serve on the Federal Reserve’s board of governors, mainstream commentators have made a point of dismissing anyone sympathetic to a gold standard as crankish or unqualified.

But it is wholly legitimate, and entirely prudent, to question the infallibility of the Federal Reserve in calibrating the money supply to the needs of the economy. No other government institution had more influence over the creation of money and credit in the lead-up to the devastating 2008 global meltdown. And the Fed’s response to the meltdown may have exacerbated the damage by lowering the incentive for banks to fund private-sector growth.

What began as an emergency decision in the wake of the financial crisis to pay interest to commercial banks on excess reserves has become the Fed’s main mechanism for conducting monetary policy. To raise interest rates, the Fed increases the rate it pays banks to keep their $1.5 trillion in excess reserves—eight times what is required—parked in accounts at Federal Reserve district banks. Rewarding banks for holding excess reserves in sterile depository accounts at the Fed rather than making loans to the public does not help create business or spur job creation.

Meanwhile, for all the talk of a “rules-based” system for international trade, there are no rules when it comes to ensuring a level monetary playing field. The classical gold standard established an international benchmark for currency values, consistent with free-trade principles. Today’s arrangements permit governments to manipulate their currencies to gain an export advantage.

Money is meant to serve as a reliable unit of account and store of value across borders and through time. It’s entirely reasonable to ask whether this might be better assured by linking the supply of money and credit to gold or some other reference point as opposed to relying on the judgment of a dozen or so monetary officials meeting eight times a year to set interest rates. A linked system could allow currency convertibility by individuals (as under a gold standard) or foreign central banks (as under Bretton Woods). Either way, it could redress inflationary pressures.

Money Meltdown

Judy Shelton is author of the 1998 book Money Meltdown.

I just ordered the book to have a better idea where she is coming from.

Regardless, I am certain she would have been a better choice for Fed chair than Powell, Bernanke, Yellen, or Greenspan.

Bubbles of Increasing Amplitude

Shelton concluded "Central bankers, and their defenders, have proven less than omniscient."

Indeed.

The judgement of the Fed has produced three consecutive bubbles, each bigger than the one before it. The only reason the latest bubble is not acknowledged yet is that it hasn't yet burst.

It's not clear precisely what Shelton has in mind but at least she is headed in the right direction. What's clear is Trump is fighting the wrong battle when it comes to trade.

Tariffs will not fix the alleged problems of currency manipulation. A gold standard would.

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For discussion, please see:

1. Disputing Trump’s NAFTA “Catastrophe” with Pictures: What’s the True Source of Trade Imbalances?
2. Mission Impossible: Tariffs Didn't Reduce the Trade Deficit (Deals Won't Either)