by Paul D. Mueller, Activist Post:
Judy Shelton has spent her career advocating for sound money.
Her latest book, Good as Gold: How to Unleash the Power of Sound Money, makes an up-to-date case for reinstituting a gold standard. Her intriguing conclusion is that the dollar can be reconnected to gold by simply issuing federal treasury bonds with gold-redeemability clauses.
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The book also addresses recent events and important current debates about monetary systems, like whether central bankers should have wide policy discretion, whether fixed or floating exchange rates are better for economic growth, and what happens when countries manipulate their currencies to boost exports.
Dr. Judy Lynn Shelton engages these questions in the context of academic debates, but she also uses the lens of rational economic planning to evaluate how the monetary system contributes to or detracts from economic growth. At the end of the day, the case for sound money rests on the claim that it will generate more stable and greater long-run economic prosperity. Dr. Shelton believes sound money will do just that. But what would such a sound money regime look like?
Although Dr. Shelton would prefer a system along the lines of a classical gold standard, she would probably be content with other monetary systems that dramatically reduced the discretion of policymakers. The real problem with our current monetary regime is not primarily technical. It is behavioral. Because public officials have strong incentives to inflate the currency, bail out various corporations, and underwrite extensive government borrowing, they do a poor job conserving the value of fiat currency or providing a predictable, stable system of interest rates, credit, liquidity, etc.
In the first couple chapters of Good as Gold, Dr. Shelton takes the Federal Reserve to task. The wide discretion Fed officials can exercise makes monetary policy unpredictable. Although Fed officials argue that their decisions are countercyclical, that may not always be the case. As Milton Friedman famously noted, the effects of monetary policy decisions have “long and variable” lags. Despite claims to being “data-driven,” Federal Open Market Committee (FOMC) decisions remain unpredictable. Data can change rapidly and unpredictably, which can make policy change rapid and unpredictable, too.
Another problem is that the “data-driven” mantra invokes the assumption that the data always clearly indicate what ought to be done. In fact, this is rarely the case. Not only do a wide variety of inflation measures exist, but there are also a wide range of time intervals over which to compare inflation trends. But that’s not the worst of it!
Employment, unemployment, GDP, and a host of other economic numbers suggest different things are going on in the economy. Retailers expect strong record spending this holiday season, while the NY Fed just released a study where the number of people reporting concern about their ability to make debt payments hit its highest level since 2020. How to weigh these various factors is far from clear.
Another problem with Fed policy is the rapid change in its interest rate targets. Three years ago, the short-run interest rate was ~.5 percent. Within two years, it was over 5 percent. That rapid change created many issues in the economy, only some of which we have recognized. The rate-hike cycle created significant turmoil in the banking industry, with Silicon Valley Bank and Signature Bank failing entirely while many large regional banks shrank or were enfolded into larger national banks.
