Good as Gold: How to Unleash the Power of Sound Money

Preface

Money Is a Moral Contract

THE HEARING ROOM of the Senate Banking Committee is a cavernous chamber with wood-paneled walls and massive bronze lighting fixtures. I was seated at a table covered in green cloth facing a semicircle of twenty-five black leather chairs tightly arranged behind an elongated curved wooden desk on an elevated rostrum. It was February 13, 2020, and the members of the committee were convened to consider my nomination to the Board of Governors of the Federal Reserve System.

The hearing was called to order by Chairman Mike Crapo, who delivered opening remarks that included a cordial welcome to the friends and family of the two nominees before the committee that morning, Christopher Waller and myself. ¹ It was a nice way to start. Besides my husband and son, another seven members of my family, including my mother, had flown in from Los Angeles the previous day.

But there was an early clue that things could get rough—at least for me. Chairman Crapo announced that he was entering into the record an article from the Wall Street Journal in support of my nomination. It was entitled The War on Judy Shelton. ²

It had certainly started to feel like war in the days leading up to the hearing. I felt supremely grateful for that Journal editorial, which I had read aloud to my husband the prior afternoon as we were driving north toward Washington on I-95 from our rural Virginia home. Ms. Shelton is clearly qualified for the Fed role, the editorial declared. The caterwauling over her nomination confirms why her intellectual diversity is needed at the Fed. The editorial cited with approval my academic research on historical eras during which economies backed their currencies with gold, noting that it revealed contrasts with the catastrophic misfires of our era of floating rates. Staunchly contradicting accusations that I had abandoned my belief in monetary discipline for political reasons, the Journal affirmed that my long-argued views were intellectually consistent. The inconsistency and confusion rest with her critics and the prevailing monetary establishment and are dangerous for the U.S. economy.

The Journal editorial concluded with the observation that the Fed was straying into uncharted territory in extending its low-rate regime with no well-defined plans for extricating itself from quantitative easing: If Senators harbor even a sliver of doubt over whether Ms. Shelton’s critics know what they’re doing, that’s all the more reason to confirm her as a distinctive voice in such crucial debates.

Was I ready to be that distinctive voice at the Fed that would add intellectual diversity to monetary policy discussions? In some ways, I had been preparing for the role for nearly four decades. My work as a doctoral student concentrated on money and banking, international finance and economics. An article I wrote in 1981 won the Trefftzs Award for outstanding scholarly achievement from the Western Finance Association and was subsequently published in the Journal of Financial and Quantitative Analysis. When I was granted a postdoctoral fellowship by the Hoover Institution at Stanford University, I used the opportunity to focus on the internal monetary and financial conditions of the Soviet Union; I wanted to understand how government management of economic resources impacted a nation’s budgetary situation and fiscal viability.

The result was a scholarly treatise entitled The Impact of Western Capital on the Soviet Economy, which became a commercially published book in 1989 with a far more captivating title: The Coming Soviet Crash: Gorbachev’s Desperate Pursuit of Credit in Western Financial Markets. What I discovered through my research was that the Soviet government had been running a massive budget deficit for years. It was effectively going bankrupt. Should Western banks bail out the failing Soviet economy or allow the dying Soviet bear to quietly succumb to its own afflictions?

My view was that it made no sense to help sustain the nation most responsible for our own nation’s heavy defense spending burden. Though my background was in economics, I found myself being consulted by national security policymakers and asked to participate in war-gaming exercises. The nexus between academic theory and political reality became very clear—and I developed an appreciation for the importance of linking those two worlds through clear policy directives.

My second book centered on the importance of sound money and solvent public finances in providing the appropriate foundation for economic prosperity, both at home and abroad. Money Meltdown: Restoring Order to the Global Currency System, published in 1994, was praised by conservative statesman Jack Kemp as a clarion call for a new stable international monetary order. Indeed, drawing on lessons learned from the gold-anchored Bretton Woods system and its antecedents, my goal was to highlight the need for a level monetary playing field to confront the menace of currency manipulation and uphold the principles of free trade.

It seemed surreal to me that my background and qualifications for serving on the Federal Reserve Board—let alone my motives—were now being questioned. Beyond weighing in on the nation’s most pressing economic and national security policy challenges as an expert witness testifying before Congress on numerous occasions, I also served as chair of the National Endowment for Democracy. During the 2016 presidential transition, I was designated lead adviser on international financial matters for the team assigned to the Treasury Department. In May 2018, after being confirmed by Congress, I began serving in London as U.S. director of the European Bank for Reconstruction and Development under the Trump administration. The opportunity to take on this new role as a governor on the Federal Reserve Board was presented in July 2019 when President Donald Trump announced his intention to nominate me for the position.

Throughout my career, I have been a steady contributor to the editorial pages of the Wall Street Journal, with more than sixty articles published as commentaries. The members of its editorial board know me well. So when they vouch for my intellectual consistency, my expertise on monetary matters, and my willingness to challenge conventional wisdom, it means a lot. The Journal endorsement provided a most welcome counterweight to the New York Times editorial published a day earlier. This Is No Way to Run a Central Bank ran the banner headline—accompanied by a hideous photo—denouncing me as a bad choice for a seat on the Fed’s board. ³ The Washington Post had featured an article that week by one of its columnists labeling me an opportunist and a quack. ⁴ While it was hard to tolerate having my views misrepresented, especially by pundits who struck me as somewhat ignorant in matters of monetary economics, I recognized that political allegiances might be affecting their judgment. Still, it seemed a bit ominous that clashing newspaper opinion pieces were playing a prominent role in defining my qualifications for becoming a Fed governor.

Then it was time for Senator Sherrod Brown to deliver his own opening statement as ranking member of the committee. He described me as someone who has spent her entire career advocating for policies that would make our economy more volatile, give families and businesses even more to worry about in an uncertain world. ⁵ According to Senator Brown, a vote for Ms. Shelton is a vote against Fed independence and our nation’s reputation as a financial bulwark for the whole world. ⁶

Things went downhill from there. Over the next two hours, I was asked to respond to loaded questions—or worse, compelled to remain silent in the face of long-winded statements distorting my beliefs. Later that day, Reuters published an article calling it a contentious Senate confirmation hearing. ⁷ CNBC described it as blistering. ⁸

Over and over again, the senators questioned me about my prior writings on the gold standard. That was hardly a surprise. Shortly after President Trump announced, on July 2, 2019, his intention to nominate Christopher Waller and myself for the two vacant Fed slots, a Washington Post columnist described me as a denizen of the Republican gold-bug circuit. The danger of the doctrine I had consistently promoted for decades, the writer explained, might be difficult for laypeople to decipher unless you understand the ‘sound money’ or ‘dependable dollar’ code of the crank right-wing fringe. ⁹

The morning the column appeared in print, I emailed it to Alan Green-span along with a tongue-in-cheek message about an almost hysterical antagonism toward the gold standard, echoing the opening sentence of his 1966 article Gold and Economic Freedom. ¹⁰ Greenspan promptly emailed back: If gold is such a worthless metal, then why does the U.S. Government, and all other major governments, hold so much of it in storage? ¹¹

Logical question, yes, but one that never seemed to occur to commentators who were quick to disparage as radical my scholarly writings on international monetary systems based on gold-convertible currencies. They seemed unaware that gold is held by central banks around the world precisely to serve as a monetary bulwark—a point readily affirmed by the former chairman of the Federal Reserve.

Thankfully, there was one brief respite during the hearing when I was invited by Senator Mike Rounds to share my thoughts without being led into any question. Responding to this precious opportunity to expound more fully on my beliefs, I answered:

I keep going back to the fact that the power to regulate the value of U.S. money is granted by our Constitution to Congress. It is in Article I, Section 8. And in the very same sentence, Congress is given the power to define official weights and measures for our country—because money was meant to be a measure, to be a standard of value.

Money has to work the same for everyone in the economy. It is important that it serve that purpose as a reliable measure so that people can plan their lives. I do not see how you can have a free-market economy if people cannot rely on the most vital tool that makes markets work. It is through money that we transmit market signals. You need clarity of those signals; otherwise, supply and demand cannot figure out what is the optimal solution.

So I think that, what has importance in discussions at the Federal Reserve, is the responsibility to remember that the money has to work for everyone—and that, in a sense, it is a moral contract between the government and the citizens. ¹²

Being able to express my deep-seated commitment to sound money brought a level of satisfaction that far outweighed the caustic slights incurred during the hearing. Bringing up the moral aspect of money as a measure should not put someone in the category of right-wing crank. Striving to ensure that money is trustworthy does not constitute a fringe movement. Indeed, having access to dependable money should be deemed a basic human right that deserves broad support. People should be able to use a medium of exchange that performs as a meaningful unit of account and a reliable store of value. Why are governments permitted to expropriate wealth through inflation while denying the use of alternative currencies? People need money that preserves their purchasing power and provides an accurate tool for measuring value across borders and through time.

Before the conclusion of the hearing, Chairman Crapo summed up the proceedings:

We all knew that this was going to be a very aggressive hearing today, particularly with regard to you, Dr. Shelton. I think you have been very solid in explaining and defending your writings and your positions. And, by the way, the reason that I introduced into the record in my opening statement an article from the Wall Street Journal entitled The War on Judy Shelton was just to help make the point that this is an orchestrated, calculated effort. I think you have done very well today, and I just wanted to tell you that you have explained, I think very capably, the positions that you take and the rationale for them. ¹³

The assessment of Chairman Crapo was much appreciated. Nevertheless, I feel compelled to explain my views and the rationale more fully to make clear how they justify continuing the endeavor. The purpose of this book is to examine what has worked, what has failed, and what can be done to appropriately calibrate the money supply to meet the needs of an economy devoted to free-market enterprise and unlimited opportunity. The crux of my position is that money is meant to be an honest measure. It should provide a reliable tool for conducting voluntary transactions among individuals; it should not serve as an economic policy instrument to be manipulated by the government.

I have come to the realization, in retrospect, that the entire nomination process was a positive experience. It proved to be enlightening—even clarifying. It underscored the importance of not being deterred by aggressive tactics and helped me comprehend how much is at stake in the pursuit of sound money.

Introduction

Call to Action

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else.

John Maynard Keynes, General Theory of Employment, Interest and Money (1936)

WHEN ALAN GREENSPAN wrote that gold and economic freedom are inseparable some twenty years before he became chairman of the Federal Reserve, the arguments he put forward marked him as both an economist and political philosopher. ¹ From an economic point of view, the benefits of having a gold standard and a free banking system include stability and balanced growth for the domestic economy. An international gold standard also serves to foster a world-wide division of labor and the broadest international trade. The focus turns to political philosophy when Greenspan notes that government deficit spending under a gold standard is severely limited and asserts that in the absence of the gold standard, there is no way to protect savings from confiscation through inflation. From Greenspan’s point of view, the incompatibility of the gold standard with chronic deficit spending is the reason welfare-state advocates oppose it: This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard. ²

Having such strong views posed no impediment to Greenspan’s confirmation as Fed chairman, nor did it seem to impinge on his fitness to serve as leader of the world’s most powerful central bank from 1987 to 2006. One could make the case that holding strong opinions about government’s proper role within an economy based on democratic capitalism should be a prerequisite for those serving at the Federal Reserve—where policy decisions put the integrity of the nation’s monetary standard at stake. Ideas are powerful, as Keynes observed, both when they are right and when they are wrong.

One thing is clear: the ideas of economists and political philosophers come profoundly into play on the subject of money and exchange rates. Using arguments first vented in the 1930s, modern disciples of John Maynard Keynes and Friedrich Hayek debate passionately over how much influence government should have in determining economic outcomes. Quarrels continue to this day over whether total discretionary authority should be granted to central banks to stimulate economic activity by deliberately reducing interest rates from what would be their market-determined rate—even as menacing inflation undermines the domestic purchasing power of citizens.

Meanwhile, with major central banks around the world exercising different monetary policies to achieve self-interested economic objectives, international trade and investment relations are distorted by currency swings. To the frustration of academics and real-world players alike, we have yet to settle the question whether cross-border monetary arrangements should be based on fixed or flexible exchange rates—decades after Nobel laureates Milton Friedman and Robert Mundell offered dueling opinions in the National Post. ³

The fundamental question at the heart of these issues arouses the passions and convictions of theorists and practitioners across the ideological spectrum: To what extent are political freedom and economic freedom linked? It’s a question that should concern every citizen. Those who believe free-market capitalism delivers the best results for society by ensuring individual liberty while delivering shared economic prosperity are not inclined to relinquish to the government whole swaths of national income and private sector development. Whether they self-identify as conservatives or simply embrace the tenets of classical economic liberalism, they prefer to rely on entrepreneurial initiative rather than government-managed industrial policy to foster innovative solutions to problems. On the other hand, those who are doubtful that the profit motive is sufficient to induce private enterprise to address important issues of economic opportunity and social justice are more likely to put their faith in government to equitably redistribute national income and curtail the seeming excesses of capitalism. Embracing a collectivist view of social organization, they see greed in the aims of private sector companies and harbor suspicions about the predatory inclinations of financial institutions.

Political philosophy especially matters when it comes to money because political leaders have a long history of compromising the purely economic functions of money in favor of achieving other objectives. Money is meant to provide a (1) medium of exchange, (2) unit of account, and (3) store of value. When those purposes are subjugated to other aims of government—whether lofty or self-serving—the validity of money as a reliable standard for evaluating goods and services becomes subject to question. When the money cannot be trusted, the price signals it conveys are increasingly perceived as murky. Free-market economies can hardly deliver the appropriate benefits to discerning consumers and reward the legitimate success of efficient producers if the forces of supply and demand are not properly equilibrated through accurate price signals.

Do we want government to have a strong role in defining the value of money? Granting to government the original power to establish the value of the nation’s currency unit by specifying its metallic content is one thing. It is quite another to allow central banks to continually alter the value of the currency unit as either an incidental or intended consequence of conducting discretionary monetary policy by exerting control over interest rates. The purchasing power of gold or silver will be responsive to supply-and-demand conditions, but when the metallic content of a nation’s currency is stipulated, the money provides a reliable pricing tool that serves as an unchanging standard for measuring value.

Long-brewing tensions over the failure of governments and central banks, using both fiscal and monetary policy, to deliver price stability as the foundation for productive economic growth have reached a level that cannot be ignored by the public. Inflation has impacted citizens in the United States and around the world—causing disappointment and resentment. Yet it is not entirely clear just who is being held responsible. When it comes to inflation, are central banks exclusively at fault? Governments make the budgetary decisions that determine spending levels; when revenues are inadequate to cover expenditures, the resulting budget deficits are financed through the issuance of government debt. The debt represents a claim on future revenues that have yet to be generated. This raises a fundamental question: Is it even possible to have sound money in the absence of sound finances?

The two major approaches the government uses to intervene in the economy—through fiscal policy or monetary policy—tend to be analyzed separately, but both play a major role in fostering inflation. For example, transfer payments from the government that go directly into the pockets of recipients serve to augment consumer spending power, which puts inflationary pressure on the prices of goods and services. For similar reasons, government forgiveness of student loans also has an inflationary impact. From the monetary point of view, conducting expansionary policy stimulus through a central bank fuels inflation because it reduces the cost of capital, which induces firms and households to borrow more money, which leads to increased economic activity—likewise putting pressure on the price level.

Merging fiscal theory with monetary policy models, economist John Coch-rane offers a framework for bridging both aspects of government involvement through his 2023 book, The Fiscal Theory of the Price Level. ⁴ Cochrane concludes that inflation breaks out when people begin to doubt that the government will ever repay its massive debts by running future budget surpluses. ⁵ Whether or not such a calculation goes into the thinking of investors and consumers, Cochrane is clearly onto something in suggesting that any serious effort to address the unsustainability of current U.S. policies will require both fiscal and monetary reforms. When central banks purchase government debt, they create new money—injecting fresh cash into the economy—by enlarging the amount of money commercial banks maintain in their accounts at their regional Federal Reserve banks. These reserve balances are further claims on existing goods and services; they can be loaned out by the banks or invested in other assets. By monetizing the debt issued by governments with a keystroke, central banks function as enablers of fiscal recklessness.

The fact that central banks are massive purchasers of government debt further muddies the issue of assigning responsibility for inflation. It would seem to cross ethical lines that central banks, which are agencies of government, stand willing to accommodate the funding needs of government required by federal budget outlays in excess of federal budget receipts. Elected representatives of the people who are authorized to approve government spending should presumably be capable of adhering to the constraint of running a balanced budget. While it could be argued that the lender-of-last-resort function for central banks exists for the precise purpose of providing liquidity under emergency conditions, this should not mean that government expenditures in excess of government revenues should be routinely accommodated.

Since the global financial crisis of 2008 and the advent of quantitative easing—with the Federal Reserve purchasing vast quantities of Treasury debt and mortgage-backed securities guaranteed by the government—it has become a normalized tool for the nation’s central bank to bail out deficit spending. That does not make quantitative easing a healthy practice, however. It is inherently political to intermingle the conduct of monetary policy with the financing needs of politicians, whether they serve in Congress or the White House.

Consider that the Federal Reserve remits the earnings derived from the interest payments received on its own portfolio of financial assets made up of those same government obligations—that is, Treasury debt and mortgage-backed securities—back to the Treasury after deducting the Fed’s operating expenses. These remittances are counted as revenues in the federal budget. When the Fed was following a near-zero interest rate policy in the post-2008 period and again during the COVID-19 pandemic (and beyond), this practice meant that the central bank was providing a significant rebate to the government—effectively subsidizing its borrowing costs. This denotes a rather blatant conflict of interest between the Treasury and the Fed, with the government’s fiscal needs conveniently met under the rubric of discretionary monetary policy.

The other side of that arrangement is equally disturbing. Whereas a period of loose monetary policy featuring near-zero rates provides a budgetary bonus to the Treasury through Fed remittances, a period of tightening monetary policy requires the Fed to pay higher rates of interest on cash accounts held at the Fed by commercial banks and money market mutual funds. The right to pay interest on reserve balances was part of an emergency set of measures approved by Congress in October 2008. The Fed has since made this practice its primary method for setting its benchmark interest rate, called the federal funds rate. In tandem with the interest paid on reserve balances held in depository accounts by commercial banks, the Fed also pays interest on reverse repurchase agreements with money market mutual funds and other financial entities. These transactions allow the participant to earn interest by keeping cash at the Fed overnight, accepting Fed portfolio holdings as collateral to be returned. When the expense of paying interest on both these categories of cash deposits exceeds the amount of interest the Fed earns on its own holdings, the difference is recorded as a deferred asset. Instead of providing remittances back to the Treasury, the Fed accumulates operating losses while the federal budget loses its former revenue source. ⁶

Taxpayers in the United States might be prompted to question why the Federal Reserve as an independent government agency provides interest payments to private parties with funds not specifically appropriated by Congress. In 2023, the Fed paid an unprecedented $281 billion in interest expense to commercial banks and money market mutual funds. ⁷ Public financial statements issued by the Fed do not provide detailed information that would identify what percentage of the Fed’s total interest payment expenditures are going to the top five largest banking institutions. Nor does the Fed divulge what percentage of its interest expense is being paid to foreign-owned institutions. Financial journalists who cover the Fed seem remarkably incurious when it comes to asking who are the beneficiaries of payments made by the nation’s central bank. Given that these payments were well in excess of the $164 billion the Fed received in revenues from its portfolio holdings in 2023—with the difference paid out of funds that would otherwise be remitted to the U.S. Treasury—taxpayers deserve answers.

One of the factors cited on the Federal Reserve’s website to explain its claim that it is independent within the government is that the Fed does not receive funding through the congressional budgetary process. ⁸ Instead, the website proclaims, the Fed pays its expenses out of the interest income it receives on government securities that it has acquired. That is not the case in reality, given that interest expense now exceeds interest revenue for the Fed—a fact that would seem to violate that aspect of central bank independence. Moreover, it is difficult to imagine a scenario over the next few years wherein the returns on the Fed’s investment portfolio (which is slated for reduction by allowing holdings to run off, i.e., by not reinvesting all the proceeds of maturing securities) will generate sufficient funds to cover interest payments at today’s high rates on the current level of reserve balances held on deposit at the Fed.

The fact that the Federal Reserve has been operating at a loss since September 2022 would seemingly have come into play with regard to the fate of the Consumer Financial Protection Bureau (CFPB), an agency set up in 2011 with the strong support of Senator Elizabeth Warren, to serve as a watchdog against predatory lenders, junk fees, and other perceived abuses inflicted on borrowers by financial lenders. While the agency’s website declares that its mission is ensuring that people are treated fairly by banks, lenders, and other financial institutions, ⁹ it is seen by many conservative lawmakers as a rogue regulator prone to aggressive enforcement actions. The CFPB is not funded through the congressional appropriations process; instead, its budget is drawn from the profits of the Federal Reserve. The constitutionality of this arrangement was challenged by a trade association on the basis that a funding mechanism outside of the congressional budgetary process raised accountability issues for the regulatory agency. A 7–2 decision by the Supreme Court in May 2024, however, rejected the argument that the CFPB’s insulation from the annual budget process was a violation of the Constitution’s clause regarding the appropriation of federal money. ¹⁰ If the ruling had gone the other way, questions about the Federal Reserve’s own status as a government agency might have been raised. Because the Fed likewise funds itself out of its profits, the lack of profits since September 2022 would seem to open an avenue for challenging the accountability of the central bank—especially because the Fed’s accumulated losses come at the expense of remittances to the Treasury.

Beyond these concerning practices involving the Federal Reserve and the Treasury, which constitute a serious problem