Judy Shelton and the Fiatbugs

Judy Shelton is Trump’s nomination to the Federal Reserve Board.  She is a long-time advocate of a gold standard and has written two books on the subject, Money Meltdown and Fixing the Dollar Now.   She is a threat to the current fiat monetary system because she advocates a gold standard.  A gold standard is democratic and represents the interests of the ordinary citizen, while fiat is created at whim out of thin air and serves the interests of the connected elite.  Under our fiat system, a small group of largely unaccountable Fed appointees meeting in secret eight times a year divine the price of credit and the value of the dollar.  Gold is democratic because government cannot control its value.  Mother earth metes it out in limited, stable quantities over millennia.  Its value remains stable. 

In his July 5, 2019, WSJ piece, Fed Pick Is Goldbug Who Bends to Fit Trump, Greg Ip makes the fiatbug case for continued elite monetary control.  The argument seems to be that a gold standard is an anachronism and no longer relevant to monetary policy. Let’s look at the score.  Hamilton put the U.S. on a gold standard at its founding.  Great Britain had established the efficacy of a gold standard over the previous two centuries.  The fledgling U.S. had already experienced its own monetary crisis with the inflationary fiat Continental currency. Hamilton wisely decided to establish the U.S. monetary foundation on the British example of gold stability.  Stable money based on gold, combined with the risk and reward of economic liberty, elevated the U.S. to the top of the global economic pyramid by the end of WW I.  Nixon ended the U.S. gold standard in 1971 with the termination of Bretton Woods.  Hamilton’s wisdom provided 182 years of stable money and economic growth that resulted in the most successful economic system in the history of the world.  It followed two centuries of British Empire based on the monetary foundation of gold.  Since the international monetary system abandoned gold in 1971 for fiat, the world has experienced 48 years of declining standards of living, constant monetary chaos, and a series of economic crises amid a historical technology revolution that has rapidly increased productivity.  

To denigrate the success of stable money based on a gold standard requires the repetition of gold fallacies.  Greg Ip assumes the fiatbug mantle in his WSJ piece and lists a series of fallacies.  The most repeated gold fallacy is that a gold standard limits the creation of dollar supply to the fixed amount of gold.  Neel Kashkari, president of the Minneapolis Fed, promoted the fallacy of limited dollar supply on a gold standard in an embarrassing tweet.  Ip highlights the same fallacy.

The appeal of the gold standard lay in tying the money supply to the gold available to back it, making high inflation impossible.

There is no connection between the amount of gold produced, U.S. gold reserves, and the supply of dollars.  Theoretically, the U.S. could be on a gold standard with no gold reserves.  Japan accomplished its gold link during Bretton Woods with virtually no gold reserves.  Similarly, Germany returned to a gold standard after the collapse of Weimar hyperinflation with little gold reserves.  

Nathan Lewis recorded the data between the global rise in the stock of gold compared with the supply of U.S. dollars.

From 1880 to 1970 U.S. base money expanded by 69x.  (Adjusted for FDR’s 1933 devaluation of gold from $20.67 to $35/oz, the “gold value” expansion of base money was 41x.)  During the same period total world gold supply expanded by 6.51x.  Again, under a gold standard, there is no connection between the availability of gold and a currency manager’s ability to expand supply as needed.

There is no set method of achieving a gold standard.  Ip correctly notes that “There is no single “gold standard.” A gold standard has only two mandatory requirements.

 1. A currency is linked to gold at a fixed price

 2. A system exists to manage the supply of currency such that the fixed price is maintained

Within these two requirements, gold standards have been maintained in various forms.  A single country may link its currency to gold. Multiple countries may link their currencies to gold in an agreed-upon international arrangement, the Classical gold standard of 1870-1914.  A country may link its currency to gold and other countries link their currency to its currency, Bretton Woods. Citizens may or may not redeem currency for gold, or only central banks may redeem currency for gold. Gold reserves may vary from zero percent to 100 percent.  As long as the two requirements are met, it is a gold standard.

Gret Ip writes:

The U.S. left the gold standard in 1933 but returned in modified form under the Bretton Woods Agreement from 1944 to 1971, which fixed the dollar to gold and other currencies to the dollar.

The U.S. didn’t leave the gold standard in 1933.  FDR devalued the dollar and changed the fixed price from $20.67/oz to $35/oz.  This was a harmful dollar devaluation that resulted in a loss of dollar stability and follow-on economic distortions.  The U.S remained on a gold standard between 1933 and the Bretton Woods Agreement as defined by the two requirements for creating a gold standard.

On inflation and interest rates, Ip writes:

She has attacked the current system for things it hasn’t done, such as creating inflation, and credited the gold standard for things it didn’t do, like taking control of interest rates away from central bankers.

The reason mankind accepted gold as money and as a standard for currency is that its value is stable.  Economist Alan Reynolds made the point decades ago that, “All inflations, everywhere, are preceded by a rise in the price of gold in that country’s currency.” The POG has risen during the Fed’s QE experiment from $700 at the onset of the financial crisis to $1400 today.  This indicates a doubling of the price level as wages and contracts unwind over the ensuing decades and adjust to a higher price of gold.  Inflation in subsistence necessities is everywhere evident except in government manufactured statistics.  The rise in the POG from $35/oz in 1971 to $1400/oz today has resulted in a 97% decline in the value of the dollar.

On a gold standard, the Fed need only adjust the supply of base money to meet demand at the fixed price of gold.  It can do this by four methods. 1. Open market purchases or sells of government securities. 2. Open market purchases or sells of foreign exchange currency.  3. Increases or decreases in the discount rate.  4. Increasing or decreasing reserve requirements.  There is no necessity for interest on reserves on a gold standard.  The current system of IOR allows the manipulation of the price of credit, and Judy Shelton correctly states that the Fed should end paying IOR.  On a gold standard, the price of credit, or interest rates, are set by the market.  A gold standard takes control of interest rates away from central bankers.  The only interest rate the Fed controls on a gold standard is the discount rate, the rate at which banks borrow from the Fed.  The Fed did not begin funds rate manipulation until 1971 with the end of BW and the start of the fiat era.  It follows that on a gold standard, central bankers become nameless functionaries administering an automatic monetary system.  On a gold standard, there will be no more Fed Maestros or Time magazine Person of the Year. 

Ip maintains that Shelton is inconsistent in calling for a loose dollar or tight dollar depending on the political party in power.  He writes:

She railed against loose monetary policy even as the price of gold fell from more than $1700 per ounce in in late 2012 to below $1200 in late 2016.  That, most goldbugs would say, means monetary policy was too tight, not too loose. 

Actually what it says is that flatbugs do not understand gold.  It is not the spot price of gold that determines the price level and indicates inflations, deflations, a loose dollar, or tight dollar, but rather the optimum price of gold.  On a fiat system, the optimum price of gold is constantly changing in relation to the spot price of gold.  The optimum POG was $750 in 2012 and adjusted upward to $1200 by 2016.  Based on the optimum POG, the dollar was loose until spot and optimum reached equilibrium in 2015.  The spot and optimum POG have been loosely correlated since July 2015 indicating a somewhat stable dollar.

The hallmark of a fiat dollar is that there is no monetary standard of reference.  It is a floating system that offers producers in the exchange economy no guarantee that their productive effort will be commensurably rewarded because the future value of their exchange contract has no defined value.  Fiat is an inefficient monetary system that requires massive derivative finacialization to hold the system together.  Central banks maintain the fiat system at the expense of the productive.  Nothing has changed in gold’s properties that over millennia established it as the monetary standard.  A gold standard will return the U.S. to a foundation of stable growth today no different than when Hamilton first put the U.S. on a gold standard.  Fiatbugs would do well to understand Judy Shelton’s insights on stable money.

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