November 16, 2020 Reading Time: 12 minutes

If there one thing that is fairly certain in this life – besides the seeming inescapability of death and taxes – is that once someone is appointed to almost any position in the political and bureaucratic structures of a government they soon discover how important and essential is the organization of which they are a part for the well-being of the nation. The country could not exist without it, along with its increasing budget and expanded authority. This applies to the Federal Reserve, America’s central bank, no less than other parts of government. 

The news media has reported that the apparently unlikely appointment of Dr. Judy Shelton to the Federal Reserve Board of Governors probably will be successfully maneuvered through the full Senate confirmation process. Shelton would then sit on the Federal Reserve Board filling the balancing a term that ends in 2024 and then made eligible for a 14-year term. Hers has been one of the more controversial nominations to the Fed in recent years, with critics fervently expressing their negative views of her. 

For instance, Tony Fratto, a former Treasury official and deputy press secretary under George W. Bush, was recently quoted as saying that Shelton’s appointment would be “a discredit to the Senate and the Fed. It screams. Nothing at all is serious. Not us. Not you. Not them.”

Mainstream Economists Against Anyone for Gold

Back in August of this year, over one hundred academic and business economists issued an open letter to members of the U.S. Senate calling for rejection of her nomination to the Fed. Among those who signed were some economics Nobel Laureates, including Robert Lucas and Joseph Stiglitz. They insisted on her unfitness for such an appointment. Why? They said: “She has advocated a return to the gold standard; she has questioned the need for federal deposit insurance; she has even questioned the need for a central bank at all.” 

They also accused her of hypocrisy, saying that Shelton had changed her stance on Federal Reserve policy and the institution’s relevance based simply on a desire to be appointed to the Fed board, and to serve the wishes of the president who had nominated her. So, she stands damned if she opposes the Fed with her call for a gold-backed currency, and she is damned if she modifies her positions on monetary policy supposedly to be more palatable to the Senators deciding her professional fate. Clearly, her critics would only stop being critical if they were somehow convinced that Judy Shelton truly loved the Fed, hated the gold standard, and supported “activist” monetary policy and interest rate manipulation; and for the full 14 years of her term on the Fed Board. 

Political campaigns are full of people who say that they are drawn to higher echelon government employment so they can “give back” to or “serve” the country, and no doubt there are some who are seriously sincere when they say so. But who can deny that what also appeals to such people, and many others who are far more crudely opportunistic, is the attraction of being a “player” and an “insider” in the various halls of political power and decision-making in determining the bigger picture of the “shape-of-things-to-come?” 

And it may be that Judy Shelton, based on her own statements of desiring to “serve” the country in this particular capacity, truly wants to, even with all her apparent changing views and emphases. Or maybe it’s all a game to say what she thinks others want and need to hear so that will approve her as a Board member of the Federal Reserve, and then sit at the Big Boy’s – oh, I mean the Big Person’s – table.  

The Real Issue is the Case for Gold, Not a Person’s Sincerity  

Be that as it may, the real issues concern whether her views on gold and the Federal Reserve are reasonable or not as useful input into the decision-making process of Fed monetary policy. To begin with, there is a far longer history of human societies going back to the ancients in which gold or silver or some other “real” commodity has served as the medium of exchange, the money-good facilitating transactions. The period of history in which mankind has primarily relied upon fiat or paper money currencies only covers about the last one hundred years. 

Now, merely because an idea or an institution has been around a long time does not prove its validity or continuing usefulness. A variety of bad ideas and bad institutions beclouded human betterment for many centuries until they were finally overturned and replaced by other ideas and institutions considered more in line with bringing about improvements in the human social, economic, and political condition. 

Fundamentally, the case for a gold standard has been based on the idea that governments have been notorious in the misuse of their capacity to turn the handle of the monetary printing press to create the money needed to fund their expenditures, rather than fully rely upon the collection of taxes. By this means, governments are able to get around the necessity of telling their citizens the truth concerning the actual cost of the activities it wishes to undertake. This was understood by many economists of differing policy persuasions.

“Progressive” Richard T. Ely Challenged Arbitrary Monetary Policy

As an example, Richard T. Ely (1854-1943) is usually viewed as one of the early and successful proponents of the interventionist-welfare state in America in the late 19th and early 20th centuries. Having earned his bachelor’s and master’s degrees at Columbia University in New York in the second half of the 1870s, he went off to complete his studies in Imperial Germany. He came back imbued with the economic ideas and policy prescriptions of the German Historical School, with its emphasis on pragmatism and expediency as the needed basis for guiding governments in regulating industry and pursuing various forms of redistribution of wealth. He was also one of the founders of the American Economic Association in 1885 and a leading figure in the American Progressive Movement in the 1890s and early decades of the 20th century. 

In his co-authored textbook, Outlines of Economics (1893, 4th revised ed. 1926) Ely highlighted the abuse with which governments – including the U.S. government during the Civil War of the 1860s – had used the issuance of paper or fiat money to fund expenditures with serious inflationary consequences for the citizens of countries experiencing such dangerous power by those in political authority. And why governments have little or no incentive to ever rein in their monetary mischiefs: 

“The supply of gold, as we have seen, is subject to variations arising from such influences as the discovery of new deposits, the exhaustion of old ones, and changes in the methods of handling the ores. Variations in gold production are reflected in movements of the general level of prices.  

“The supply of fiat money, it is argued, could be arbitrarily controlled by government and its purchasing power could be kept more nearly stable. Closely scrutinized, this particular argument for fiat money turns into the strongest of the arguments against it. Under practical conditions, experience has shown, governments find it much easier to expand than to contract their issues of paper money. 

“Expansion permits larger expenditures; it is, for the time being a substitute for taxation; it raises prices and stimulates business. Contraction on the other hand, is at the expense of an immediate increase in taxation; it calls for rigid economy on the part of the government; it has for the time being a depressing effect upon business activities. 

“With all of its shortcomings, the gold standard has the great advantage that its variations, largely the result of the play of the forces of the market, are beyond the arbitrary control of government.” (p. 259)

J. Laurence Laughlin and the Perverse Incentives of Paper Money

We may use one more example, but this time by an economist with nearly the exact opposite of Richard Ely’s public policy views. J. Laurence Laughlin (1850-1933) earned his PhD from Harvard University, and became a founder of the economics department at the University of Chicago in 1892. He was an advocate of the establishment of a central bank in the United States in the years leading up to the opening of the Federal Reserve in 1914. He is also often considered a critic of the traditional quantity theory of money. On general matters of economic policy, Laughlin was a strong proponent of a general laissez-faire, free market society. 

In his Money and Prices (1919), Laughlin also emphasized the danger of paper currencies not connected to gold by redemption requirements to prevent governments from taking advantage of their capacity to increase the amount of paper money in circulation:  

“The very existence of paper [money] issues, originating in a wrong method of borrowing [by the government], is a constant menace. The mere lapse of time in which no injury has been incurred unfortunately serves to lull the fear of anger. If retained, such issues are a suggestion for similar crude expansions in the future, when men are too excited to judge calmly of their acts. Their very presence is an incentive.

“If legislators were all monetary experts, and never influenced by political considerations, there would be little risk in retaining for a time [such fiat money]; but we must take men as they are, and provide for probable acts of those who are incompetent and ill-advised. Obviously, these national guardians of our monetary system do not personally lose anything when they get the treasury into desperate straits . . . 

“What is still more dangerous is the fact that the whim of the government is the only limit to its [paper money] issues . . . If a fancied need presses upon men inexperienced in monetary operations, especially if they have been inoculated with the fallacy that the more money a country has the better off it is, there will be excessive issues, followed by raids on the reserves.

“The paper will depreciate – and the country will undergo rapid fluctuations in prices, an unsettling of contracts, a period of mad speculation, leading to the inevitable ruin of a commercial crisis . . . It being understood [therefore] that convertibility into gold is the prime prerequisite either of government or bank issues.” (pp. 265-266; 274)

The 20th Century Failures of Paper Money Systems

Is there anything in the history of the last one hundred years to invalidate the questions and concerns of such economists as Richard T. Ely or J. Laurence Laughlin, from so long ago, that led them to support and argue for a gold standard on political grounds? There was the monetary madness during and after the First World War, with paper money inflations to fund the expenses of the belligerent powers, and the destructive hyperinflations that followed the end of that conflict. (See my article, “The Lasting Legacies of World War I: Big Government, Paper Money and Inflation”.)

There was the false sense of economic and monetary stability in the 1920s, followed by the Great Depression due to misguided Federal Reserve policy in the ’20s and disruptive government interventions and centralized planning schemes in the decade of the 1930s. Then more inflations to finance the Second World War, with a rollercoaster of inflations and recessions in the post-World War II period, followed by the new Federal Reserve monetary mismanagements that led to the financial and housing crises of 2008-2009, with continuing monetary manipulation over the next ten years of economic recovery. (See my article, “Ten Years On: Recession, Recovery and the Regulatory State”.)

Institutions Restrict Potentially Harmful Behavior

Unfortunately, the benefit of a gold standard has not been that it has always effectively prevented government monetary mismanagement and abuse; far from it. But, like many social, economic and political institutions, it sets limits and rules on the conduct of the societal participants that restrict everyday conduct that if allowed and regularly pursued can bring about changes in attitudes and actions that cumulatively brings damage to all in society.

It can be easily argued that John Maynard Keynes’s “revolutionary” idea of governments balancing their budget over the business cycle – budget deficits in ‘bad” times and budget surpluses in “good” years – rather than on an annualized basis set loose the perverse political incentives of politicians never having to completely tell the citizenry from whence will come all the revenues to cover the costs of increasing government expenditures with which campaign contributions and votes are bought by politicians in the never-ending election cycles of modern democratic society. This institutional change has led to U.S. government budget deficits for 63 of the last 75 years since the end of the Second World War in 1945, with, now, annual trillion-dollar budget deficits likely to be the norm for as far as the fiscal eye can see. (See my articles, “Why Government Deficits and Debt Do Matter” and “Debt and Deficits are Out of Control” and “Debt, Deficits and the Cost of Free Lunches”.)

The same has happened with mismanagement of the monetary system with, first, the weakening of the gold standard during and after the First World War, and then its abandonment in one country after the other beginning in the 1930s. The world is on fiat or paper money standards with total control in the hands of various monetary central planners with little or no external check on their policy decisions, other than the particular monetary theory fads and fashions that central bankers and their staff economic advisors currently hold as a guide for actual policy actions; along with the pressures of contemporary politics, regardless of how much it may be formally punctuated that the leading central banks around the world make their policy choices independent of the political climate. 

Not having to worry about mandatory redemption of the bank notes and other monetary equivalents they issue being paid in gold “on demand” at a fixed rate of exchange by either domestic or foreign holders of their fiat currencies, central banks have been able to set loose what more than one economist has called the “age of inflation” since the end of the Second World War. 

Gold an International Money vs. Fluctuating Paper Currencies

The end to the gold standard also weakened the international quality of what had been in many ways a global monetary system in which gold was the world’s money and national currencies were merely different denominational ways of expressing relative amounts of the same money good. 

The French social philosopher, political economist, and “futurist,” Bertrand de Jouvenel (1903-1987), in an article on “Money in the Market” (1955), recounted the experience of a British family vacationing in France before and then after the end of the gold standard in the 1930s:

“In 1912, an English family spent its summer holiday in an out-of-the-way French village. A bill was presented, invoiced in francs; the English father had nothing but English gold sovereigns, then in circulation in Britain. This did not embarrass the innkeeper; true, he had never seen coins stamped with the British Monarch’s profile, but he was thoroughly familiar with the gold coins then circulating in France. 

“Placing a 20-franc gold piece by the side of the sovereign, he found the latter heavier (123.27 grains to 99.56) and it seemed to him that two sovereigns made up about the same weight as a 50-franc gold piece (50 francs = 248.9 grains; 2 sovereigns = 246.54). Therefore, without consulting anybody, he made up his mind to accept two sovereigns as equivalent to 50 francs . . .

“In 1932, the same English family returned to the same spot, again the head of the family had no other means of payment than those current in Britain at the time, i.e., pound notes. The aged innkeeper took these notes, laid them side by side with French notes, and this time learned nothing from the comparison . . . The ‘weighing’ of pounds had ceased to be a physical process, it was now a market process, a day-by-day confrontation of the French demand for pounds with the British demand for francs.

“In the former case the rate of exchange depended upon the unchanging balance of physical weights in fine gold between the national coins: it was therefore inherently stable; in the second case it depended upon the changing balance of claims between two countries . . . it was therefore inherently unstable.” (See Bertrand de Jouvenel, Economics of the Good Life [Transaction Publishers, 1999], pp. 179-180.)

The Changing Opinions of Economists on Monetary Policy

When Great Britain in 1931 and then the United States in 1933 went off the gold standard, there was much hue and cry among a large majority of economists and many in the general public that a terrible policy mistake had been made in ending gold as the core money based on obligatory redemption of bank notes into a fixed weight of gold. 

No doubt, the economists who issued that open letter in August of 2020 angrily protesting to the U.S. Senate their objection to Judy Shelton’s nomination to the Federal Reserve Board of Governors would all consider it the essence of monetary policy wisdom in the 1930s to have freed the British and American monetary systems from what Keynes had in the 1920s called that “barbarous relic” – gold. 

By implication they would also be saying how misguided and wrong-headed were all those economists of the 1930s to oppose the leaving of the gold standard so governments might have wider discretion to wield monetary policy in the “activist” attempt to overcome the Great Depression. 

Let me suggest that it is not outside the realm of the possible, perhaps the probable, that 50 years from now, many, maybe a significant majority, of economists will look upon the signers of that letter and think how misguided and foolish they were in thinking that governments and their central bankers had the knowledge, wisdom and ability to micromanage the economy through the macro-manipulation of money, credit and interest rates. 

The Freedom to Choose the Currency to Use

They will wonder how it was that so many in the economics profession could have suffered from the delusion that monetary central planning ever could be any more feasible than the failed Soviet-style system of general central planning of human affairs. Those future economists will be confounded that these economists of 2020 had not paid more attention to the reasoning of Austrian economist and Nobel Prize-winner, Friedrich A. Hayek (1899-1992), when he pointed out that nothing had been more wrong-headed than leaving the control of money in the monopoly hands of government.  

That, as Hayek had argued in Choice in Currency (1976), nothing would be more reasonable and rational than letting everyone, anywhere, choose the money or monies that they found more convenient and advantageous to use in various and sundry transactions and exchanges. That such freedom to choose would be an invaluable institutional means to keep government monetary mismanagement and abuse in check, since any political authority which noticeably reduced the value or increased the uncertainty of its national currency’s future worth, would see a flight out of its use by its own and other citizens of the world. (See my article, “Government Monopoly Money vs. Personal Choice in Currency”.)

Indeed, those future economists may also wonder why it was so difficult for those earlier economists of 2020 to fully appreciate the value and effectiveness of private competitive free banking as a replacement for the atavistic notion that a central bank was either necessary or desirable. They will be surprised at the general ignoring of an entire sub-field of monetary theorists that had emerged in the late 20th and early 21st centuries who demonstrated why central banks were the very institutional instrument to propagate the types of instabilities that monetary central planning was supposed to eliminate, or at least reduce. And why and how it was that the very stability and feedback needed for a functioning and growing economic order to flourish was far more likely and possible through monetary freedom. (See my eBook, Monetary Central Planning and the State.) 

And who knows, if Judy Shelton is appointed to the Federal Reserve Board of Governors, and if she actually espouses and defends the ideas for which she is being condemned by so many of those “mainstream” economists today, it may be a useful step to the societal transformation to a freer society, a key long run element of which must be the freeing of money from political control. 

Richard M. Ebeling

Richard M. Ebeling

Richard M. Ebeling, an AIER Senior Fellow, is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina.

Ebeling lived on AIER’s campus from 2008 to 2009.

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