Gold and Ideology, Continued

Last week I commented on the views of James Grant about the gold standard.  I disagree with Mr. Grant about the gold standard, but he knows a great deal about a lot of things and he understands really well how financial markets work at the ground level.  Aside from that he is a really good writer, which suggests that he is a clear, if occasionally misguided, thinker.  This week, I turn to Dr. Judy Shelton, writing in the new (August 1) issue of the Weekly Standard (“Gold Standard or Bust”) and extolling the virtues of the gold standard.  I don’t know, and have never met Dr. Shelton, but she has been a frequent op-ed contributor to the Wall Street Journal and various other publications of a like ideological orientation for 20 years or more, invariably advocating a return to the gold standard.  In 1994, she published a book Money Meltdown touting the gold standard as a cure for all our monetary ills.  I also observe that she is listed as a contributor on the Free Banking blog, but has yet to post anything.

I was tempted to provide a line-by-line commentary on Dr. Shelton’s Weekly Standard piece, but it would be  tedious and churlish to dwell excessively on her deficiencies as a wordsmith or lapses from lucidity.

But consider the following passage:

As government-issued claims against our country’s future output accumulate, there is a hollowing-out effect, with financial capital drawn away from the real economy.  Real economic growth happens when private investors take their chances on innovative entrepreneurs – not when they are induced to purchase “safe” government securities.

What can this possibly mean?  That government borrowing necessarily takes resources away from the private economy?  What if those resources are not being used and would remain (temporarily or permanently) idle but for government borrowing?  What does it mean for “financial capital to be drawn away from the real economy”?  Drawn by what?  By rising interest rates?  Aren’t interest rates now at the lowest levels since the Great Depression?  And how does government borrowing induce private investors not to “take their chances on innovative entrepreneurs?”  Might the level of aggregate demand possibly be relevant to this discussion?  I don’t say that the answers to these questions are obvious, but Dr. Shelton, securely ensconced in her own ideological cocoon, seems blissfully unaware that the questions even exist.

Dr. Shelton continues:

Since the resources needed to pay for current government expenditures are not available, the government is laying claim to future revenues.

That seems like a truism, but Dr. Shelton is just preparing us for the following profundity:

The notion of money as a claim on tangible assets is thus rendered abstract.

OK, time to move on.

After having established, to her own satisfaction at any rate, the imminent danger of currency debasement, Dr. Shelton conjectures that the interests of ordinary Americans have come into perfect alignment with those of la haute finance internationale.

The connection was made last November when former Alaska governor Sarah Palin called for a stable dollar to put our economy back on the right track.  ‘The Fed’s pump priming addiction has got our small businesses running scared,” she noted, “and our allies worried.”  Robert Zoellick, who heads the World Bank, lamented in a Financial Times op-ed that global consternation over the Fed’s quantitative easing was prompting talk of currency wars.  Zoellick proposed that the global monetary regime be reformed to spur economic growth —and suggested that nay new system should “consider employing gold as an international reference point.”

Perhaps Dr. Shelton has forgotten, but within two days of his reference to gold, Mr. Zoellick specifically denied that he meant to support or suggest restoring the gold standard.  But for Dr. Shelton, gold should not be a mere reference point, but a standard.  Why?  Because gold stands for discipline, so that people who mistrust the government can cash their currency in for gold at the fixed parity.  In this way, the money supply will adjust to “the collective assessment of market participants” rather than to the “less-than-omniscient hunches of central bankers.” 

According to the ideology of the gold standard, a gold standard would make the value of  money totally independent of the “less-than-omniscient hunches of central bankers.”  The value of a dollar would be identical to the value of gold, not to what the central bankers want it to be.  But, in a recent New York Times story about the revival of interest in the gold standard, it was reported that central banks still have 29,000 tons of gold sitting in their vaults out of perhaps 166,000 tons of gold that have been mined throughout world history.  Why does Dr. Shelton, or anyone else, imagine that, with such an enormous stockpile of gold under their control, the value of gold would be insulated from the decisions or whims of central bankers?

Gold provides a self-correcting mechanism for irrational exuberance; as credit begins to flow too freely, as equity values or commodity prices appear frothy, the astute observer at the margin cashes out in gold. Monetary central planning gives way to the aggregate wisdom of the free market.

Here Dr. Shelton indulges in a favorite trope of modern gold standard ideology: the facile identification (and deliberate confusion) of central banking with central planning.

Quoting Ludwig von Mises, Dr. Shelton extols the gold standard as a barrier against runaway government spending, as if there was no government borrowing under the gold standard.  Once in a lecture, Mises offered the following argument:

If, under the gold standard, a government is asked to spend money for something new, the minister of finance can say: “And where do I get the money? Tell me, first, how I will find the money for this additional expenditure.”

Yet, without a tinge of embarrassment, Dr. Shelton also invokes the memory of Jack Kemp, who not very successfully sought the Presidency on a promise to cut taxes and restore the gold standard.  Some of us,  however, still remember when Kemp, defending the Reagan administration, to the delight of the Wall Street Journal editorial page, for running huge deficits during a recession, declared that Republicans “no longer worship at the altar of a balanced budget.”  But that was then and now is now.

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14 Responses to “Gold and Ideology, Continued”


  1. 1 Ben Abbott July 26, 2011 at 9:46 am

    Among the possibilities, might Dr. Shelton might be alluding to Banks borrowing from the fed to buy T-bills?

    Would such create an environment where entrepreneurs must pay interest rates at a premium as compared to T-bills? Does this take resources away from the private economy by elevating the cost of investment capital?

  2. 2 Lars Christensen July 26, 2011 at 9:53 am

    David, one question for Dr. Shelton – if the dollar really is so horrible without gold backing why is it that it is so much demand? Why it most FX reserves in the world in USD? Why would investors buy the dollar when risk aversion increases? Why is inflation still so muted in the US (because demand outpaces supply of dollars…)?

    AND if Dr. Shelton does not like central banking (I personally is no fan of central banking either…) – then why does she not just advocate Free Banking? Why should she tell the rest of us what type of currency to use? In fact I would argue that it is just another form of socialism advocating GOVERNMENT money based on gold.

    Furthermore, the discussion about the budget is bizarre. It seems like she actually think that the Federal Reserve is printing dollars and shipping them directly to the US Treasury – Zimbabwe style…

  3. 3 Benjamin Cole July 26, 2011 at 10:02 am

    More blah, blah about the gold standard.

    Listen, the problem we face now is that the Fed is choking the US economy. Sadly enough, this is likely to be the reality for the next several years. Blog about that.

  4. 4 gabe July 26, 2011 at 10:50 am

    “The Fed is choking the US economy” yet I see most of the mainstream economist picking fights with boogeymen…attacking the gold standard/Rothbard/libertarians some War Street Journal defender of Jack Kemp? really Jack Kemp? Why not at least go after Dick Cheney?

    Why bother with this…why not look into what in the hell the Fed is doing to us right now!!?!!

  5. 5 gabe July 26, 2011 at 10:54 am

    Of course they don’t ship it staright to the Treasury. The Fed has 1.8 trillion in US governemnt bonds…first they print it and give a big cut to the primary dealers…then ship it to the treasury. Don’t you know how the bond auctions and market works?

  6. 6 David Glasner July 26, 2011 at 11:43 am

    Ben, The Fed is paying a higher interest rate on reserves than the yield on T-bills, so there would be no reason for banks to borrow from the Fed to buy T-bills. I think it is normally the case that banks charge borrowers a higher interest rate than the yield on Treasuries, so if that’s what she’s referring to, it’s normal operating procedure.

    Lars, I don’t think that I am going to be communicating directly with Dr. Shelton for quite a while now, so you may want to find another conduit for your question. But you are correct to point out, that despite all that has happened over the past 3-4 years, the dollar remains unchallenged internationally as a store of value. Of course, she would say that dollar has depreciated since quantitative easing started. And I would say that the dollar is still significantly above its pre-crisis exchange rate against the euro. Actually, I think that Dr. Shelton may be a supporter of free banking. As I pointed out, she is an (apparently inactive) contributor to the Free Banking blog and she did cite approvingly the free banking literature in her book. I am actually going to scold you now, Lars, for saying that central banking is a form of socialism. I think that the sort of ideological emoting that I am trying to discourage.

    Benjamin, Sorry to disappoint you yet again, but you will just have to put up with me. Take me as I am.

    Gabe, Ditto.

  7. 7 rhmurphy July 26, 2011 at 11:58 am

    I don’t see anything wrong with the comment that government borrowing is crowding out investment *on the margin.* Get rid of government borrowing and get rid paying interest on reserves, and private borrowing will go up simply because the banks will want to do something with that money, on the margin. I don’t think low interest rates are evidence otherwise, because they are just a sign of nervous banks.

    To make the central bank as central planner argument more palatable, here is a working paper from Jeffrey Hummel arguing that what Bernanke has done is much more similar to central planning than anything the Fed has ever done in the past. http://www.sjsu.edu/economics/docs/Bernanke_v_Friedman7.pdf Dr. Shelton may have been thinking of that.

  8. 8 David Glasner July 26, 2011 at 12:20 pm

    RH, Why are you slyly adding interest on reserves into the mix? I did not actually assert that government borrowing doesn’t have any effect on private investment. I think that a coherent argument can in fact be made that even with high unemployment government borrowing would crowd out some (not necessarily an equal amount of) private investment. To make that assertion as if it were obvious and indisputable is evidence of, well, an ideological bias. Furthermore, if the borrowing is financed by — oh no, please don’t say it — money creation (yikes!), then there is no crowding out. Thanks for the link to Hummel’s paper, but I will be really surprised if I agree with it.

  9. 9 Benjamin Cole July 26, 2011 at 1:30 pm

    David-

    I admire you, but want you to turn your estimable guns on something worthwhile, that will produce a good for society.

    Better to light a single candle than curse the darkness…although cursing is more satisfying.

  10. 10 Lars Christensen July 26, 2011 at 1:43 pm

    Haha David…well I know you are trying to discourage the ideological stuff – and I appreciate it. However, the reference to central banking as socialism was a reference to Dr. Shelton’s paradoxical view that “somebody” should regulate whether money should be gold backed or not. I never understood how one could have a view that there should be 100% reserve banking for example in a Free Banking system. Who will regulate that?? What if the market chooses something else than 100% reserve? What will the “gold party” do about that?

    Or said in another way would Dr. Sheldon prefer central banking based on a gold standard or fractional reserve Free Banking? I know what Larry White and George Selgin would prefer…

  11. 11 João Marcus Marinho Nunes July 26, 2011 at 8:50 pm

    In times of crisis all the hacks come out of the woodwork. Since everyone is desperate they get a “hearing”. And that´s dangerous!

  12. 12 David Glasner July 27, 2011 at 7:34 am

    Lars, I am not sure which comment of Dr. Shelton you are referring to. When she refers to backing I assume that she just means that as synonymous with convertibility. Since she is affiliated with the Free Banking Blog to which both Larry White and George Selgin are contributors, I think it is at least plausible to assume that she is sympathetic to free banking along the lines that Larry and George have proposed. So I think that you may want to give her the benefit of the doubt on this point, at any rate.

    Benjamin, I greatly appreciate your sentiment. i hope that I can do some good, but my own comparative advantage is in exposing errors committed by others. When I find stuff that I feel that I can criticize effectively I try to write something. Please feel free to pass on any suggestions you might have for what else I could write about that you think would be contribute to the welfare of society.

    Marcus, You are right. But sometimes I am still surprised by what I see in print.

  13. 13 Bongstar420 December 22, 2011 at 12:32 pm

    The US Treasury prints those Dollars, gives them to the Fed, and then the US government barrows that money from the Fed system (presumably). Why does a government need to owe any money at all or barrow any since it has a legal monopoly on its production? The US Treasury could print money, spend it on development/affairs, and that would be how money gets into the system. If nothing needs to be done, a simple check can be written to all people with the same amount to each individual with no loopholes like corporate personhood. A free banking system could then serve as the monetary network for circulating money.

    Our current system is giving bankers free work. I do not see manufactures receiving free elements for resale as a value added good. Why should bankers get free money if manufactures do not get free commodities? Banks should barrow money from the Treasury and pay interest on it if anything.


  1. 1 When central banking becomes central planning « The Market Monetarist Trackback on October 23, 2011 at 4:58 am

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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