Archive for the 'Judy Shelton' Category

Dr. Shelton Remains Outspoken: She Should Have Known Better

Published July 11, 2019 currency manipulation , gold standard , Great Depression , Judy Shelton , Uncategorized 5 Comments
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I started blogging in July 2011, and in one of my first blogposts I discussed an article in the now defunct Weekly Standard by Dr. Judy Shelton entitled “Gold Standard or Bust.” I wrote then:

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 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.

So I was not very impressed by Dr. Shelton then. I have had occasion to write about her again a few times since, and I cannot report that I have detected any improvement in the lucidity of her thought or the clarity of her exposition.

Aside from, or perhaps owing to, her infatuation with the gold standard, Dr. Shelton seems to have developed a deep aversion to what is commonly, and usually misleadingly, known as currency manipulation. Using her modest entrepreneurial skills as a monetary-policy pundit, Dr. Shelton has tried to use the specter of currency manipulation as a talking point for gold-standard advocacy. So, in 2017 Dr. Shelton wrote an op-ed about currency manipulation for the Wall Street Journal that was so woefully uninformed and unintelligible, that I felt obligated to write a blogpost just for her, a tutorial on the ABCs of currency manipulation, as I called it then. Here’s an excerpt from my tutorial:

[i]t was no surprise to see in Tuesday’s Wall Street Journal that monetary-policy entrepreneur Dr. Judy Shelton has written another one of her screeds promoting the gold standard, in which, showing no awareness of the necessary conditions for currency manipulation, she assures us that a) currency manipulation is a real problem and b) that restoring the gold standard would solve it.

Certainly the rules regarding international exchange-rate arrangements are not working. Monetary integrity was the key to making Bretton Woods institutions work when they were created after World War II to prevent future breakdowns in world order due to trade. The international monetary system, devised in 1944, was based on fixed exchange rates linked to a gold-convertible dollar.

No such system exists today. And no real leader can aspire to champion both the logic and the morality of free trade without confronting the practice that undermines both: currency manipulation.

Ahem, pray tell, which rules relating to exchange-rate arrangements does Dr. Shelton believe are not working? She doesn’t cite any. And, what, on earth does “monetary integrity” even mean, and what does that high-minded, but totally amorphous, concept have to do with the rules of exchange-rate arrangements that aren’t working?

Dr. Shelton mentions “monetary integrity” in the context of the Bretton Woods system, a system based — well, sort of — on fixed exchange rates, forgetting – or choosing not — to acknowledge that, under the Bretton Woods system, exchange rates were also unilaterally adjustable by participating countries. Not only were they adjustable, but currency devaluations were implemented on numerous occasions as a strategy for export promotion, the most notorious example being Britain’s 30% devaluation of sterling in 1949, just five years after the Bretton Woods agreement had been signed. Indeed, many other countries, including West Germany, Italy, and Japan, also had chronically undervalued currencies under the Bretton Woods system, as did France after it rejoined the gold standard in 1926 at a devalued rate deliberately chosen to ensure that its export industries would enjoy a competitive advantage.

The key point to keep in mind is that for a country to gain a competitive advantage by lowering its exchange rate, it has to prevent the automatic tendency of international price arbitrage and corresponding flows of money to eliminate competitive advantages arising from movements in exchange rates. If a depreciated exchange rate gives rise to an export surplus, a corresponding inflow of foreign funds to finance the export surplus will eventually either drive the exchange rate back toward its old level, thereby reducing or eliminating the initial depreciation, or, if the lower rate is maintained, the cash inflow will accumulate in reserve holdings of the central bank. Unless the central bank is willing to accept a continuing accumulation of foreign-exchange reserves, the increased domestic demand and monetary expansion associated with the export surplus will lead to a corresponding rise in domestic prices, wages and incomes, thereby reducing or eliminating the competitive advantage created by the depressed exchange rate. Thus, unless the central bank is willing to accumulate foreign-exchange reserves without limit, or can create an increased demand by private banks and the public to hold additional cash, thereby creating a chronic excess demand for money that can be satisfied only by a continuing export surplus, a permanently reduced foreign-exchange rate creates only a transitory competitive advantage.

I don’t say that currency manipulation is not possible. It is not only possible, but we know that currency manipulation has been practiced. But currency manipulation can occur under a fixed-exchange rate regime as well as under flexible exchange-rate regimes, as demonstrated by the conduct of the Bank of France from 1926 to 1935 while it was operating under a gold standard. And the most egregious recent example of currency manipulation was undertaken by the Chinese central bank when it effectively pegged the yuan to the dollar at a fixed rate. Keeping its exchange rate fixed against the dollar was precisely the offense that the currency-manipulation police accused the Chinese of committing.

I leave it to interested readers to go back and finish the rest of my tutorial for Dr. Shelton. And if you read carefully and attentively, you are likely to understand the concept of currency manipulation a lot more clearly than when you started.

Alas, it’s obvious that Dr. Shelton has either not read or not understood the tutorial I wrote for her, because, in her latest pronouncement on the subject she covers substantially the same ground as she did two years ago, with no sign of increased comprehension of the subject on which she expounds with such misplaced self-assurance. Here are some samples of Dr. Shelton’s conceptual confusion and historical ignorance.

History can be especially informative when it comes to evaluating the relationship between optimal economic performance and monetary regimes. In the 1930s, for example, the “beggar thy neighbor” tactic of devaluing currencies against gold to gain a trade export advantage hampered a global economic recovery.

Beggar thy neighbor policies were indeed adopted by the United States, but they were adopted first in the 1922 (the Fordney-McCumber Act) and again in 1930 (Smoot-Hawley Act) when the US was on the gold standard with the value of the dollar pegged at $4.86 $20.67 for an ounce of gold. The Great Depression started in late 1929, but the stock market crash of 1929 may have been in part precipitated by fears that the Smoot-Hawley Act would be passed by Congress and signed into law by President Hoover.

At any rate, exchange rates among most major countries were pegged to either gold or the dollar until September 1931 when Britain suspended the convertibility of the pound into gold. The Great Depression was the result of a rapid deflation caused by gold accumulation by central banks as they rejoined the gold standard that had been almost universally suspended during World War I. Countries that remained on the gold standard during the Great Depression were condemned to suffer deflation as gold became ever more valuable in real terms, so that currency depreciation against gold was the only pathway to recovery. Thus, once convertibility was suspended and the pound allowed to depreciate, the British economy stopped contracting and began a modest recovery with slowly expanding output and employment.

The United States, however, kept the dollar pegged to its $4.86 $20.67 an ounce parity with gold until April 1933, when FDR saved the American economy by suspending convertibility and commencing a policy of deliberate reflation (i.e. inflation to restore the 1926 price level). An unprecedented expansion of output, employment and income accompanied the rise in prices following the suspension of the gold standard. Currency depreciation was the key to recovery from, not the cause of, depression.

Having exposed her ignorance of the causes of the Great Depression, Dr. Shelton then begins a descent into her confusion about the subject of currency manipulation, about which I had tried to tutor her, evidently without success.

The absence of rules aimed at maintaining a level monetary playing field invites currency manipulation that could spark a backlash against the concept of free trade. Countries engaged in competitive depreciation undermine the principles of genuine competition, and those that have sought to participate in good faith in the global marketplace are unfairly penalized by the monetary sleight of hand executed through central banks.

Currency manipulation is possible only under specific conditions. A depreciating currency is not normally a manipulated currency. Currencies fluctuate in relative values for many different reasons, but if prices adjust in rough proportion to the change in exchange rates, the competitive positions of the countries are only temporarily affected by the change in exchange rates. For a country to gain a sustained advantage for its export and import-competing industries by depreciating its exchange rate, it must adopt a monetary policy that consistently provides less cash than the public demands or needs to satisfy its liquidity needs, forcing the public to obtain the desired cash balances through a balance-of-payments surplus and an inflow of foreign-exchange reserves into the country’s central bank or treasury.

U.S. leadership is necessary to address this fundamental violation of free-trade practices and its distortionary impact on free-market outcomes. When the United States’ trading partners engage in currency manipulation, it is not competing — it’s cheating.

That is why it is vital to weigh the implications of U.S. monetary policy on the dollar’s exchange-rate value against other currencies. Trade and financial flows can be substantially altered by speculative market forces responding to the public comments of officials at the helm of the European Central Bank, the Bank of Japan or the People’s Bank of China — with calls for “additional stimulus” alerting currency players to impending devaluation policies.

Dr. Shelton here reveals a comprehensive misunderstanding of the difference between a monetary policy that aims to stimulate economic activity in general by raising the price level or increasing the rate of inflation to stimulate expenditure and a policy of monetary restraint that aims to raise the relative price of domestic export and import-competing products relative to the prices of domestic non-tradable goods and services, e.g., new homes and apartments. It is only the latter combination of tight monetary policy and exchange-rate intervention to depreciate a currency in foreign-exchange markets that qualifies as currency manipulation.

And, under that understanding, it is obvious that currency manipulation is possible under a fixed-exchange-rate system, as France did in the 1920s and 1930s, and as most European countries and Japan did in the 1950s and early 1960s under the Bretton Woods system so well loved by Dr. Shelton.

In the 1950s and early 1960s, the US dollar was chronically overvalued. The situation was not remediated until the 1960s under the Kennedy administration when consistently loose monetary policy by the Fed made currency manipulation so costly for the Germans and Japanese that they revalued their currencies upward to avoid the inflationary consequences of US monetary expansion.

And then, in a final flourish, Dr. Shelton puts her ignorance of what happened in the Great Depression on public display with the following observation.

When currencies shift downward against the dollar, it makes U.S. exports more expensive for consumers in other nations. It also discounts the cost of imported goods compared with domestic U.S. products. Downshifting currencies against the dollar has the same punishing impact as a tariff. That is why, as in the 1930s during the Great Depression, currency devaluation prompts retaliatory tariffs.

The retaliatory tariffs were imposed in response to the US tariffs that preceded the or were imposed at the outset of the Great Depression in 1930. The devaluations against gold promoted economic recovery, and were accompanied by a general reduction in tariff levels under FDR after the US devalued the dollar against gold and the remaining gold standard currencies. Whereof she knows nothing, thereof Dr. Shelton would do better to remain silent.

Judy Shelton Speaks Up for the Gold Standard

Published April 24, 2019 currency manipulation , Judy Shelton , R. G. Hawtrey , Uncategorized 15 Comments
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I have been working on a third installment in my series on how, with a huge assist from Arthur Burns, things fell apart in the 1970s. In my third installment, I will discuss the sad denouement of Burns’s misunderstandings and mistakes when Paul Volcker administered a brutal dose of tight money that caused the worst downturn and highest unemployment since the Great Depression in the Great Recession of 1981-82. But having seen another one of Judy Shelton’s less than enlightening op-eds arguing for a gold standard in the formerly respectable editorial section of the Wall Street Journal, I am going to pause from my account of Volcker’s monetary policy in the early 1980s to give Dr. Shelton my undivided attention.

The opening paragraph of Dr. Shelton’s op-ed is a less than auspicious start.

Since President Trump announced his intention to nominate Herman Cain and Stephen Moore to serve on the Federal Reserve’s board of governors, mainstream commentators have made a point of dismissing anyone sympathetic to a gold standard as crankish or unqualified.

That is a totally false charge. Since Herman Cain and Stephen Moore were nominated, they have been exposed as incompetent and unqualified to serve on the Board of Governors of the world’s most important central bank. It is not support for reestablishing the gold standard that demonstrates their incompetence and lack of qualifications. It is true that most economists, myself included, oppose restoring the gold standard. It is also true that most supporters of the gold standard, like, say — to choose a name more or less at random — Ron Paul, are indeed cranks and unqualified to hold high office, but there is indeed a minority of economists, including some outstanding ones like Larry White, George Selgin, Richard Timberlake and Nobel Laureate Robert Mundell, who do favor restoring the gold standard, at least under certain conditions.

But Cain and Moore are so unqualified and so incompetent, that they are incapable of doing more than mouthing platitudes about how wonderful it would be to have a dollar as good as gold by restoring some unspecified link between the dollar and gold. Because of their manifest ignorance about how a gold standard would work now or how it did work when it was in operation, they were unprepared to defend their support of a gold standard when called upon to do so by inquisitive reporters. So they just lied and denied that they had ever supported returning to the gold standard. Thus, in addition to being ignorant, incompetent and unqualified to serve on the Board of Governors of the Federal Reserve, Cain and Moore exposed their own foolishness and stupidity, because it was easy for reporters to dig up multiple statements by both aspiring central bankers explicitly calling for a gold standard to be restored and muddled utterances bearing at least vague resemblance to support for the gold standard.

So Dr. Shelton, in accusing mainstream commentators of dismissing anyone sympathetic to a gold standard as crankish or unqualified is accusing mainstream commentators of a level of intolerance and closed-mindedness for which she supplies not a shred of evidence.

After making a defamatory accusation with no basis in fact, Dr. Shelton turns her attention to a strawman whom she slays mercilessly.

But it is wholly legitimate, and entirely prudent, to question the infallibility of the Federal Reserve in calibrating the money supply to the needs of the economy. No other government institution had more influence over the creation of money and credit in the lead-up to the devastating 2008 global meltdown.

Where to begin? The Federal Reserve has not been targeting the quantity of money in the economy as a policy instrument since the early 1980s when the Fed misguidedly used the quantity of money as its policy target in its anti-inflation strategy. After acknowledging that mistake the Fed has, ever since, eschewed attempts to conduct monetary policy by targeting any monetary aggregate. It is through the independent choices and decisions of individual agents and of many competing private banking institutions, not the dictate of the Federal Reserve, that the quantity of money in the economy at any given time is determined. Indeed, it is true that the Federal Reserve played a great role in the run-up to the 2008 financial crisis, but its mistake had nothing to do with the amount of money being created. Rather the problem was that the Fed was setting its policy interest rate at too high a level throughout 2008 because of misplaced inflation fears fueled by a temporary increases in commodity prices that deterred the Fed from providing the monetary stimulus needed to counter a rapidly deepening recession.

But guess who was urging the Fed to raise its interest rate in 2008 exactly when a cut in interest rates was what the economy needed? None other than the Wall Street Journal editorial page. And guess who was the lead editorial writer on the Wall Street Journal in 2008 for economic policy? None other than Stephen Moore himself. Isn’t that special?

I will forbear from discussing Dr. Shelton’s comments on the Fed’s policy of paying interest on reserves, because I actually agree with her criticism of the policy. But I do want to say a word about her discussion of currency manipulation and the supposed role of the gold standard in minimizing such currency manipulation.

The classical gold standard established an international benchmark for currency values, consistent with free-trade principles. Today’s arrangements permit governments to manipulate their currencies to gain an export advantage.

Having previously explained to Dr. Shelton that currency manipulation to gain an export advantage depends not just on the exchange rate, but the monetary policy that is associated with that exchange rate, I have to admit some disappointment that my previous efforts to instruct her don’t seem to have improved her understanding of the ABCs of currency manipulation. But I will try again. Let me just quote from my last attempt to educate her.

The key point to keep in mind is that for a country to gain a competitive advantage by lowering its exchange rate, it has to prevent the automatic tendency of international price arbitrage and corresponding flows of money to eliminate competitive advantages arising from movements in exchange rates. If a depreciated exchange rate gives rise to an export surplus, a corresponding inflow of foreign funds to finance the export surplus will eventually either drive the exchange rate back toward its old level, thereby reducing or eliminating the initial depreciation, or, if the lower rate is maintained, the cash inflow will accumulate in reserve holdings of the central bank. Unless the central bank is willing to accept a continuing accumulation of foreign-exchange reserves, the increased domestic demand and monetary expansion associated with the export surplus will lead to a corresponding rise in domestic prices, wages and incomes, thereby reducing or eliminating the competitive advantage created by the depressed exchange rate. Thus, unless the central bank is willing to accumulate foreign-exchange reserves without limit, or can create an increased demand by private banks and the public to hold additional cash, thereby creating a chronic excess demand for money that can be satisfied only by a continuing export surplus, a permanently reduced foreign-exchange rate creates only a transitory competitive advantage.

I don’t say that currency manipulation is not possible. It is not only possible, but we know that currency manipulation has been practiced. But currency manipulation can occur under a fixed-exchange rate regime as well as under flexible exchange-rate regimes, as demonstrated by the conduct of the Bank of France from 1926 to 1935 while it was operating under a gold standard.

Dr. Shelton believes that restoring a gold standard would usher in a period of economic growth like the one that followed World War II under the Bretton Woods System. Well, Dr. Shelton might want to reconsider how well the Bretton Woods system worked to the advantage of the United States.

The fact is that, as Ralph Hawtrey pointed out in his Incomes and Money, the US dollar was overvalued relative to the currencies of most its European trading parties, which is why unemployment in the US was chronically above 5% after 1954 to 1965. With undervalued currencies, West Germany, Italy, Belgium, Britain, France and Japan all had much lower unemployment than the US. It was only in 1961, after John Kennedy became President, when the Federal Reserve systematically loosened monetary policy, forcing Germany and other countries to revalue their countries upward to avoid importing US inflation that the US was able redress the overvaluation of the dollar. But in doing so, the US also gradually rendered the $35/ounce price of gold, at which it maintained a kind of semi-convertibility of the dollar, unsustainable, leading a decade later to the final abandonment of the gold-dollar peg.

Dr. Shelton is obviously dedicated to restoring the gold standard, but she really ought to study up on how the gold standard actually worked in its previous incarnations and semi-incarnations, before she opines any further about how it might work in the future. At present, she doesn’t seem to be knowledgeable about how the gold standard worked in the past, and her confidence that it would work well in the future is entirely misplaced.

A Tutorial for Judy Shelton on the ABCs of Currency Manipulation

Published February 15, 2017 currency manipulation , exchange rate protection , Judy Shelton 13 Comments
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Currency manipulation has become a favorite bugbear of critics of both monetary policy and trade policy. Some claim that countries depress their exchange rates to give their exporters an unfair advantage in foreign markets and to insulate their domestic producers from foreign competition. Others claim that using monetary policy as a way to stimulate aggregate demand is necessarily a form of currency manipulation, because monetary expansion causes the currency whose supply is being expanded to depreciate against other currencies, making monetary expansion, ipso facto, a form of currency manipulation.

As I have already explained in a number of posts (e.g., here, here, and here) a theoretically respectable case can be made for the possibility that currency manipulation can be used as a form of covert protectionism without imposing either tariffs, quotas or obviously protectionist measures to favor the producers of one country against their foreign competitors. All of this was explained by the eminent international trade theorist Max Corden  over 30 years ago in a famous paper (“Exchange Rate Protection”). But to be able to make a credible case that currency manipulation is being practiced, it has to be shown that currency depreciation has been coupled with a restrictive monetary policy – either by reducing the supply of, or by increasing the demand for, base money. The charge that monetary expansion is ever a form of currency manipulation is therefore suspect on its face, and those who make accusations that countries are engaging in currency manipulation rarely bother to support the charge with evidence that currency deprection is being coupled with a restrictive monetary policy.

So it was no surprise to see in Tuesday’s Wall Street Journal that monetary-policy entrepreneur Dr. Judy Shelton has written another one of her screeds promoting the gold standard, in which, showing no awareness of the necessary conditions for currency manipulation, she assures us that a) currency manipulation is a real problem and b) that restoring the gold standard would solve it.

Certainly the rules regarding international exchange-rate arrangements are not working. Monetary integrity was the key to making Bretton Woods institutions work when they were created after World War II to prevent future breakdowns in world order due to trade. The international monetary system, devised in 1944, was based on fixed exchange rates linked to a gold-convertible dollar.

No such system exists today. And no real leader can aspire to champion both the logic and the morality of free trade without confronting the practice that undermines both: currency manipulation.

Ahem, pray tell, which rules relating to exchange-rate arrangements does Dr. Shelton believe are not working? She doesn’t cite any. And, what, on earth does “monetary integrity” even mean, and what does that high-minded, but totally amorphous, concept have to do with the rules of exchange-rate arrangements that aren’t working?

Dr. Shelton mentions “monetary integrity” in the context of the Bretton Woods system, a system based — well, sort of — on fixed exchange rates, forgetting – or choosing not — to acknowledge that, under the Bretton Woods system, exchange rates were also unilaterally adjustable by participating countries. Not only were they adjustable, but currency devaluations were implemented on numerous occasions as a strategy for export promotion, the most notorious example being Britain’s 30% devaluation of sterling in 1949, just five years after the Bretton Woods agreement had been signed. Indeed, many other countries, including West Germany, Italy, and Japan, also had chronically undervalued currencies under the Bretton Woods system, as did France after it rejoined the gold standard in 1926 at a devalued rate deliberately chosen to ensure that its export industries would enjoy a competitive advantage.

The key point to keep in mind is that for a country to gain a competitive advantage by lowering its exchange rate, it has to prevent the automatic tendency of international price arbitrage and corresponding flows of money to eliminate competitive advantages arising from movements in exchange rates. If a depreciated exchange rate gives rise to an export surplus, a corresponding inflow of foreign funds to finance the export surplus will eventually either drive the exchange rate back toward its old level, thereby reducing or eliminating the initial depreciation, or, if the lower rate is maintained, the cash inflow will accumulate in reserve holdings of the central bank. Unless the central bank is willing to accept a continuing accumulation of foreign-exchange reserves, the increased domestic demand and monetary expansion associated with the export surplus will lead to a corresponding rise in domestic prices, wages and incomes, thereby reducing or eliminating the competitive advantage created by the depressed exchange rate. Thus, unless the central bank is willing to accumulate foreign-exchange reserves without limit, or can create an increased demand by private banks and the public to hold additional cash, thereby creating a chronic excess demand for money that can be satisfied only by a continuing export surplus, a permanently reduced foreign-exchange rate creates only a transitory competitive advantage.

I don’t say that currency manipulation is not possible. It is not only possible, but we know that currency manipulation has been practiced. But currency manipulation can occur under a fixed-exchange rate regime as well as under flexible exchange-rate regimes, as demonstrated by the conduct of the Bank of France from 1926 to 1935 while it was operating under a gold standard. And the most egregious recent example of currency manipulation was undertaken by the Chinese central bank when it effectively pegged the yuan to the dollar at a fixed rate. Keeping its exchange rate fixed against the dollar was precisely the offense that the currency-manipulation police accused the Chinese of committing.

When governments manipulate exchange rates to affect currency markets, they undermine the honest efforts of countries that wish to compete fairly in the global marketplace. Supply and demand are distorted by artificial prices conveyed through contrived exchange rates. Businesses fail as legitimately earned profits become currency losses.

It is no wonder that appeals to free trade prompt cynicism among those who realize the game is rigged against them. Opposing the Trans-Pacific Partnership in June 2015, Rep. Debbie Dingell (D., Mich.) explained: “We can compete with anybody in the world. We build the best product. But we can’t compete with the Bank of Japan or the Japanese government.”

In other words, central banks provide useful cover for currency manipulation. Japan’s answer to the charge that it manipulates its currency for trade purposes is that movements in the exchange rate are driven by monetary policy aimed at domestic inflation and employment objectives. But there’s no denying that one of the primary “arrows” of Japan’s economic strategy under Prime Minister Shinzo Abe, starting in late 2012, was to use radical quantitative easing to boost the “competitiveness” of Japan’s exports. Over the next three years, the yen fell against the U.S. dollar by some 40%.

That sounds horrible, but Dr. Shelton conveniently forgets – or declines – to acknowledge that in September 2012, the yen had reached its post-war high against the dollar. Moreover, between September 2012 and September 2015, the trade weighted US dollar index in terms of major currencies rose by almost 25%, so most of the depreciation of the yen against the dollar reflected dollar appreciation rather than yen depreciation.

Now as I pointed out in a post in 2013 about Japan, there really were reasons to suspect that the Japanese were engaging in currency manipulation even though Japan’s rapid accumulation of foreign exchange reserves that began in 2009 came to a halt in 2012 before the Bank of Japan launched its quantitative easing program. I have not kept up on what policies the Bank of Japan has been following, so I am not going to venture an opinion about whether Japan is or is not a currency manipulator. But the evidence that Dr. Shelton is providing to support her charge is simply useless and irrelevant.

Last April, U.S. Treasury Secretary Jacob Lew cautioned Japan against using currency depreciation to gain a trade advantage and he placed the country on a the“monitoring list” of potential currency manipulators. But in response, Japanese Finance Minister Taro Aso threatened to raise the bar, saying he was “prepared to undertake intervention” in the foreign-exchange market.

Obviously, the US government responds to pressures from domestic interests harmed by Japanese competition. Whether such back and forth between the American Treasury Secretary and his Japanese counterpart signifies anything beyond routine grandstanding I am not in a position to say.

China has long been intervening directly in the foreign-exchange market to manipulate the value of its currency. The People’s Bank of China announces a daily midpoint for the acceptable exchange rate between the yuan and the dollar, and then does not allow its currency to move more than 2% from the target price. When the value of the yuan starts to edge higher than the desired exchange rate, China’s government buys dollars to push it back down. When the yuan starts to drift lower than the desired rate, it sells off dollar reserves to buy back its own currency.

China’s government has reserves that amount to nearly $3 trillion. According to Mr. Lew, the U.S. should mute its criticism because China has spent nearly $1 trillion to cushion the yuan’s fall over the last 2½ years or so. In a veiled reproach to Mr. Trump’s intention to label China a currency manipulator, Mr. Lew said it was “analytically dangerous” to equate China’s current intervention policies with its earlier efforts to devalue its currency for purposes of gaining a trade advantage. China, he noted, would only be open to criticism that is “intellectually sound.”

Whether China is propping up exchange rates or holding them down, manipulation is manipulation and should not be overlooked. To be intellectually consistent, one must acknowledge that the distortions induced by government intervention in the foreign-exchange market affect both trade and capital flows. A country that props up the value of its currency against the dollar may have strategic goals for investing in U.S. assets.

Far from being intellectually consistent, Dr. Shelton is rushing headlong into intellectual incoherence. She has latched on to the mantra of “currency manipulation,” and she will not let go. How does Dr. Shelton imagine that the fixed exchange rates of the Bretton Woods era, for which she so fervently pines, were maintained?

I have no idea what she might be thinking, but the answer is that they were maintained by intervention into currency markets to keep exchange rates from deviating by more than a minimal amount from their target rates. So precisely the behavior that, under the Bretton Woods system, she extols wholeheartedly, she condemns mindlessly when now undertaken by the Chinese.

Again, my point is not that the Chinese have not engaged in exchange-rate protection in the past. I have actually suggested in earlier posts to which I have hyperlinked above that the Chinese have engaged in that practice. But that no longer appears to be the case, and Dr. Shelton is clearly unable to provide any evidence that the Chinese are still engaging in that practice.

 [T]he . . . first step [to take] to address this issue [is] by questioning why there aren’t adequate rules in place to keep countries from manipulating their exchange rates.

The next step is to establish a universal set of rules based on monetary sovereignty and discipline that would allow nations to voluntarily participate in a trade agreement that did not permit them to undermine true competition by manipulating exchange rates.

I have actually just offered such a rule in case Dr. Shelton is interested. But I have little hope and no expectation that she is or will be.

About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. 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.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner

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