Why They Hate Judy

By: Doug French

Trump’s lady in waiting for the Federal Reserve, Judy Shelton, is losing Republican support by the day. The Washington Post unleashed its comeliest columnist, Catherine Rampell, to finish off Ms. Shelton, who’s primary negative is her past support for the gold standard, and her questioning the need for the central bank at all.

Adherents of the Austrian School of Economics have been cuckoo for Shelton for those very reasons, but, Ms. Rampell describes the Fed nominee as “a demonstrably unqualified partisan quack.” 

Ms. Rampell claims a gold standard “might be popular among the right-wing fringe, but it was abandoned worldwide long ago and remains almost unanimously rejected by economists. For good reasons, including that gold prices are volatile. Linking the dollar to gold can also restrict liquidity when the economy needs it most — as happened during the Great Depression.”

She forgets, the Great Depression was inevitable given the boom the Fed created in the years before. “The Federal Reserve System launched a further burst of inflation in 1927,” wrote Hans F. Sennholz, “the result being that total currency outside banks plus demand and time deposits in the United States increased from $44.51 billion at the end of June 1924, to $55.17 billion in 1929. The volume of farm and urban mortgages expanded from $16.8 billion in 1921 to $27.1 billion in 1929. Similar increases occurred in industrial, financial, and state and local government indebtedness. This expansion of money and credit was accompanied by rapidly rising real-estate and stock prices. Prices for industrial securities, according to Standard & Poor’s common stock index, rose from 59.4 in June of 1922 to 195.2 in September of 1929. Railroad stock climbed from 189.2 to 446.0, while public utilities rose from 82.0 to 375.1.” 

What were once referred to as panics, then depressions, and now recessions are the healing of the economy from inflationary and speculative booms which lead to malinvestment and dangerous economic distortions. “The ensuing recession is a period of repair and readjustment. Prices and costs adjust anew to consumer choices and preferences,” explained Sennholz. 

As Ms. Rampell writes, today’s economists, trained in the modern Keynesian framework, believe corrections aren’t allowed and malinvestment should be enabled by cheap money forever, with the result being zombie companies wasting precious capital. Capitalism requires success and failure. A link from gold to the dollar keeps government and private business in check. 

“Shelton’s confirmation could represent a point of no return for corrupting the mission and functionality of the Fed,” writes Rampell, “and destroying whatever bipartisan resolve remained to not tank the economy for political gain.”

In his book Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken, Jim Grant wrote, ”the pro-Federal Reserve System forces had promised to uphold the gold standard and to defend the new Federal Reserve notes against the well-observed tendency of government-backed currencies to depreciate.” 

Elihu Root, Republican senator from New York, spoke eloquently and at length against the Federal Reserve Act with his primary argument being that the central bank could be inflationary. While it didn’t have to be, he insisted it would be. Fed proponents claimed the country would be fortunate to have an “elastic” currency. “Root retorted that it would rather be an ‘expansive’ one–all growth and no contraction,” Grant wrote. 

Senator Root was prescient beyond his dreams. Ms. Shelton might bring a tiny bit of historical wisdom to the arguments in the Eccles building.

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