Why the Attacks on Judy Shelton by Fed Insiders Are Cause for Concern
Dr. Judy Shelton, one of President Trump’s nominees to the Federal Reserve Board of Governors, has been under constant attack since she passed her Senate committee vote. In addition to receiving pushback in the press, she is now being harshly criticized by the central banking community, primarily for her favorable view of the gold standard. A group of former Fed staffers, economists, and bank presidents just wrote a letter to the Senate, recommending her bid be rejected. But the reasons they give should make us seriously concerned about the Fed’s ability to uphold the public interest. Keeping Shelton off the Board of Governors is nothing more than Fed insiders’ attempt to prevent those with unfashionable views from participating in monetary policy decisions.
Let’s be clear: Objecting to Shelton’s confirmation because she said nice things about gold-backed money is absurd. The US isn’t returning to the gold standard, and having Shelton on the Board of Governors won’t change that. Going back to gold would require an Act of Congress, and since there’s no viable political coalition for gold, the issue is moot.
Shelton’s detractors know this. Their resistance to Shelton is not due to the substance of her views. It is due to the fashionability of her views, or rather the lack thereof. Among central bankers, commodity money is gauche. It’s low-status. Realizing this, we can see the attacks on Shelton are nothing more than an attempt to keep the “wrong sorts of folks” away from substantive areas of monetary policy.
According to the Fed insiders, Shelton has “a decades-long record of writings and statements that call into question her fitness for a spot on the Fed's Board of Governors.” More than 40 Fed affiliates signed the letter so far. They conclude that “Ms. Shelton's views are so extreme and ill-considered as to be an unnecessary distraction” from important monetary policy issues.
It’s true that Shelton has a history of unorthodox views. She is rare for liking rule-bound monetary systems, such as the gold standard, better than central bank discretion. But are her positions at odds with the evidence?
The answer, from those familiar with US monetary and macroeconomic history, is a resounding no. Ever since Christina Romer’s revisions to the historical production statistics in the 1980’s, economists have known that the relative tranquility of the post-Fed era is a “figment of the data.” These data exaggerated the size of business cycles in the pre-Fed era, making the US central bank look better at its job than it really is. More recent studies confirm that the Fed’s “performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I.” They also show that “real GDP growth has been lower under the Fed, while inflation has been higher.” The gold standard that existed under the National Banking System (1863-1913, with gold redeemability resuming in 1879) was “superior in some respects and no worse in others” compared to what we have now.
It’s not Shelton with the “extreme and ill-considered” views, but the Fed insiders.
This is especially frustrating given that there are legitimate grounds to criticize Shelton. During President Obama’s time in office, Shelton lambasted the Fed’s low-interest rate policies. But later, she flip-flopped and supported President Trump’s calls for the Fed to embrace lower rates. Her sudden switch from monetary hawk to monetary dove is concerning. Yet it clearly takes a backseat to critics’ concern over her positions on gold, as well as central banking in general.
It’s perfectly legitimate to worry about partisanship at the Board of Governors. Shelton’s disparagers should be making this the central issue of her nomination. That they’re not betrays their real motives. As professional economists and bankers, they should be well-aware that Shelton’s positions have historical support. Unfortunately, Fed insiders are just as prone to groupthink and social desirability bias as the rest of us.
For better or worse, the Fed is the first line of defense against macroeconomic turbulence. Americans rely on Fed staff to protect the public from inflation and unemployment. The behavior of Shelton’s Fed-insider opponents gives the public ample reason to worry. Instead of focusing on substantive issues, their criticisms of Shelton look very much like an Old Boys, country-club attempt to circle the wagons. The American people have a right to expect better from those entrusted with such enormous responsibility.