(This item originally appeared at Forbes.com on November 17, 2020.)
“Never go full retard” is a good principle to abide by. Central banking worldwide is becoming more and more kooky by the week. Ken Rogoff, professor of economics at Harvard and former Chief Economist of the International Monetary Fund, cuts a wide swath across academic economics. In May 2020, he made a public case for “deeply negative interest rates.” That is, perhaps, just one man’s opinion.
But in November, he said: “If not for the near-zero lower bound, most central banks would now be setting interest rates far below zero, say, at minus 3-4%. This suggests that even as the economy improves, it could be a long time before policymakers are willing to ‘lift off’ from zero and raise rates into positive territory.” In other words, his personal views are now conventional wisdom worldwide — despite there being no example in all of human history of “deeply negative interest rates” doing any good for anyone anywhere. This is central bank macroeconomic manipulation cranked up to 11. Because why? A flu-like disease?
In the US, a new plan seems to be forming for 2021. It involves the Federal Reserve expanding its balance sheet (“printing money”) by about $3.5 trillion, while Congress spends roughly the same amount. That is about 18% of GDP, basically pure printing-press finance. Because, that always ends well.
This is a warmup for why the Senate should confirm Judy Shelton’s nomination for the Federal Reserve Board of Governors this week. Shelton is a very good economist, and like very good economists for the last two hundred years, she is in favor of Stable Money, which in practice has usually meant a gold standard system. Unlike the proposals floating around central banks today, this has always worked well.
Alan Greenspan, who was Chairman of the Federal Reserve for eighteen years during which people started calling him “the Maestro,” was considered a gold standard fan when he began his term; and he continued his admiration of the world gold standard after his retirement.
Most countries today (more than 50%, according to the IMF) follow the basic principles of Stable Money. Usually, they link their currencies to an external standard of value, most commonly the dollar or euro. The most rigorous expression of this principle is the currency board. In doing so, they give up hopes of domestic macroeconomic management via currency jiggering by central banks. They can’t “print money” willy-nilly to fund domestic spending ambitions. Many of these governments have already gone down that road, and they don’t like it. Today, they just want Stable Money. Their monetary policy has become essentially passive.
Just as the euro serves as an external standard of value for dozens of countries today, gold served that role in the past, for the whole world. This was the World Gold Standard system, which defined the nineteenth century before 1914, was recreated in the 1920s, and recreated again at the Bretton Woods convention in 1944. This led to the two most prosperous decades for the global economy — the 1950s and 1960s — in the entire period from 1914 to the present day. The Bretton Woods global gold standard seemed to be working well (although it suffered from internal mismanagement). Nobody wanted it to end in 1971 — not even Richard Nixon. Just a few months later, realizing his error, Nixon himself attempted to put the world gold standard system back together at the Smithsonian Agreement of December 1971, in which the US agreed to repeg the dollar to gold at $38/oz. But, unfortunately, it didn’t work out.
Today’s floating currency environment — and the increasingly aggressive central bank macroeconomic manipulation it empowers — is the result of that failure. In 2017, former Bank of England governor Mervyn King wrote The End of Alchemy, basically arguing that central banks should back off from their schemes and tricks. Instead, since then, things have become even more extreme.
Probably, Shelton’s presence on the seven-member Board of Governors of the Federal Reserve, who are themselves part of the twelve-person Federal Open Market Committee, will not change the course of events very much. Nevertheless, she will at least add an element at the Federal Reserve that doesn’t buy into the kind of notions popularized by Ken Rogoff, about which I think we will eventually say: Wow, that was retarded.
“No State shall … make any Thing but gold and silver Coin a Tender in Payment of Debts,” reads Article I Section 10 of the U.S. Constitution. The U.S. abided by this principle (if not quite the letter of the law) for nearly two centuries, until 1971, and became the wealthiest and most prosperous country in the history of the world. Unlike all of the goofball notions peddled by central bankers today, which never seem to work out right, it has a proven track record of success. It is basically the same idea as most countries use today, of achieving Stable Money by linking the currency to an external standard of value.
Most people don’t really follow the convolutions of academic economics. But, they do understand that, when something works for decades and centuries, it deserves some respect. The screeching and wailing from the academics, about Judy Shelton’s nomination, is proof positive that they have gone off the deep end, into a spiral of delusion. Unfortunately, this has consequences; and when it is time to get ourselves out of the mess they have created, we will need someone who knows how to do that.
