What if America backed its debt with gold again?
In this powerful episode, economist and former Federal Reserve nominee Judy Shelton shares her bold vision for restoring trust in U.S. money. From a historic rethink of the Treasury’s role, to issuing gold-convertible “Trust Bonds” timed to America’s 300th anniversary, Shelton challenges decades of monetary policy and calls for a return to lasting value.
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Transcript
Monetary Metals:
Welcome back to the Gold Exchange podcast. I am joined by one of our favorite guests and good friend, Dr. Judy Shelton. Dr. Judy Shelton is a senior fellow at the Independent Institute, an expert in monetary economics, and the author of multiple books like The Coming Soviet Crash, Money Meltdown, and her most recent book, Good as Gold. Judy, welcome back to the show.
Judy Shelton:
Thank you. Happy to be with you.
Monetary Metals:
Judy, so much has happened since we last spoke. Obviously, President Trump has been putting a lot of interesting policies out there. There’s been tariffs, there’s been all types of different moves in the dollar as a currency. But I want to start with the gold standard, which is obviously a monetary system that we used to be on, we no longer are. What do you think is in terms of the chances that we see something more like a gold standard going forward? There have been lots of talks about a Mara Lago Accord. There have been talks about how our currency, the dollar, is valued against other currencies. What do you think that this idea that we’ll all go back to gold, we’ll be on a single standard where gold is that trusted unit of account, and then from there, we can figure out things like trade or inflation or other policies? Do you think that’s a reasonable assumption that people want to go back to a gold standard now?
Judy Shelton:
Well, I think you raised a very important It’s a very important issue of how exactly are we defining a gold standard? Because it’s true, our country has long had some link to gold as the anchor for its monetary system. But there’s a big difference between when we were on classical international gold standard, and roughly the whole world was from 1880 to World War I, so about 1913. That was a time when you really had a unified monetary system. Every country had its own currency, but it defined it in terms of the same reserve asset, gold. So that was just different weights of the same asset. So you almost had the same price anywhere in the world. I think that set up a level international playing field for international trade, which did flourish during that same period. We didn’t have any a system, really, in between World War I and World War II. It was a mess. We had the 1930s. You had competitive depreciation, where countries tried to go back on some gold standard to define their own currency. But then to gain a trade advantage, they would depreciate their currency relative to gold. That was called the Beggar thy Neighbor era, and we ended up with depression and ultimately another war.
It was not long after the United States got involved in World War II. Actually, the first memo was written two weeks after Pearl Harbor was bombed. Under the Treasury Secretary of the United States, Henry Morgenthau, he said, What a new system can we think about after we get through this war, which the United States was now entering, to give a sense of hope for the future? Because we knew there would be all these war-torn nations in Europe, and some of them, it wasn’t clear what they were fighting for. The idea was United States would work to set up a new level international playing field, but instead of, well, as it turned out to be the Breton Wood system, instead of being a a gold standard where every country had to keep its currency stable relative to gold, the United States would. That is, we would anchor the system by saying it takes $35 to buy an ounce of gold. Then what other nations had to do—this was going to be this new future system—was keep their currencies at a fixed rate. I mean fixed, like our allies could only have their currency move 1% up or down relative to whatever that fixed rate was.
They had to keep it fixed. But if they felt the United States was inflating and exporting that inflation, those other countries who were participants in the Bretton Wood system, and this means all the European countries, not the Soviet Union, they were invited, but they opted out at the last minute. But these other countries would be able to cash in the extra dollars that were coming into their country for that $35 per ounce of gold rate. That was the way to keep bringing the system back to where it was meant to be. That enforced fiscal discipline on every government, including the US. That’s a system we had. It worked extremely well. That is, the productivity gains all around the world, but in the United States were very impressive. We had good real economic growth, very low inflation, and we had a narrowing of the wealth gap. The inequality on wealth and income really started to decrease. What do I think could happen now, I don’t think you can go back to either of those systems. But what I’m proposing is that since the US is a legacy of that system, is the world’s largest holder gold reserves.
We have 261 million ounces. We’re carrying them at a book value of $42 an ounce, and they’re worth considerably more. Our holdings are carried by the treasury as being worth 11 billion. It’s probably about 800 billion getting closer to a trillion. My idea is that for the first time since Nixon cut off any link between the value of the US dollar in gold, it would be interesting if our treasury issued a new security, I call them treasury trust bonds, that offer gold convertibility at maturity. When the bond would mature, the holder could either get the face value in dollars or it would have been pre-established how much gold they could get. I think in a way, it’s a novelty. We’re not talking about the whole money supply. This wouldn’t be the smallest treasury offering that is out there, but it wouldn’t be the smallest either. This would be like tips bonds in a way, which are treasury inflation-protected securities. But I think it would get attention. If you could then compare the rate of return that investors demand when they know that they’re holding in the future a dollar as good as gold, literally, because they know how much gold or how much dollars they can get in the future.
Look at the interest rate demanded on that treasury offering relative to a normal treasury offering, fiat money, purely, with no convertibility aspects in the future, except into future dollars. That could turn into a very useful information tool for the Fed because it measures aggregate expectations about the purchasing power of the dollar relative to gold, which is a surrogate for commodities, and in that sense for the real economy. It could also turn into some a price rule in the future. That is when I talk about a gold standard or I’m referred to as a gold bug, what I’m saying is, why not use a link between the dollar and gold? That is a win-win all around, including the bookkeeping value of gaining that windfall profit.
Monetary Metals:
One thing I really like about your proposal is it’s very sober, it’s very calm, it’s very relaxed. It’s not saying, Hey, we need to bring the whole monetary system to a screeching halt overnight and swap something over. It’s not an attack on other countries or their currencies. It’s simply saying, Hey, we have a security like a TIPS, which is a treasury that is inflation-protected. Why not have a currency or a security that is also maybe debasement-protected? So it’s in something like gold or an asset that people can say, Hey, I’m pretty sure in 20 years from now or 15 years from now, this gold will still have its value or maybe more value compared to the same in dollars. And just let people choose. If it turns out that nobody wants these securities, well, that’ll be some information all its own. It won’t cost us anything. And we’ll learn, wow, people really trust the dollar. Or if people are buying these up like hotcakes, we’ll also realize, Wow, there’s a strong demand for an asset that is paid by a government that we know will pay it in a currency that isn’t the dollar but is actually in gold.
So what do you think is the strongest argument against this? Why would someone not want to have this treasury trust bond or these securities that are denominated and paid in gold?
Judy Shelton:
Well, first off, thank you for encapsulating it so well. That is exactly the concept. And as you say, it’s voluntary. This is for people who want the assurance that they have future purchasing power. And for them, Knowing they would have a certain amount of gold is a comfortable feeling, just like a tips bond where they know they’ll be compensated by the consumer price index. This is doing it by the value of gold. I think some people, and this is sad for me, their first reaction to it is to say, But I would never trust the government. I would never trust the government to live up to its promise. I think we can get around that. Certainly, you would have to warehouse the gold and to stipulate that that is the collateral for this security. You see people who want to take a tour through Fort Knox. I’m all for it. I don’t think it’s necessary, but I could be wrong. But I think even that would be a positive thing if it reassured people I would be more concerned, not whether it’s physically there, but about any encumbrances that we might not be aware of.
But I think that that’s part of issuing this. I want to use this whole exercise to bring attention to the importance of having an honest measure where people know you’ve defined the value of the dollar in terms of something that has an inherent value. I think in that sense, you’ve made a statement on behalf of the importance of monetary integrity. For people for whom that’s important, because some of us feel victims of monetary policy, my problem, I guess, or my complaint, is I don’t see money as just another policy tool to be managed or manipulated by government to achieve its economic economic objectives. I think that money is almost like a human right. I mean, you have to be able to plan in your life. Money is meant to be that unit of account. You can make plans. It’s supposed to be the way that price signals are conveyed. In that sense, it’s to work hand in hand with free markets and supply and demand and not distort signals, whether it’s for defining the value view of goods, at what cross between supply and demand does the price settle and equilibrate. I think that’s very helpful for making long-term investments.
The store of value function of money is equally important. I also think for all the talk of, I don’t know, that we have global financial markets or an open global marketplace, how is it that you can isolate money? I want to capture all the benefits of a unified currency policy that carries its value across borders and through time. I would say some negative reaction is that people wouldn’t trust the government. Well, we’re really in trouble if that’s the case. But Alan Greenspan proposed a gold backed bond back in 1981. I find that very interesting. I met with him several times on this. We went to Capitol Hill together in subsequent years to push the idea. He thought that it should be set up that the treasury would just issue an instrument that says, We promise to pay this many ounces of gold this far into the future, whether it was five years or 10 years, however long. But he didn’t think it mattered whether the US used its own gold or just purchased gold. Although he did say it could be expensive for the government if they have to buy very expensive gold to pay out the rate that they had in mind when they issued the security.
My feeling is our own gold, those are the family jewels. They’ve been sitting there since they were valued at $42 in February of 1973. That was the official end of trying to reestablish the woods Agreement. They’ve been sitting there doing nothing for us all this time. What I don’t want is for some future presidential administration to say, Let’s sell them like they’re public lands and we could privatize. Let’s sell them because we haven’t solved our budget issues. To me, that’s just, sure, you could sell them and you could get maybe a trillion, and that goes down the rat hole. We don’t have anything to protect that as an investment. Instead, I’d like to lock it up effectively by saying, This is the collateral. These are the family jewels of the United States. This is a family emergency. I think we warehouse our own gold and specifically define that as the collateral that’s backing up this formal treasury link expressed through a formal treasury offering. I’m even suggesting it could be a 50-year bond. You could have shorter duration gold-link bonds. But I like that idea because ever since President Trump started saying how we really need to appreciate the 250th anniversary of the Declaration of Independence, I thought, how perfect.
Let’s issue this on July fourth, 2026, and let’s have it mature on our 300th, on July fourth, 2076. Because you know what? It’s a little shocking. If you say to people, Do you think the United States will still be standing tall in 50 years? I’m not sure everyone thinks so. We keep hearing how unsustainable our fiscal path is. This, to me, would be a sign. This would be a pact of, what should I say, putting our money where our mouth is or make America’s money great again or make America’s gold money again. I guess that’s what I’m saying. Let’s use it to do something very good toward changing that trajectory toward fiscal unsustainability. Let’s move towards sound finances and sound money.
Monetary Metals:
I think one of the benefits of that as well is that if you do a shorter duration, people can say, “Hey, look, they’re paying out the gold. I trust that the system that they’ve set up is functioning. I put my treasury bond out for a year, and a year later, I got the gold that I wanted.” So it’s working, and we can either extend those durations outward. So if people are worried that they’ll never pay it back, and I’m just putting this away, and 50 years later, they won’t have any gold, well, you can start with a shorter duration, right? It might have less of a yield or something like that, but you could slowly increase the duration. What do you think about that idea?
Judy Shelton:
I think it’s very interesting. I go back to Alan Greenspan, since he was always a gold advocate, and I would meet with him fairly regularly, certainly every few months, both when he was Fed Chair and after he left, after 18 years. He said he never changed his views from his original Gold and Economic Freedom essay that he wrote in the ’60s. It’s a pretty radical essay, I must say, for a button-down banker and someone who’s considered conservative. Maybe it’s classically liberal in the sense of elevating the rights of individuals over government, you might say. But yes, I like that idea. I would definitely entertain that because I do think it would not only be reassuring to see that it’s immediately functioning as promised and people are paid out as the instrument required. But the idea that Greenspan had initially is that this would put pressure on the fiscal actions of Congress. Because if people saw redemption of these gold-linked bonds, and in his case, it wasn’t a matter of trading for dollars. They would just get the gold. But he thought it would cost the government the cost of buying the gold to pay them off.
In either case, he thought this would be a pretty steady a reminder. He thought five-year duration was appropriate. But I can see something. I would probably try to do a parallel set of terms of maturity to what the treasury puts out, let’s say starting with maybe a two-year, a five-year, 10-year notes, and then they go to 30-year bonds. And 50-year bonds are not out of the realm of consideration. In fact, when I worked on the transition team when President Trump first came in, I was assigned to Treasury and to be the lead advisor on international affairs, and we were looking at the longer duration. So it depends on investor interest. I can see, and again, I don’t mean to call it a novelty to suggest trivializing. I’m just saying that this will attract attention, and it could even be done as a special savings bond. If you did the 50-year, people might buy for their kid’s education or as a family legacy-type gift, and that could be exchanged or transferred to future generations. But I also see value in the shorter term, and I think even more useful would be the information value of doing that, again, to the Fed, as they see people…
If you see demand increasing, what does that tell you? That people are predicting the dollar will lose value or lose purchasing power relative to gold as a commodity, as a surrogate for the real economy, and for the prices of real goods and services. That’s an important information tool for the Federal Reserve. I don’t see why you also couldn’t have stable coins that we know now that with the new legislation, they have to be 100% verifiably backed by readily transmitted into dollar securities, which are going to likely be treasuries or dollars themselves. But what if a percentage of the collateral behind a stablecoin or the reserves that justify the issuance of the stablecoin, what if they were 100% backed up by gold convertible treasuries or 10%? I think that could be very interesting because now you’re starting to talk about a stablecoin links the dollar and gold. I could see something like that. Even the US government saying they’re good with that. You could even have something issued by treasury that also functions as a stablecoin. I thought, let’s call it a Solidus for solid US. That was the name of an ancient coin that was popular.
It spanned continents, a solidus, the use of the solidus. So interesting things. And I also think you could have private duplications. If there is demand for such an instrument, why wouldn’t private funds set up security Securities that were a combination of traditional treasury securities combined with some a gold futures, whether it’s a put or a call or however you would set it up, but some a gold futures contract and try to replicate the same payoff that they see as a popular one, that you either get this security or you get so much gold, and we’re going to set it by the market rate boom right now for various durations. That’s a way to magnify this dollar-gold link through private holdings of gold and private holdings of treasuries.
Monetary Metals:
Yeah. One thing I also want to potentially discuss with you is this idea, which the CEO of the company, Keith Wiener, came up with many years ago, which is that not only would these bonds, of course, be payable in ounces of gold, but the actually only way to pay for them would be by using existing treasury bills. So the idea would be that you’re swapping out debt securities that are denominated in dollars for debt securities that are denominated in gold. You could either, again, start farther out in duration and move backwards until all Gold debt securities were denominated in gold, or like you said, we could maybe try different durations and see how that works. So that’s also another potential avenue where not only can you pay for the security in dollars, but maybe you would have to pay for the security in outstanding treasury debt because 31 trillion dollars of outstanding treasury debt. That’s quite a lot of debt that the US will have to handle. So where do you see that debt question? Do you think that we’re going to try to push more of our debt into these different types of, whether it’s stablecoins or different currencies?
How do you think we’re going to to deal with this debt issue going forward?
Judy Shelton:
I think what we’re going to see is Treasury trying to build up new demand for its securities, for US government debt. I think one way that’s being considered is to change the supplementary leverage ratio for banks. That is, it’s part of their capital structure, and there are some assets, tier one assets, et cetera. But given that Treasuries are considered riskless, although you can certainly take a gain or a loss. I mean, the Fed’s own holdings of treasuries have a trillion dollar loss built into them right now. But the idea is that they’re still considered the riskless asset, government guaranteed. Anyway, the SLR controversy, it’s something being addressed as part of the bank’s regulatory stablecoin, structure and requirements. But that’s one way. The stablecoin legislation is also seen to be a way to promote demand for stablecoins. I’m sorry, demand for treasuries to back up the stablecoins. I guess what I see is the US will still keep putting out the debt. But as Treasury Secretary Scott Besson says, the goal is to increase growth at a faster rate than the percentage of debt relative to GDP. He thinks that as you start to bring that down through higher growth, then say the Congressional Budget Office is anticipating that the demand for the debt will remain strong.
We also see President Trump warning, again today, BRICS countries shouldn’t consider having any alternative currency to the US dollar as the global reserve currency, or else they are liable for another 10% increase in tariffs that might be applied. I would say we’re using mechanical means to increase demand for treasuries. But one aspect you might consider of having tariffs, if Americans end up purchasing fewer imports, then there’s less mechanical reason to exchange dollars for other currencies. That’s why we’re seeing changes in the value of the dollar. I also think that the foreign exchange market now is less set up to allow people to exchange currencies to carry out trade and more like just a beauty contest with its own set of speculative rewards. I mean, there’s like 600 billion in derivatives out there. Did I say billion? A trillion. About 70% of them are linked in some way to currency movements and varying interest rates among the world’s major central banks. I guess what I’m saying is the US has a lot of debt. We’re going to continue to be adding to that debt. The way that interacts with interest rates, which is probably why it really matters, has a lot to do with demand and supply for treasury debt.
That’s where I think the emphasis is. The gold security, gold linked security that I’m advocating, is not going to alleviate all of that so much as call attention to it. I think my whole purpose, as I think I already said, is to set a load start for wanting to move toward sound finances, a balanced budget. We actually talk about it, but we’re not moving much closer. Growth will be the salvation. I agree with our Treasury Secretary on that. But I would like to have that little reminder in there of what does it mean to have a dollar as good as gold? By that, I mean a dollar that is not just incidental, just another variable that the government uses to try to resolve its own challenges changes. I think it has to serve individuals. I think it’s a freedom tool in that sense. I think it was meant to be, according to our founders and as Thomas Jefferson wrote in his notes on the establishment of a money unit for the United States. If we decide the dollar is going to be our money unit, we have to define with precision what is a dollar. Then we proceeded to define it in terms of a specific weight of gold or silver.
Monetary Metals:
I do want to mention to our viewers, which if they do know this, it’ll be a great reminder, what % of these different FX swaps have the dollar on one side? It’s over 97%. So the dollar is a large part of these different currency swaps or reserves or FX trading. And one thing I think that you’re hinting at here is that we wouldn’t need to have all this FX trading if we had a sound gold-based currency. There was no FX trading. You had your Spanish dollar, the US dollar, the Canadian dollar, but they were all the same ounces of gold. Those billions and billions, and in often terms, trillions of dollars that are being traded every day in the FX, all those smart, brilliant minds wouldn’t have to be worried, Oh, what’s the Hong Kong peg going to look like tomorrow? They could be focusing on curing cancer or starting a business instead of guessing between, will the interest rate in the US be this or will the Yen fall against the dollar? Unfortunately, a large part of that financialization has happened because we’ve left a sound, if you want to say, almost boring monetary system where gold worked in a very simple, boring way that everyone could understand.
Maybe you just throw it under the pillow, maybe you invest it or spend it. But it was pretty basic, right? There was not a lot of need for a monetary understanding. Versus now with the financialization of the economy, with the politicization of the Fed or the interest rates or the fiscal system that we’re under, there’s so much financialization that people do need to be aware of. Do you think that maybe we’re going to try to push towards a system where you don’t need to worry about finances as much because the real economy is what’s growing and you can focus on that?
Judy Shelton:
Wouldn’t I love that? Yes, well stated. There’s so much talent. Think of all the quants coming out of Ivy League schools and going to Wall Street. I don’t fault them one bit. They’re so smart in figuring out how to play these derivatives. But this market wouldn’t exist. This is a speculator’s paradise. But it’s based on interpreting an eyebrow raise by a member of the Fed. It’s wild these days, isn’t it? Where you have people auditioning to be the Fed chair, and I think the Fed has become more political than ever. You have a whole industry devoted to interpreting. I mean, today, the minutes came out right at 2:00 o’clock today, so I’ll be devouring those. But along with thousands of people who get paid as financial analysts because they’re trying to read what is the nuanced meaning of That’s the thing that anyone might have said at a prior meeting of the Federal Open Market Committee. That is a mistake. That means the money, instead of being a tool, becomes this device used by others to gain profit, not to provide this honest measure, not to facilitate voluntary commerce, but as a game in itself.
I think that’s what has happened. So, yes, I would love it to be boring. I would love to put all that talent and passion and brains into what I would consider more productive. And more productive activity, as I say, there’s nothing wrong with chasing profit. It’s a normal human instinct. It’s just that those opportunities wouldn’t exist if we had a coherent, logical, ethical, international monetary set of arrangements in place. Here, I will even be quite sympathetic to an argument that President Trump made. He held up a letter, I guess he sent it or wanted it conveyed to Fed Chairman Powell, showing the rates, the policy interest rates, the target rates of, I don’t know, 50, 60, however There are many central banks in the world. He brought out the very important issue and question, why? Well, let’s just look at the European Central Bank. Their policy interest rate, their target rate is 2%. Ours is at 4. 4%. What I’m referring to is not what we call a federal funds rate. That really doesn’t exist. We’re talking about what is the interest on reserve balances? What does the Fed pay on the 3. 4 trillion parked in cash at the Fed, held by private commercial banks, to not do anything with it, to let it just sit there, corralled, and not be loaned out?
Why are we paying more than twice what the ECB is paying? You look at the Bank of Japan, theirs is 50 basis points. The Bank of Canada, I think theirs is two and three quarters. That is why the hundreds of billions that the Fed pays out in this interest on reserve balances, and it’s over 620 billion since the Fed started running an operating loss in September of 2022, Over 40% goes to foreign institutions, foreign banks. How is it that we don’t have, and again, with this world of globalized finance, and we talk about reciprocity on trade, our Their banks that operate in their markets get their rate. Their banks are getting more than twice, again, I’m looking at the ECB, the rate they would get if they kept that cash at home. They set up operations here. They’re allowed to have a master account at the Federal Reserve. If you look at their balance sheets, mostly they just keep cash at the Fed. That’s a big part of their Loans are a small part. This is money that actually all the money the Fed makes off its own massive portfolio, 6.7 trillion, that would normally be remitted back to Treasury as revenues to the budget, paying for schools and Medicare and all the things that revenues to the government provide for as outlays.
That money is going not just 100%, but 100 plus the feds going into debt every day, paying that money out to private commercial banks. It’s a huge subsidy for them. Looking at last week’s 8. 8 numbers from the Fed of over 44% is going to foreign banks operating in the US. This is crazy. Unlike when you had a unified gold standard, it was very sophisticated in terms of it really thought there were international financial markets and international trade. What you have now is currency manipulation to get a trade advantage and currencies fluctuating every bit as much as as tariffs, even with these new tariffs. Then you have these differential policy rates being paid out by central banks who are all using it to corral liquidity in their own markets. But the banks are so much smarter. They said, Okay, that’s fine, but they’ll pay us more to keep our money sitting there doing What are some reforms that you would like to see done?
Monetary Metals:
Because obviously, there’s these different things, whether it’s bailouts, whether it’s paying interest on reserves. Obviously, there’s lots of things that the feds and the federal government do or have as policies. What are some reforms that you think not only would you like to see, but are actually doable to be done?
Judy Shelton:
One thing that’s very doable, but there’d be a lot of resistance, mostly from the five largest banks in the United States, the foreign ones, It would be a little more reticent, but would be to have Congress rescind the authorization it gave to the Fed to pay interest on reserve balances. It’s a fairly new privilege. The Fed got that privilege in October 2008 as part of an emergency package because the chairman of the Fed at the time, Ben Bernanke, knew that he was going to have to do something very, very big and decided to engage in what can be called quantitative easing. But it was just large scale purchases of government bonds. Because what that meant is you were buying treasuries from banks. The way the Fed does that, it just says, We’ll buy that million dollar treasury security. Boom. We just put a million dollars by a key stroke into your account, your master account at the Fed, so you now have that much cash. Well, normally, if you do that to the extent the Fed did, that’s what Milton Friedmann called base money, high-powered money, because it always was the inverse of the reserve requirement.
I used to teach money in banking when I was getting my PhD, so I taught it to undergraduates. The whole idea was that banks wanted to be loaned out, but they had to keep a certain amount in reserves at the Federal Reserve. It averaged about 10% of their deposits. If up to 10% of their depositors came in one day and said, I want my money out, they could do it without it being an emergency. They had cash. But they wanted to minimize that because they earned nothing on the cash. Well, when Bernanke knew that he would be putting all of this potential new cash into the system that could be loaned out, he also wanted to be able to keep that from becoming hyperinflationary because he’s expanding the monetary base so much that could expand economic activity. The Fed thinks economic activity means inflation. He said, If I can have this right to pay interest on reserves, he said, I can raise interest rates in 15 minutes. I don’t have to do it the way Paul Volcker did. I don’t have to buy and sell treasuries, and then banks decide whether they should lock money up in treasuries or keep making loans to the private economy.
Instead, I can just say, Just don’t do anything. Leave it sitting here, and we’ll pay you this much. At first, it didn’t even matter too much. He always knew that it would look bad, that it would look like a subsidy to banks. He admitted that. He wrote a Brookings paper about it. He said, But it’s not a problem because A, interest rates were at near zero. Remember, for a long time after 2008, all the way through till December of 2015, so seven years. Even when they were 25 basis points. This is not a lot of money for us to be paying 25 basis points to banks. Two, he says, And the Fed is making so much money on its own portfolio, we can easily cover it, so it’s nothing. Three, he said, And it’s going to end because once we get out of this emergency, we’re going to start shrinking the portfolio so all of those excess reserves will disappear because we’re no longer buying treasury securities from banks. None of None of those things happened. None of those things happened. It’s not 25 basis points. It’s 4.4%, so that’s multiples higher than it was.
The Fed can’t pay for it. It’s borrowing from treasury to pay for it. What was the final one? Oh, and instead of shrinking the balance sheet, that’s funny, they came down some from the 9 trillion. But if you look at the CBO projections, they show over the next 10 years, they expect the Fed to more than double its holdings of treasury bonds. They expect it to be 9.9 trillion at the end of this 10-year period. It’s certainly 2 trillion higher than when Bernanke said that, so they never did normalize. What I would do, my reforms would be I would get there is legislation that has been put into the record by Rand Paul, Senator Paul, to after reading an op-ed I had in the journal a couple of weeks ago on exactly this issue, he wrote legislation and said, Congress should rescind the right for the Fed to pay interest on reserves. There had already been one from a representative, from Warren Davidson, a congressman. I would encourage Congress to do that, to take It’s way that right of the Fed to pay interest on reserves. I think it’s a very unhealthy practice.
Once you make the case how much it’s going to foreign banks out of revenues that would go to the American taxpayers, I think the Fed’s on a back foot in defending it. What would the Fed do instead to control rates? Because this is now their preferred rate. It’s the lazy central bankers way to control rates. They’d have to go back and do it the Paul Volcker way. That would mean if they thought, if they took Their policy rate down to zero, which is what happens if you eliminate it, then what they would have to do if they still want to have interest rates, even let’s say at their current rate, they have to sell securities. That’s The other thing I want them to do, I want them to reduce their footprint and credit markets. I want them to shrink the portfolio. I want them to sell treasuries. That is what I would do, force the Fed to do To do interest rates the old-fashioned way. But overall, my approach to the Fed would be that it become boring, as you said. That, yes, do we need a lender of last resort? Yes, I understand that.
When everyone panics, and Paul Volcker taught me that, he said, When everyone panics, they assume that somehow the Fed knows what to do. He said, The truth is, we don’t know either. But the The fact that people think we have a plan is, ironically, what saves it. That is the plan that they think we do. We saw during COVID, I mean, Paul just threw everything but the kitchen sink. He did everything from the shelf that the Fed has as a potential way to get involved. I guess you don’t want to take out the airbag because that can limit damage in the event of an accident. But I think we have to be able to put the car back on the road sooner, and the Fed needed to fade out, not become more prominent. I think the Fed’s goal should not be to have restrictive interest rates or stimulate interest rates. It should want to allow the cost of loanable capital to be determined by market factors and to have price signaling on the availability of demand and supply of capital be determined that way, not by a central committee. You mentioned my books. I feel qualified to talk on these issues because really my first book was on the Soviet bankruptcy.
I wrote it when I had a postdoctoral fellowship at the Hoover Institution at Stanford University. My book was going to be on the impact of Western capital on the Soviet economy, but it caused me to really look at their internal monetary and financial situation. So yes, a country can go bankrupt. A country with nukes that’s seen as one of the giants walking on Earth can go bankrupt. So I know that. I’m not saying it will happen to the US, but it starts when you have capital flowing through the banking system up to government to finance deficit spending. That’s what Gosbank did, and that’s what I see commercial banks doing now with the Fed, just keeping cash there, buying treasuries, and then selling them back, and then getting paid by a government agency. Instead of the real lending is now taking place through private credit markets. How does that even justify the Fed? It’s not examining those non-depository financial institutions that are making the real loans today. I don’t think the Fed is going to be capable of controlling the money supply as stablecoins grow. The Fed needs to be looking ahead at these challenges.
I think it’s going to be outmoded and is losing its, I won’t say relevancy because you still have all the financial reporters showing up for the press conferences after every FOMC meeting. It’s like Stockholm syndrome. It’s like we want to be captivated and And part of this whole thing of what’s the Fed going to do next and who will be chair and who will vote this way or that way. But instead of worrying about whether we’re going to get a 25 basis point decrease in interest rates in July versus September, We should be looking at these huge issues. How do you reconcile what central banks do around the world with any a unified approach to the fact that global financial capital will chase the best return it can get. The goal is to make it want to invest in the most productive opportunities. That shouldn’t just be a matter of which central bank you park your money at to do nothing. My approach to the Fed would be, I hope, fairly vertically integrated from these larger issues that are even a matter of political philosophy, what’s the appropriate role of a central bank in a free market economy, and what’s relative importance of the private sector compared to just financing the government, down to this nitty-gritty of, okay, if the Fed didn’t have the right to pay interest on reserve balances, how exactly would it manage What does that mean about reverse repos or about the discount rate or about these other tools that the Fed is now allowed to become musty?
Monetary Metals:
I do want to ask you, in your vision, what does success look like? Let’s say we get some of these reforms implemented 10 years down the line. What would we be seeing differently then if we don’t change our current trajectory? What would that successful vision look like?
Judy Shelton:
I think success would be that people have access to a reliable unit of account. They have a dependable store of value. I hope it’s the dollar. It can exemplify this money that I’m talking about and also be that meaningful unit of exchange. I think the dollar can be the global reserve currency in the sense that it could become, as Ronald Reagan said, he thought one of the first things he would do. He got a commercial back when he was running, originally for President, saying one of the first things he would do is establish some a link between the dollar and gold because his goal was to make the dollar the most trustworthy currency in the world. I would like to see real moves to restore the monetary integrity of the dollar and that become the model for the world. I mean, these other central banks do what they do because they’re copying us. The idea of having an inflation target actually came from the Bank of New Zealand, and then the other banks ended up copying it because it said, All right, we’re going to target 2% inflation. When Greenspan was at the Fed, if you look at the transcripts for July 1996, he said, What does it mean that our mandate says stable prices.
How should we interpret that? He said in his view, that meant zero inflation. In fact, the Humphrey Hawkins legislation of 1978, which people sometimes say, Oh, that defines a Fed’s mandate. Well, it calls for zero, zero % inflation. That’s what I think. I would target zero. But then I think I might move toward, what do I mean by target? Because If the Fed’s main tool is to have artificial interest rates, and it achieves it by paying banks not to lend, I think that whole system is wrong. I think the Fed’s way of fighting inflation is to fight economic growth. That’s their enemy. They say, Oh, all we can do is suppress demand. We can’t increase supply. Well, I think the supply increase in output is the answer to inflation. Increase output. The ones who increase output are small and medium-sized businesses who hire the employees who invest in plant and equipment, and they need access to capital to do that. Actually, the Fed can affect the supply, and I think right now, they’re affecting it very negatively. I want to have a meaningful yield curve, not have overnight rates be relatively the same as a 10-year treasury bond.
I mean, it doesn’t make sense. I think it’s the Fed’s use of that overnight tool, the rate on reserve balances that they pay commercial banks so that they don’t lend out the money I think that is the key to ending this. I think having a treasury security that actually forces the dollar to be measured against gold and let the market show how they value one form of money, which gold has always been, relative to this dollar, fiat dollar, that would be useful. Those are specific reforms. I think I’ve given an idea of my thematic dramatic approach.
Monetary Metals:
I do want to end as we come to the end of our interview here with someone who I think has successfully done this, which is Javier Milei in Argentina. And very interesting for you to hear, I was recently in Argentina, I have some relatives who live there, and they said, Everything the United States does, we love to copy because we think that they are the tip of the spear, whether it comes to the financial world, whether it comes to crypto, whatever it is, we copy what the US does. And Javier Melei is someone that I’d like the US to happy. He’s cut regulation, he’s cut government spending, and it’s worked. So my question for you is, do you think we need to get to the point of an Argentina where inflation is bad, the economy is bad, and people are unhappy with the administration until we turn things around? Or do you think that we can be the tip of the spear and say, Hey, we’re going to show the world through whether a gold-backed security of some sort, whether it’s through pro-growth policies? What do you think is more likely, that we show the world the way forward or that we have to go to a lower standard of living and see all of this disruption until we change our tune?
Judy Shelton:
I don’t think we have to. Just like, I don’t think we have to go through the 1930s and a world war to think about needing a coherent international monetary system worthy of the name. We had to go through a war to get Bretton Woods and have some an anchor. I think that is what set the stage for wanting to reduce tariffs. First, you had to have the level monetary platform. Otherwise, it makes no sense to talk about getting rid of tariffs because they’re a way of compensating, just as they were the Smoot–Hawley Tariffs were a way of compensating for competitive depreciation through debasing currencies. I love what Javier Melei is doing. He’s a Rothbard fan. He believes in a gold anchor and very much reflects that way thinking. I think he sees dollarization as a better alternative to a currency that had hyperinflated. But I remember when Argentina under Domingo Cavallo, who was a great friend, had a one for one currency board arrangement for the Austral, the Argentine currency, was totally exchangeable into the US dollar. And so that could have been a model. And I was approached by the successor, President of Argentina, to say, Would the Fed consider having some an arrangement?
I think the Americas, we could have a regional currency, but instead of just dollarizing and everyone using a fiat dollar, I mean, why not everyone have some? What if all of those countries who wanted to be part of a group of trading partners in the Americas all agreed to issue some gold-back treasury offering as part of their own sovereign obligation. Then you would see the beginning of, let’s say, that Mexico and Canada issued 50-year gold-back bonds. What you’re showing is that 50 years from now, all three of our currencies, let’s say, for the three countries of NAFTA, would be worth a fixed exchange rate because they’d all be defined in the same reserve asset, gold, because you would be having the Mexican peso denominated convertible gold offering, and then the Canadian dollar convertible gold offering, and then our own. The point being that it’s a way to be moving toward a fixed exchange rate among those three currencies in the future, or at least a way of then measuring. If it turns out that That one country is not meeting its obligations or the amount that’s redeemable in gold is not important enough, well, now at least you even have a way of saying, Well, then we have to have this level of tariff to compensate for the pure currency effect that is giving your exports an advantage.
The country should say, We agree. We see it. There are ways that we can, I think, start to build the appropriate monetary foundation for a fair trading platform. Then you do get the Adam Smith benefits of comparative value. But without using a coherent unit of account to measure that value, I don’t think you can stand up for free trade without addressing the need for sound money.
Monetary Metals:
Dr. Shelton, this has been a fascinating interview. I feel like I learn so much every time we speak. Where can people follow you and find more of your work?
Judy Shelton:
Well, Well, occasionally in the Wall Street Journal, but more reliably, I guess on X, @judyshel. That’s where you’ll find mine. I really appreciate speaking with you. Thank you for letting me explain at length, and your understanding is so clear for me. It’s very gratifying. Plus, I liked your idea about the shorter duration and keep reinforcing the idea that you have that convertibility. I like it. I got a lot out of our conversation, and I appreciate your viewership, and you’re inviting me to talk today.
Monetary Metals:
Dr. Shelton, thank you so much. For those interested in getting the book, it’s called Good as Gold. Dr. Shelton, we’ll see you in the future.
Judy Shelton:
Thank you. Bye-bye.
