Judy Shelton has earned media attention for her criticisms of Federal Reserve policy. In July of 2025, during an online interview with Steve Bannon, she accused Fed chair Jerome Powell of “setting himself up as some kind of an emperor” merely because he had tentatively predicted in his April remarks to the Economic Club of Chicago that then-proposed tariffs might result in price increases and slow growth.
In a subsequent September 18th Fox Business clip, Shelton dismissed the controversy over Federal Reserve independence as a “soap opera”.
Shelton’s most recent book, Good as Gold: How to Unleash the Power of Sound Money can provide insight into her thinking about monetary policy. Its accessible style belies the fact that Shelton has a sophisticated understanding of at least some important monetary issues. Unfortunately, in other areas, her knowledge displays serious gaps.
I heartily agree with her book’s call for a return to a gold standard, and her clear identification of the advantages of the gold standard is probably the best part of the book. She starts by declaring that money should be a “moral contract.” Later, in the third and fourth of six chapters, she provides a more comprehensive and compelling argument, pointing out that the pre-World War II gold standard provided far more stable prices over the long run and greater rates of economic growth than subsequent fiat money regimes, as well as the benefits from fixed exchange rates between countries. The only objection to a gold standard she fails to thoroughly address is the allegation that a gold standard would usher in greater short-run price and economic volatility.
Early in the book, Shelton also invokes Friedrich Hayek, arguing that central banks necessarily constitute a form of central planning. She shows that the resulting knowledge problem faced by central banks can lead to “planned chaos,” citing the performance of the Soviet Gosbank under Gorbachev.
Shelton also contends that the uncertainty generated by central banks has contributed to increased financialization, diverting resources from other productive activities into the financial sector. She even posits a financialization Laffer Curve, in which at some point the size of the financial sector starts causing a decline in the economy’s total output. No doubt that is possible. Yet when she claims that the growth of the financial sector from 10 percent of GDP in 1950 to 22 percent by 2020 was partly the result of “monetary policy uncertainty” (60), she neglects to bring up other factors that may have been involved. Obviously, economic regulations beyond pure monetary policy have contributed to financialization, and surely some of this financialization helps alleviate the negative impact of those interventions. Indeed, at least some part of the financial sector’s growth merely brought about lower transaction costs, as does the very existence of a commonly accepted medium of exchange.
On the other hand, one of the weaker parts of the book involves some of Shelton’s criticism of the current Fed.
While she recognizes that there is a relationship between the Fed’s target interest rate and the growth rate of the money supply, she has a highly exaggerated view of the Fed’s broader ability to affect market interest rates. She buys into the fallacy, widespread not only among the general public but also among many public-policy pundits, that the Fed has tight control over nearly all market interest rates. While Fed-induced inflation ultimately raises nominal interest rates, the Fed’s control over real market rates is very limited, with the Fed usually following the market rather than the opposite. I am not the only one who has insisted that the Fed’s impact on real interest rates is transitory. The same point has been made both by such Fed critics as George Selgin and Norbert Michel and by such Fed defenders as Ben Bernanke.
“Shelton is so preoccupied with the Fed’s alleged pernicious influence on interest rates that she seldom connects it to the Fed’s impact on the money stock.”
For example, Shelton blames the Fed for the period of low interest rates after the Financial Crisis. She claims that this alleged Fed-imposed “financial repression” had “cost U.S. savers alone some $470 billion dollars in lost interest income” (29), citing a 2015 report of the company Swiss Re. But most monetary economists now recognize that those persistently low interest rates were driven primarily by market forces rather than by Fed policy.
Shelton is so preoccupied with the Fed’s alleged pernicious influence on interest rates that she seldom connects it to the Fed’s impact on the money stock. To lower interest rates in the short run, the Fed increases the growth of the money stock, and to increase interest rates, it does the opposite. Instead of recognizing that these short-run effects on real rates result from the Fed’s open-market operations and other strictly monetary tools, she seems to overlook this causal relation. As a result, she concludes that the Fed almost constantly distorts various market rates away from their equilibrium level.
Shelton also seems unable to decide which is worse, the Fed holding market rates too low or too high. Her book is fairly consistent in denouncing low interest rates that “benefited certain entities within the economy” (44). But since the book’s publication, in online interviews, she has joined those complaining that Powell is holding the Fed’s target rate too high and not lowering it fast and far enough. During a November 11, 2025 CNBC interview, she even claimed that substantial rate cuts would generate such a strong boost to economic growth that it would actually drive the inflation rate down rather than up.
Shelton is also hostile to the Fed paying interest on reserves and on reverse repurchase agreements. While there are certainly legitimate criticisms of these policies, her primary objection is that the interest paid on reserves, by inducing banks to hold more reserves, curtails lending to the general public. While that is correct at first glance, she does not seem to recognize that paying interest on reserves is merely an indirect way of financing the Treasury’s large debt. The Fed, through interest-earning reserves, is in effect borrowing money from the banks on the liability side of its balance sheet to relend it on the asset side, similar to what regular commercial banks do. Consequently, the interest the Fed pays to banks comes from the interest it earns on its assets, 60 percent of which are Treasury securities. Eliminating interest on reserves would indeed allow the banks to increase their lending to the public.
But bank reserves are only a fraction of the amount of money they issue in the form of deposits. The ratio of the total money stock to total reserves is referred to as the money multiplier. When the Fed started paying interest on reserves in October 2008, banks increased their reserve ratios with respect to their deposits, reducing the money multiplier. Converting these interest-earning reserves from what are essentially bank loans to the Fed back into pure non-interest bearing fiat money, much of that increased bank lending would result from banks reducing their reserve ratios and creating additional money. This would increase the money multiplier and the total money stock.
Moreover, the resulting expansion of the amount of money in circulation could be quite drastic. Assuming that the proportion of the total money stock held in the form of currency in circulation remains fairly stable at just under 11 percent of M2 (the Fed’s broadest measure of the money stock), the ratio of bank reserves to M2 deposits could fall from its current level of about 16 percent to the level prevailing before the Fed instituted interest on reserves, usually below 3 percent. Although the expected increase in currency holdings would decrease total reserves from its current $3.1 trillion to $1.1 trillion, such a drastic fall in reserve ratios could cause total M2 to rise to as much as $40.2 trillion, nearly double its current level as of September 2025 of $22.1 trillion. A smaller decline in the reserve ratio would obviously reduce the magnitude of any resulting monetary expansion. A likely counteracting factor is that any sizable increase in the total money stock would also be accompanied by a decline in the amount of the base the public chooses to hold as currency, thus leaving banks with more reserves to expand upon.
The Fed could try to offset this monetary expansion in several ways. It could decrease the asset size of its balance sheet by selling off Treasuries to the public, who would purchase them with the newly created bank money. This would have little effect on the total interest the Treasury regularly pays on its debt, because any interest now paid to the Fed would simply be redirected to private investors. It would have the advantage of reducing the size of the Fed’s total balance sheet. But with the fall in bank reserve ratios increasing the amount of bank-created money, the Fed would have to reduce its balance sheet far enough to entirely counteract this increase in the money multiplier.
Another way the Fed could try to stifle resulting inflation after eliminating any interest on reserves is by reimposing mandatory reserve requirements on the banks. But this would merely undercut Shelton’s goal of increased bank lending to the public. Any reserve requirement high enough to prevent a significant monetary expansion would also impose severe financial strains on bank earnings.
In short, Shelton appears to be unaware of or unconcerned about how paying interest on reserves affects the money multiplier. As for reverse repos, they simply involve temporarily passing along the interest the Fed earns on its securities to private parties while placing those securities into private hands and removing money from circulation. Moreover, reverse repos were significant only during the post-Covid period and now constitute a minor part of the Fed’s balance sheet.
Shelton’s discussion of exchange rates also poses problems. She begins with an informed discussion of the debate between Robert Mundell and Milton Friedman about whether exchange rates should be fixed or flexible. Shelton clearly favors the former. To be sure, the international gold standard provided fixed exchange rates in the past, and to return to such a regime is a worthy goal. Shelton also admires the jerry-rigged Bretton Woods system, fixing foreign currencies to the dollar and the dollar to gold at below gold’s market price, although she admits “there are reasons not to resurrect the Bretton Woods system as it was originally structured” (14). But the collapse of the system as a result of America’s high inflation in the 1960s illustrates that in the present world of competing fiat currencies, maintaining fixed exchange rates is rarely sustainable.
“Shelton appears to be unaware of or unconcerned about how paying interest on reserves affects the money multiplier.”
With central banks pursuing differing monetary policies, the only way for exchange rates to adjust to fluctuating inflation rates between countries is with flexible exchange rates or, at a minimum, flexible pegs. The poster-child case of fixed exchange rates leading to disastrous consequences was Chile in the early 1980s. Chile had fixed its exchange rate to the dollar. But as the U.S. rate of inflation declined, accompanied by a major U.S. recession in 1982, Chile’s peso appreciated in sync with the dollar. With Chile’s domestic prices and wages inflexible downward, Chile’s economy suffered an even more severe downturn than the U.S., accompanied by bank failures that ultimately forced Chile to abandon its fixed exchange rate. This was also one factor that contributed to the eventual discrediting and partial abandonment much later of many of the other successful free market reforms that the “Chicago Boys” had previously instituted. Fixing exchange rates between two fiat currencies can persist only when the monetary policies of the two central banks or monetary authorities are closely coordinated. The belief that fixing exchange rates can force monetary alignment was the mistaken hope that led to Chile’s crisis.
Shelton is aware of some of the difficulties posed by fixed exchange rates between countries with independent monetary policies. Yet she thinks flexible rates have their own major drawback, and gives it nearly equal if not greater emphasis. Shelton favors fixed exchange rates because they eliminate the risk from currency fluctuation, thereby increasing international trade and anchoring inflation. She also believes that fixed exchange rates prevent countries from allegedly manipulating their currencies to generate trade surpluses at the expense of their trading partners. Treating almost every instance of a foreign currency depreciating relative to another as “currency manipulation,” she denounces this “menace” (ix) as “a serious abrogation of free-trade principles” that “the world’s major central banks breezily dismiss … as an unintended consequence of their domestic monetary policy” (100). While strongly opposed to capital controls, she instead concludes that “the imposition of tariffs can seem like the only effective method for countering deliberate currency depreciation by foreign trade partners” (85). Indeed, she goes so far as to conclude that “whether the devaluation was intentional or not, it becomes possible to assess an appropriate tariff to apply as compensation for the impact of currency devaluation on the terms of trade between nations” (169).
Shelton’s concern here is with changes in the terms of trade that increase one country’s exports relative to its imports, while doing the opposite to its trading partners. But, like many of those who denounce currency manipulation, she has an incomplete understanding of what causes the resulting trade deficits.
To begin with, Shelton focuses almost exclusively on the nominal exchange rate and never brings up the important distinction between nominal and real exchange rates, except indirectly in two brief mentions of the term “purchasing power parity” (87, 128). But nominal exchange rates, if they are flexible, change in response to countries’ differing rates of inflation. In the short run, they may overshoot or undershoot that goal, but over the long run, they equilibrate the purchasing power of the two currencies with respect to each other. In other words, if the inflation rate in one country’s currency is 3 percent higher than that of another country it trades with, arbitrage will eventually cause the first country’s nominal exchange rate to fall at the rate of 3 percent with respect to the currency of its trading partner.
Changes in the terms of trade instead are reflected in the real exchange rate. It is a fall in the real exchange rate that increases a country’s exports relative to its imports. That is referred to as an increase in the country’s current account. But the real exchange rate is rarely at perfect purchasing power parity to begin with, given that such parity is nowadays defined as a situation in which the price of a large basket of goods and services in one country equals that in another. Thus, even when the nominal exchange rate equilibrates the price levels between two countries, it does not follow that the real exchange rate is at purchasing power parity, broadly defined. Indeed, how could this be the case if the two countries have vastly different comparative advantages in the goods they produce, some of which are non-tradable. Additionally, tradable goods are not always perfect substitutes, given varying preferences, brands, and other minor differences. Transportation costs can also cause deviations from purchasing power parity.
Divergent monetary policies can alter the real exchange rate in the short run until, as noted above, the nominal exchange rate has fully adjusted to diverging rates of inflation. But many other factors can also affect real exchange rates and thus a country’s current account. Indeed, the causes of a persistent change in real exchange rates are frequently unrelated to monetary policy. Increasing investment abroad, improved productivity, and reducing government indebtedness can all reduce the real exchange rate. Shelton only briefly hints at these “macroeconomic policies” (171). Consider Germany, which had the world’s largest current account surplus until 2023 and is on the U.S. Treasury’s monitoring list for currency manipulation. But Germany, being part of the Eurozone without its own currency, cannot affect its nominal exchange rate. Instead, as Scott Sumner has cogently pointed out, the German government has been able to “reduce its real exchange rate” because it has “run budget surpluses, which tend to boost domestic saving.” This “makes German firms relatively more competitive, increasing Germany’s current account balance.”
China is high on Shelton’s list of currency manipulators. But this widely touted complaint actually first emerged in the early 2000s when China had a fixed, rather than flexible, nominal exchange rate with the dollar. Yet it was already running a current account surplus. In 2005, when China switched to a managed but variable nominal exchange rate, the renminbi gradually appreciated, not depreciated, with respect to the dollar. Since then, after China orchestrated a devaluation in 2015, the renminbi’s floating nominal exchange rate with the dollar has fluctuated within a relatively stable corridor. Throughout all these changes, China continued to enjoy a current account surplus of varying size. Explaining why is complicated. Many factors were involved, including China’s initial rapid growth after moving away from a planned economy and its continuing large net holdings of foreign investments. But clearly China’s nominal exchange rate, even when flexible, does not belong in the list of factors. China has also long been holding large reserves of foreign currency, the largest in the world. This constitutes a monetary policy that helps generate a current account surplus, and Shelton mentions it. But building up currency reserves usually causes the nominal exchange rate to depreciate, which was consistently not the case for China, whose foreign currency reserves reached their peak dollar value the year before the depreciation of 2015, after which reserves declined slightly before leveling off.
“Shelton’s advocacy of tariffs as a remedy for a foreign country’s currency depreciation is the wrong solution to the wrong problem.”
In short, policies that alter a country’s real exchange rate are generally different from those that alter its nominal exchange rate, with but a slight overlap. Including the multiple factors that create a current account surplus under the simplistic rubric of currency manipulation is neither illuminating nor helpful. And Shelton’s advocacy of tariffs as a remedy for a foreign country’s currency depreciation is the wrong solution to the wrong problem. An increase in the price of a country’s exports relative to its imports does impose costs on exporters, but it benefits importers. Nor do tariffs seamlessly reverse these impacts. In fact, they generally increase the prices of imported inputs for exporters, while passing along the impact of the tariff tax to consumers, all of which can reduce the economy’s growth rate. Worse, they could set off a trade war in which other countries employ the kinds of retaliatory protectionist measures widely resorted to after the U.S. adopted the Smoot-Hawley Tariff in 1929. By 1934, total world trade had declined by approximately 66 percent, and a global depression had been prolonged. Shelton is aware of this episode. She alludes to it once in the book, but without acknowledging the crucial role of tariffs in making things worse (121–122).
Given that Shelton generally supports supply-side measures, her current enthusiasm for employing tariffs as a response to alleged currency manipulation borders on the bizarre. Reining in the U.S. government’s fiscal profligacy, if it is done with spending reductions rather than tax increases, is a policy that would simultaneously stimulate greater economic growth and raise the country’s current account surplus, so shouldn’t she be redirecting more of her efforts toward that objective?
Moreover, as an admirer of F.A. Hayek who denounces central planning, why does she believe that the knowledge and incentives problems associated with passing the exact right tariff that achieves her desired goals would not end up bedeviled by the unintended and undesirable consequences that she sees as plaguing central banking?
Halfway through the book, Shelton does offer a proposal for eventually restoring a gold standard. It has several steps, but its key element is to have the U.S. government issue, what she labels, Treasury Trust Bonds. She is building on Alan Greenspan’s suggestion in 1981 that the Treasury issue five-year Treasury notes redeemable for gold. But Shelton, rather than having gold-backed securities competing alongside dollar-backed securities, wants the Treasury Trust Bonds to be redeemable upon maturity “at either the face value of the bond in dollars or the prespecified equivalent in gold” (156). This would make them somewhat analogous to Treasury Inflation-Protected Securities, except that they would pay no interest and have longer maturities of twenty, thirty, or fifty years.
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Not only would these Treasury Trust bonds protect investors against any depreciation of the dollar with respect to gold, but they would dramatically demonstrate the extent of the dollar’s fall in value and possibly pressure the government to rely less on inflationary finance. This is certainly an intriguing idea. But the chances of its implementation, and even more so, of the government’s adherence to its promised gold redemption should it ever be implemented seem dim, given both the current political climate and mainstream macroeconomic orthodoxy. After all, the U.S. found it quite easy to repudiate its commitments to gold, both during the Great Depression under President Franklin Roosevelt and when it abandoned the Bretton Woods System under President Richard Nixon.
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Thanks to David Henderson for his extensive edits and suggestions, and to Jack Estill and Pierre Lemieux for their helpful comments.
