In 2012, Charles Plosser, then President and CEO of the Federal Reserve Bank of Philadelphia, gave a speech titled, “Fiscal and Monetary Policy: Restoring the Boundaries.” In the wake of the response to the Great Recession, Plosser lamented that both governments and board members were pushing central banks to engage in policy areas well beyond their scope of authority (such as credit allocation).

Twelve years later, Plosser’s speech appears prescient. The lines between fiscal and monetary policy were blurred further in the wake of the COVID-19 contraction, yielding disastrous results. Real median weekly earnings have yet to surpass 2020 levels, while Americans are seeing their dollar being eroded by inflation, and attempts to earn more eaten up by inflation.

Now, more than ever, it is imperative that Americans understand the importance of sound money. For those focused on fiscal reform (myself included), understanding why fiscal and monetary policy must be separated is essential.

Judy Shelton’s latest book, Good as Gold: How to Unleash the Power of Sound Money, can help show the average American that achieving sound money is both a desirable and tangible policy goal. This book provides a great introduction to those new to monetary policy and the difficulties of influencing the Washington consensus that celebrates a powerful central bank and a dollar disconnected from gold. While more experienced monetary economists may find fewer new insights, Shelton’s clear prose and thorough arguments offer vital insights to Americans desperate for answers about inflation and how to fix the dollar.

“An Unhealthy Symbiosis”

Before laying out the case for a gold-backed dollar, Shelton outlines why the status quo does not work. Simply put, the Federal Reserve relies on central planning, which, like all other instances of central planning, is riddled with knowledge and incentive problems.

To highlight the pitfalls of central planning, Shelton relies on her previous experience studying and visiting the Soviet Union and its central bank, the Gosbank. While the Gosbank directed government capital to state-run enterprises, time, talent, and resources were never put to their best possible use. Without a functional price system, central planners attempting to make decisions about resource allocation do so in the dark. Those decisions are also made in the interest of bureaucrats at the expense of citizens. Shelton writes, “Gosbank officials had more motivation to accommodate the government than to ensure that productive economic activity was actually taking place.” As the Gosbank balanced expenditures and receipts on paper, the people living under Soviet rule suffered shortages of even the most basic goods and services. The primary incentive of government officials (including bureaucrats at the Gosbank) became covering up the Soviet economy’s failures. By the time of Gorbachev’s economic reforms in the late 1980’s “the internal budget of the Soviet Union was already in shambles.”

Shelton then draws a comparison between the Soviet experience and the Federal Reserve following the Great Recession. Shelton notes that while the Fed’s recent actions, “hardly mean our central bank has taken on the characteristics of Gosbank,” it is still a major concern. She writes,

An unhealthy symbiosis between banking and government develops when banks are so involved in financing government deficit spending that loanable funds are more readily made available to the government—crowding out potentially productive loans to the real economy.

Reading this passage reminded me of James Buchanan writing about the opportunity cost of government debt. When private investors purchase government debt, it comes at the cost of whatever other projects investors might have otherwise invested in or provided financing for. As Buchanan put it, government spending that is funded by debt is “in effect chopping up the apple trees for firewood, thereby reducing the yield of the orchard forever.” Moreover, this debt also shackles future generations with higher taxes. This lesson becomes especially relevant when considering the Fed’s responses to economic crises, like the Great Recession.

Confronting the Great Recession, the Fed “embarked on a series of large-scale purchases of US Treasury debt from commercial banks and other financial institutions.” Under the pre-2008 corridor system operating regime, the Fed would have needed to reduce its holding of Treasury Securities to expand credit in order to avoid an increase in bank reserves that would have then resulted in a rise in the general level of prices. The Fed financed this credit expansion at first by decreasing its Treasury holdings.

In October 2008, however, the Fed transitioned to a floor system operating regime. As my colleague Will Luther explains, in a floor system the Fed pays interest on reserves at banks that hold accounts at the Fed. By paying an interest rate greater than financial institutions could get from holding similar assets (and thereby preventing newly created money from being circulated in the economy), banks now have an incentive not to lend out most of their reserves. The Fed was able to finance credit expansion while also expanding its balance sheet without subsequent inflation in the wake of the Great Recession.

Shelton discusses this policy change in Good as Gold but focuses on the resulting incentive problems. When larger banks have an incentive to hold large reserve balances at the Fed, the Fed can turn these excess reserves into loanable funds available to the government rather than commercial banks turning excess reserves into loans for the private sector. Rising inflation resulted in the wake of the COVID-19 economic downturn because nominal spending surged thanks to government transfers helped by the Fed. The result was too much money chasing too few goods.

Restoring the Confidence Between Man and Man

Shelton quotes James Madison’s 1786 address before the Virginia Assembly that “unreliable money” is “destroying the confidence between man and man, by which resources of one may be commanded by another.” Record-high inflation over the past several years has destroyed purchasing power. Confidence in the ability of Fed officials to do their job is at its lowest point since 2013. In addition, the Fed’s discretionary nature creates “paralyzing uncertainty.” She writes, “Having access to money that provides a meaningful measure helps to clarify daily decisions … [and] helps to indemnify long-term planning.”

The way to make the US dollar more reliable, Shelton argues, is to return it to gold. Citing numerous economists including Fed Chair Ben Bernanke, she notes that the classical gold standard delivered price stability during the years it was enacted. She also writes favorably of the Bretton Woods system, noting that it was successful at preventing currency depreciation compared to the current system. The end of Bretton Woods (brought about by President Nixon’s decision to close the gold window) marked a shift in monetary policy that negatively impacted the average American. Shelton, citing Brian Domitrovic’s book Econoclasts, notes that after the end of Bretton Woods in 1971, it was not enough for Americans to save money. Any money that was saved also had to be hedged, lest its purchasing power eroded away from inflation. This is reflected in the fact that, since August 1971, the purchasing power of the consumer dollar has lost approximately 87 percent of its value.

Apart from the late 1970s under Fed Chair Paul Volcker through the early 2000s, the Fed has leaned more on discretionary policy than rules. With quotes from former Fed Chair and current Treasury Secretary Janet Yellen, Shelton demonstrates that, in recent years, officials at the Fed have little interest in binding themselves to a monetary rule. While Shelton notes that binding monetary policy to a single monetary rule would provide greater certainty than the status quo, she seems skeptical of a rules-based approach making permanent fixes. She quotes economist George Selgin, who states that current incentives will inevitably lead monetary officials to “tinker with the monetary stock” even if the monetary rule is strict and “carefully crafted.” Shelton adds, “This temptation to tinker persists despite the poor performance of monetary authorities, which means more fundamental reforms are required before the next major debacle takes place.” That “fundamental reform” is a return to the gold standard.

Although she discusses the gold standard’s past success, Shelton does not wish to simply turn back the clock on monetary policy. To get America back on the gold standard, she recommends launching new Treasury Trust Bonds (TTB), which have earned the name “Shelton Bonds” by economist George Gilder. These TTBs would be “gold-backed Treasury obligations” that citizens could redeem for the dollar into gold. TTBs would also serve as “an observable barometer of fiscal prudence” by using the dollar’s convertibility to gold to assess whether the Fed is maintaining stable prices. Differences between the yields of conventional Treasury bonds and TTBs would signal concerns about future dollar stability, putting pressure on the US government to balance revenues and expenditures. These bonds could have a 5-year maturity or, as she suggests in the epilogue, a 50-year maturity. The 50-year maturity bond (if issued on July 4, 2026) would mature on America’s Tricentennial Anniversary, July 4, 2076. In doing so, these long-term bonds would represent “an act of good faith that fiscal and monetary transgressions were coming to an end through competent oversight” as well as a symbolic gesture toward a renewed commitment to “the necessity of sound money to preserve the rewards and responsibilities of American freedom.”

Shelton also suggests that the means to achieving TTB would be “the appointment of a commission ‘to investigate possible ways to set a fixed value for the dollar’ as called for in the 2012 [and 2016] Republican Party Platform.” She also notes that the possibility of utilizing digital currencies appears promising. Shelton sees stablecoins such as digital gold currency (DGC) “backed by physical gold reserves held in vaults” as having potential, but “the challenge of guaranteeing that digital tokens are backed up by physical gold reserves remains a major issue.”

Shelton also examines how a gold-backed dollar is needed internationally. Research shows, that if the US were to return to the gold standard, other countries may not be willing to do the same. To make a gold-backed dollar appealing to the rest of the world, Shelton suggests taking the case directly to the International Monetary Fund (IMF). She argues that the IMF fails to uphold its original purpose to “safeguard exchange rate stability” and that the US should question the IMF’s role in the global economy. Shelton notes that the IMF could prevent “beggar-thy-neighbor currency depreciations from undermining trade” if it adopted a new monetary order based on gold convertibility for government debt but it’s unlikely the IMF would be willing to make such a massive change. She suggests that the IMF’s unwillingness could serve as an opportunity for a call to action. If America were to push for such a change, Shelton writes, “the announcement will be a particularly poignant reminder that America is still the world’s leading nation.”

Making the dollar “good as gold” is not just something that should happen, she insists. It is something that can happen in our lifetime.

Sound Money … If You Can Keep It

Ultimately, Shelton notes, such fundamental reforms rely on political courage. In addition to showing the “why” and “how” to return to the gold standard, Good as Gold serves as a call to action. She emphasizes that the next great American leader must see money as a “moral contract between the government and its citizens.” By this, Shelton means that Americans must have money they can trust to be able to plan day-to-day activities as well as prepare for the future.

While it will take significant political courage and capital to return the US dollar to gold, the question of how the connection between the dollar and gold be maintained for our posterity remains. As my colleagues Peter Earle and Will Luther note, both the American people and policymakers know that the link between the dollar and gold was severed over the course of the twentieth century and it could easily happen again. Earle and Luther write, “We can reinstate the gold standard. We cannot reinstate a shared confidence in the gold standard’s permanence.” To this end, I humbly suggest adding in some of David Hume’s approach to government where, “every man ought to be supposed a knave, and to have no other end, in all his actions, than private interest.” Strong leadership will be most effective if they provide the institutional constraints so that present and future policymakers have an incentive to keep the dollar linked to gold.

To her point regarding the shortcomings of a rules-based monetary policy, an economist may ask, “Shortcomings compared to what?” If policymakers can move from the status quo to a monetary policy constitutionally bound by a rule (such as an NGDP level target or even an inflation target), that opportunity should be taken because a rules-based policy yields a more predictable monetary policy than what we have now. It is dangerous to abandon good policy solutions that restrain monetary discretion for the ideal of returning to sound money. Overall, Good as Gold provides a much-needed optimistic view of the dismal outlook of government-controlled monetary policy. In the preface, Shelton writes, “The purpose of this book is to examine what has worked, what has failed, and what can be done to appropriately calibrate the money supply to meet the needs of an economy devoted to free-market enterprise and unlimited opportunity.” She accomplishes that purpose well. While the feasibility of her specific proposals may spark debate among monetary experts, they are nonetheless debates worth having. For many young Americans who learned about inflation the hard way over the past several years, this book provides a blueprint for a brighter, freer future.