Reforming the Federal Reserve: The Case for Sound Money

The Federal Reserve has become increasingly powerful and prominent in financial markets in recent decades, wielding enormous influence over the economy and monetary policy. However, this concentration of power in the hands of unelected officials raises important questions about accountability, economic stability, and the future of the U.S. dollar as the world's reserve currency.

In a wide-ranging interview, monetary economist Dr. Judy Shelton makes a compelling case for reforming the Federal Reserve and returning to sound money principles. As a former economic advisor to President Trump and author of several books on monetary policy, Dr. Shelton offers unique insights into the challenges facing the U.S. economy and potential solutions.

The Federal Reserve's Expanding Power and Influence

Dr. Shelton argues that as the Federal Reserve has grown more powerful, it has also become inherently more political. She notes that the Fed is now in a position to "steer financial rewards to some members of society at the expense of others." This ability to pick winners and losers in the economy through monetary policy decisions raises concerns about fairness and democratic accountability.

Furthermore, Dr. Shelton contends that the Fed's actions have enabled unsustainable deficit spending by Congress and the White House. By purchasing large amounts of government debt and keeping interest rates artificially low for extended periods, the Fed has removed an important source of fiscal discipline.

"The Fed has been complicit with a deficit spending Congress and White House," Dr. Shelton states. This has contributed to the national debt ballooning to nearly $36 trillion, with interest payments alone now costing taxpayers more than defense spending.

The Need for Congressional Oversight and Reform

Given the Fed's outsized influence on the economy, Dr. Shelton believes it is time for Congress to seriously examine reforming the central bank. She argues that lawmakers should be "every bit as concerned about power that has been placed in the hands of our monetary officials" as they are about potential overreach by other branches of government.

Specifically, Dr. Shelton suggests Congress should look at whether the Fed should have:

• Limits on the amount of government debt it can purchase
• Limits on the amount of base money it can create
• Limits on interest payments it can give to commercial banks and money market funds at taxpayer expense

"The Fed has become too prominent, too powerful, and in that sense too political," Dr. Shelton concludes. By placing some reasonable constraints on the Fed's authority, Congress could help restore balance and accountability to monetary policy.

The Case for Sound Money

A key part of Dr. Shelton's proposed reforms involves returning to sound money principles that provide a stable foundation for long-term economic growth and prosperity. She argues that money should work the same for every citizen, serving as an honest measure and reliable store of value.

However, the current fiat currency system, where the dollar's value is not tied to any tangible asset, has led to a loss of trust and purchasing power over time. Dr. Shelton notes that the Fed's 2% inflation target means it is deliberately taking measures to erode the dollar's value by 2% every year.

To address this, Dr. Shelton proposes reestablishing a link between the dollar and gold through the issuance of "Treasury Trust Bonds." These would be long-term Treasury bonds that give holders the option to receive either the face value in dollars or a pre-specified amount of gold at maturity.

This would help restore confidence in the dollar both domestically and internationally. It could also potentially lead to a more stable international monetary system if other countries followed suit with similar gold-convertible bonds.

Benefits of Monetary Reform

Dr. Shelton outlines several potential benefits of reforming the Fed and moving towards sound money principles:

1. Restoring fiscal discipline by making it more difficult for the government to rely on monetary policy to finance deficits

2. Reducing wealth inequality by limiting the Fed's ability to inflate asset prices through loose monetary policy

3. Providing a more stable foundation for long-term economic planning and investment

4. Strengthening the dollar's position as the world's reserve currency

5. Creating a more level playing field in international trade by reducing currency manipulation

6. Increasing transparency and accountability in monetary policy decisions

Challenges to Implementation

Despite the potential benefits, Dr. Shelton acknowledges that reforming the Federal Reserve and monetary system would face significant challenges:

• Resistance from those who benefit from the current system, including Wall Street and large banks
• Concerns about disrupting financial markets in the short-term
• Political opposition from those who favor using monetary policy for social goals
• Institutional inertia and the difficulty of changing long-established practices
• International coordination challenges if moving towards a new monetary framework

The Path Forward

To overcome these obstacles and build momentum for reform, Dr. Shelton emphasizes the need for bold leadership and public education on monetary issues. She suggests several potential paths forward:

1. Executive action by a future president to direct the Treasury to issue gold-convertible bonds

2. Congressional hearings and legislation to reform the Federal Reserve's mandate and powers

3. Building a coalition of economists, policymakers, and citizens in favor of sound money principles

4. Leveraging growing concerns about inflation and dollar devaluation to make the case for change

5. Starting with smaller reforms to build credibility before tackling larger structural changes

Conclusion

As the U.S. faces growing economic challenges and uncertainty about the dollar's future as the world's reserve currency, the ideas put forward by Dr. Judy Shelton deserve serious consideration. While reforming the Federal Reserve and monetary system would be a complex undertaking, the potential benefits in terms of economic stability, fiscal discipline, and long-term prosperity make it a worthy goal to pursue.

By fostering an informed public debate on these issues and exploring pragmatic reform options, policymakers can work towards a monetary system that better serves the interests of all Americans. As Dr. Shelton concludes, "I think it's important that the Fed which has daily influence over the performance of equity markets is responsible for increasing wealth inequality...I think the money has to work the same for everyone."

Ultimately, creating a more stable, transparent, and equitable monetary system is essential for preserving America's economic strength and democratic institutions in the decades to come. The time for serious discussion and action on Federal Reserve reform is now.

Article created from: https://youtu.be/lLBkVdOK4_I?si=9RfI_uzW9GGgkVtj