In a follow-up Fox Business segment on September 18, Shelton dismissed the ongoing debates about Federal Reserve independence as nothing more than a “soap opera.”
Her latest book, Good as Gold: How to Unleash the Power of Sound Money, serves as a window into her monetary policy perspectives. Although its approachable tone disguises a nuanced understanding of key monetary issues, there are also areas where her grasp appears notably thin.
I find myself in agreement with her advocacy for a return to a gold standard. Her identification of the gold standard’s advantages is, arguably, the book’s strongest aspect. She opens with the bold assertion that money should be viewed as a “moral contract.” In the subsequent chapters, particularly the third and fourth of her six-chapter work, she presents a compelling argument that the pre-World War II gold standard fostered significantly more stable prices and superior economic growth compared to the fiat money regimes that followed. However, she only skims over the objection that a gold standard might induce greater short-term price volatility and economic instability.
At the outset of the book, Shelton invokes Friedrich Hayek to assert that central banks represent a form of central planning. She illustrates how this leads to a “knowledge problem” that can culminate in “planned chaos,” citing the Soviet Gosbank’s performance under Gorbachev as a cautionary tale.
Moreover, Shelton posits that the uncertainty stemming from central banks has fueled financialization, shifting resources away from productive endeavors towards the financial sector. She even proposes a financialization Laffer Curve, suggesting that beyond a certain point, an expanding financial sector can diminish overall economic output. While this proposition isn’t entirely implausible, her assertion that the financial sector’s growth from 10% of GDP in 1950 to 22% by 2020 was partially due to “monetary policy uncertainty” overlooks other contributing factors. Regulatory frameworks beyond mere monetary policy have spurred financialization, and it’s worth noting that some aspects of this growth have actually reduced transaction costs, akin to the benefits of having a widely accepted medium of exchange.
Conversely, her critiques of the current Federal Reserve are among the book’s less compelling elements.
While recognizing the correlation between the Fed’s target interest rate and the growth of the money supply, Shelton exhibits an exaggerated belief in the Fed’s capacity to manipulate market interest rates. She subscribes to the widespread misconception, held not only by the general public but by numerous policy commentators, that the Fed exercises tight control over nearly all market interest rates. Although Fed-induced inflation does eventually elevate nominal interest rates, the reality is that the Fed’s influence over real market rates is quite limited, often trailing behind market movements rather than leading them.
“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 instance, Shelton attributes the post-Financial Crisis period of low interest rates to the Fed’s actions, claiming that this “financial repression” cost U.S. savers a staggering $470 billion in lost interest income, as per a 2015 report by Swiss Re. Yet, most monetary economists now recognize that these persistently low rates were primarily driven by market forces rather than direct Fed policy.
Her fixation on the Fed’s supposed malign influence on interest rates often overshadows an essential connection to the Fed’s influence on the money supply. To temporarily lower interest rates, the Fed boosts the growth of the money stock, and vice versa. By failing to acknowledge this causal relationship, she concludes that the Fed perpetually distorts various market rates away from their natural equilibrium.
Moreover, Shelton appears torn between condemning the Fed for maintaining excessively low rates versus criticizing it for not lowering rates aggressively enough. Her book consistently lambasts low interest rates for favoring “certain entities within the economy.” Yet, in subsequent online appearances, she has expressed frustration with Powell for holding rates too high and not cutting them sufficiently. During a November 11, 2025 CNBC interview, she even suggested that substantial rate cuts could spur economic growth to the extent that it would ultimately lower inflation.
Her disdain for the Fed’s practice of paying interest on reserves and reverse repurchase agreements is apparent. While there are valid concerns regarding these policies, her primary argument hinges on the belief that paying interest on reserves discourages banks from lending to the public. While this viewpoint has merit, she overlooks the fact that paying interest on reserves is an indirect method of financing the Treasury’s considerable debt. Essentially, the Fed borrows from banks on one side of its balance sheet to re-lend on the other side, paralleling the operations of traditional commercial banks. Consequently, the interest the Fed pays out stems from earnings on its assets, 60% of which consist of Treasury securities. While eliminating interest on reserves could increase banks’ lending capacity, one must consider that reserves are merely a fraction of the deposits they create.
The ratio of total money stock to total reserves, known as the money multiplier, bears mentioning. When the Fed initiated interest on reserves in October 2008, banks adjusted their reserve ratios relative to their deposits, leading to a reduction in the money multiplier. Transitioning these interest-earning reserves back into non-interest-bearing fiat money could facilitate increased bank lending through lowered reserve ratios, ultimately expanding the money supply.
Furthermore, the potential scale of this monetary expansion could be significant. If the proportion of total money stock retained as currency remains relatively stable at just under 11% of M2 (the Fed’s broadest metric), the ratio of bank reserves to M2 could plummet from its current level of about 16% to below the 3% mark that prevailed before the Fed began paying interest on reserves. Such a drastic drop in reserve ratios could inflate total M2 to as much as $40.2 trillion—nearly double its current September 2025 level of $22.1 trillion. While a smaller decline in the reserve ratio would mitigate the extent of this monetary growth, it’s critical to recognize that a considerable increase in the money stock would likely coincide with a decrease in the amount of base currency the public opts to hold.
To counteract this potential monetary expansion, the Fed might consider reducing the size of its balance sheet by selling Treasuries to the public, who would purchase them with the newly created bank money. This strategy would minimally affect total interest payments on Treasury debt, as interest that would have gone to the Fed would be redirected to private investors. However, the Fed would need to shrink its balance sheet sufficiently to negate the increase in the money multiplier caused by falling bank reserve ratios.
Alternatively, the Fed could attempt to curb inflation by reinstating mandatory reserve requirements for banks. However, this would counteract Shelton’s aim of enhancing bank lending to the public, as any sufficiently high reserve requirement would strain bank profitability.
In summary, Shelton seems either unaware of or indifferent to the implications of paying interest on reserves concerning the money multiplier. Regarding reverse repos, they merely involve the temporary transfer of interest earned on the Fed’s securities to private parties while simultaneously reducing the money supply. Moreover, reverse repos gained prominence only in the post-Covid climate and now constitute a minor segment of the Fed’s balance sheet.
Shelton’s insights on exchange rates also raise eyebrows. She begins with an informed examination of the debate between Robert Mundell and Milton Friedman concerning fixed versus flexible exchange rates, revealing her preference for the former. Indeed, the historical gold standard did provide fixed exchange rates, and advocating for a return to such a system is a commendable objective. However, her admiration for the ad-hoc Bretton Woods arrangement—fixing foreign currencies to the dollar and the dollar to gold at a rate below gold’s market value—seems misplaced, especially considering the system’s demise due to rampant U.S. inflation in the 1960s.
“Shelton appears to be unaware of or unconcerned about how paying interest on reserves affects the money multiplier.”
In a world with central banks pursuing divergent monetary policies, the only viable method for exchange rates to adapt to fluctuating inflation rates is through flexible exchange rates or, at a minimum, flexible pegs. The fixed exchange rate debacle in Chile during the early 1980s serves as a cautionary illustration. Chile pegged its currency to the dollar, but when U.S. inflation fell amid a recession, the peso appreciated. The inflexibility of Chile’s domestic prices and wages led to a severe economic downturn, ultimately forcing the abandonment of the fixed exchange rate regime.
Shelton acknowledges some challenges linked to fixed exchange rates in the presence of independent monetary policies but seems overly critical of flexible rates. She argues that fixed rates mitigate currency fluctuation risks, thereby facilitating international trade and stabilizing inflation. Furthermore, she believes fixed exchange rates prevent nations from manipulating their currencies to gain trade surpluses at the expense of others. Shelton’s portrayal of foreign currency depreciation as “currency manipulation” is a somewhat simplistic view of a complex issue, which she condemns as a serious violation of free-trade principles.
Her conclusion that tariffs may serve as the only effective countermeasure to deliberate currency depreciation is particularly concerning. While she expresses a desire to avoid capital controls, her endorsement of tariffs as a remedy for currency manipulation is misguided. Tariffs may indeed raise the costs of exports, but they also inflate prices for consumers and diminish the economy’s overall growth rate. Such a protective measure could potentially incite retaliatory trade wars, reminiscent of the Smoot-Hawley Tariff of 1929, which ultimately led to a drastic decline in global trade and exacerbated the Great Depression.
Given Shelton’s general support for supply-side policies, her enthusiasm for tariffs as a reaction to alleged currency manipulation feels bewildering. Shouldn’t she prioritize reducing the U.S. government’s fiscal excesses—achievable through spending cuts rather than tax hikes—as a way to boost economic growth and current account surpluses?
Moreover, as a Hayek admirer who denounces central planning, one must wonder if she believes the intricacies of determining the perfect tariff won’t be equally fraught with unintended consequences as those she attributes to central banking.
Halfway through her book, Shelton proposes a multi-step approach for restoring a gold standard, centering on her concept of Treasury Trust Bonds. Building on Alan Greenspan’s 1981 suggestion for gold-redeemable five-year Treasury notes, Shelton envisions these bonds being redeemable at maturity either in dollars or gold. This would mimic Treasury Inflation-Protected Securities but would pay no interest and have significantly longer maturities of twenty, thirty, or even fifty years.
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These Treasury Trust Bonds would not only shield investors from dollar depreciation relative to gold but would also starkly illustrate the dollar’s declining value, potentially nudging the government towards less inflationary financing. While this idea is certainly intriguing, its practical implementation appears dim, especially given current political dynamics and mainstream economic thought. History shows the U.S. has not hesitated to renege on gold commitments, both during the Great Depression under FDR and with Nixon’s abandonment of the Bretton Woods System.
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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.
