NOIC 2017 Judy Shelton

the New Orleans conference the world's greatest investment event good afternoon everyone thank you for the kind introduction and let me say what a great pleasure it is to be here with you what an honor this conference is legendary the roster of past speakers include so many of my intellectual and political heroes Iran Margaret Thatcher Jack Kemp plus many of my current comrades in arms steve forbes jim grant steve war larry cudlow so thank you for inviting me I am very aware in speaking before this audience that I am talking to some of the world's most savvy investors and I apologize that my topic for today is not really about providing actionable investment advice the golden opportunity I am proposing has more to do with an investment in the future of America and the world an investment in free-market capitalism it's an investment that will require a lot of political capital but the expected gain should be counted in terms of preserving American principles and ensuring the leadership of the United States in the world economy what are those principles free markets equal opportunity rule of law I think under this president America has a golden opportunity to forge a long term investment toward aligning our monetary policy in support of those principles both domestically and internationally I am talking about major monetary reform I strongly believe we need to establish new rules for international currency relations because we have two big problems today one our Federal Reserve caters to financial markets not to the small businesses and entrepreneurs who actually produce goods and provide services so there's a disconnect between monetary policy and how it impacts the availability of credit for the real economy - we have a problem with regard to how our nation performs in the global marketplace which is that economic outcomes are highly vulnerable to exchange rate effects so that we could see the gains we're trying to achieve through tax and trade reform overturned by currency movements here's the challenge we need to reconnect the value of our money both here and abroad to productive economic activity so that it supports genuine competition in a way that is consistent with our principles of free markets equal opportunity and rule of law and that requires a level monetary playing field we have to restore the integrity of the dollar now Americans should care about that because the dollar is our unit of account I find it unconscionable that the Federal Reserve can deliberately seek to reduce the purchasing power of the dollar by two percent a year as a matter of policy that's more than a 20 percent loss in a single decade the dollar is our legal tender it's supposed to provide a dependable store of value you should be able to trust the money you've earned the money you use to make plans to build businesses stable money is vital to productive economic growth you can't carry out a successful progra if it's built on quicksand so now let's focus on the international monetary system we have today a couple of weeks ago The Wall Street Journal published an op-ed of mine under the title woodpecker's for sound money because my point in that piece was that what we need at the Fed is not a hawk or a dove but a woodpecker someone who will hammer away on the importance of sound money we need a stable dollar not just for economic reasons but also for strategic reasons in the geopolitical sense we have rivals out there and when the exchange rate value of the dollar can be shifted by what other central banks do it can have the effect of neutralizing or even reversing what we're trying to accomplish for our own nation's economy just think you want corporations to move back to the US you want them to repatriate cash and you're going to lower the corporate tax rate to get them to do that that's great but then the dollar shifts and they will have to consider whether it will cost them more in currency losses than they would save on taxes by coming back or maybe you're trying to renegotiate trade agreements and you're wondering whether you should impose a tariff or a surtax on goods imported from Mexico or Japan and then the yen and the peso depreciate against the dollar so that goods imported from those countries are still cheaper for Americans to buy I find it ironic when I hear world leaders talking today making speeches at Davos at the International Economic Forum people like Chinese President Xi Jinping saying oh we need to preserve our rules-based global trading system when he says that of course he's insinuating that America has abandoned its leadership role and he's suggesting that President Trump doesn't believe in free trade but that's not true he does believe in free trade he's said so many times but it has to be fair you have to have a level playing field it is totally unfair and nonsensical to talk about a rules-based global trading system and not talk about currency manipulation and the effect of exchange rate movements on trade and capital flows we don't have a level monetary playing field because there are no rules we have not had a rules-based international monetary system since President Nixon ended the Bretton Woods Agreement in August 1971 now under that system exchange rates among currencies were fixed and the dollar was convertible into gold why did we have a system like that what was the purpose and what about the timing it was in 1944 that the Bretton Woods Agreement was established well we actually need to go back to December 7 1941 the day Pearl Harbor was attacked Henry Morgenthau was US Treasury secretary at the time and he immediately directed his deputy to start thinking about how to coordinate monetary arrangements among the United States and its allies who were now at war against the Axis powers the goal was to figure out a way to stabilize exchange rates to strengthen the alliance now why was it deemed so important to ensure stable exchange rates at a time of war when the very survival of those allied nations was at stake the answer those nations needed assurances that a more prosperous economic future lay ahead if they could summon the will to prevail and triumph during the 1930s which was fresh in their memories nations had resorted to competitive devaluation as a tactic to gain an export advantage over their trade partners as the gold standard was serially abandoned the total volume of trade started dropping the currency chaos gave way to rising protectionism which became a recipe for worldwide economic depression but now there was a chance to fix it once the United States was brought into the war we were in a position to bring economic leadership along with military strength to the table Morgenthau decided that something new had to be done in the sphere of international economic relations something powerful and comprehensive the objective was to establish new rules that would ensure a level monetary playing field has the logical foundation for free trade America was going to provide those assurances that would unify and encourage the anti Axis forces and that would greatly strengthen their will and their effort to win so that was the motivation America felt compelled to create a stable international monetary system and gold was always part of the plan gold would provide a common reference point it would anchor the whole system even john maynard keynes believed that gold should play a central role in this new monetary system though he wouldn't have elevated the u.s. dollar to being the key currency at the heart of the system he wouldn't have wanted the dollar to be the only currency officially convertible into gold if he could have prevented it but he could not we were the most powerful country in the most powerful position and so less than four weeks after Allied forces landed at Normandy on June 6 1944 the Bretton Woods conference was convened representatives from 44 Allied nations assembled for three weeks at a mountain resort in Bretton Woods New Hampshire to agree on the rules for a fixed exchange rate international monetary system based on a u.s. dollar convertible into gold and now the big question did that stable monetary platform deliver as promised actually better than promised we had strong economic growth rates around the world particularly in the United States for the next two and a half decades we also saw tremendous gains in labor productivity rates which mostly benefited the middle class so that meant we also experienced a big decreases in the inequality of wealth among Americans but that period of exceptional economic performance ended in 1971 with the closing of the gold window we must protect the position of the American dollar as a pillar of monetary stability around the world in the past seven years there's been an average of one international monetary crisis every year now who gains from these crises not the working man not the investor not the real producers of wealth the gainers are the international money speculators because they thrive on crises they helped to create them in recent weeks the speculators have been waging an all-out war on the American dollar the strength of a nation's currency is based on the strength of that nation's economy and the American economy is by far the strongest in the world accordingly I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators I have directed secretary Connolly to suspend temporarily the convertibility of the dollar in the gold or other reserve assets except in amounts and conditions determined to be in the interest of monetary stability and in the best interest of the United States now what is this action which is very technical what does it mean for you let me rate a rat lay to rest the Bugaboo of what is called devaluation if you want to buy a foreign car or take a trip abroad market conditions may cause your dollar to buy slightly less but if you are among the overwhelming majority of Americans who buy american-made products in America your dollar will be worth just as much tomorrow as it is today the effect of this action in other words will be to stabilize the dollar now this action will not win us any friends among International Money traders but our primary concern is with the American workers and with fair competition around the world to our friends abroad including the many responsible members of the international banking community who are dedicated to the stability and the flow of trade I give this assurance the United States has always been and will continue to be a forward-looking and trustworthy trading partner and full cooperation with the International Monetary Fund and those who trade with us we will press for the necessary reforms to set up an urgent Lee needed new international monetary system stability and equal treatment is in everybody's best interest I am determined that the American dollar must never again be a hostage in the hands of international speculators well whether you blame that decision by President Nixon on our budget problems here in the US trying to finance both guns and butter during the 1960s or whether you attribute the collapse of the Bretton Woods system to an internal design failure because of its dependence on a single reserve currency country it's called the tripping dilemma in any case the vision of providing a solid monetary foundation to optimize free trade and capital flows that approach was shattered by Nixon's decision to suspend gold convertibility of the dollar and even though Nixon stated in his speech that we will press for the necessary reforms to set up an urgent Lee needed new international monetary system that new system didn't happen despite very strong efforts to restore it notably by Paul Volcker who was then Treasury undersecretary for Monetary Affairs instead we went into the great unknown of floating rates and that was largely due to the ideas of a very influential monetary economist who was making the case that not having any kind of system should be the noose them Milton Friedman argued that if we let exchange rates float freely we would end up with balanced trade because if there was a lot of demand for cheap goods from Japan let's say and Americans had to keep cashing in their dollars to buy yen to pay for the Japanese imports they wanted that would drive the value of the yen higher against the dollar it would push up the exchange rate which would then make those Japanese goods more expensive for Americans to buy it's a very appealing theory and it came at an opportune time when the Bretton Woods fixed rate system was under pressure now I was with the Hoover Institution at Stanford University for a decade from the mid 1980s to the mid 90s and I had discussions with Milton back then we were both senior research fellows and I came away appreciating the theoretical model but felt growing concern over how it was actually being applied one thing for me is is very clear the way his theory of freely floating rates turned out in reality was not the approach he had in mind Milton's primary goal in all his work was to restrain the power of governments to interfere with free markets but what we have today without any rules in the absence of any kind of monetary system gives governments tremendous power to accumulate reserves with which they can target the value of their currency against other currencies milton detested the idea of a dirty float and his worst nightmare would be the vast discretionary authority now enjoyed by central bankers who can move exchange rates by merely hinting what they are planning to do with interest rates well a very influential politician was running for president in 1980 and he liked Milton Friedman was highly skeptical about the omniscience government officials Ronald Reagan wanted to empower the private sector by going back to a stable dollar that people could trust Ronald Reagan believes government causes inflation not business not labor in the 1960s the federal government decided to stop tying the value of the dollar to gold this permitted them to print as much money as they wanted to spend and that's why we've had this crippling inflation will never regain price stability until we restore some form of gold backing to the dollar as president my first priority will be to make the dollar the most trusted currency in the world the most trusted currency in the world in that video Reagan puts the issue of dollar and Treg integrity in moral terms Reagan is supporting the idea that the dollar should be an honest unit of account and meaningful store of value and he makes it clear that he believes the trustworthiness of the dollar depends on having some sort of gold backing to provide the necessary discipline to ensure its integrity now Reagan was influenced intellectually by the thinking of economist Robert Mandel who designed the supply side economic growth agenda that became known as the Reagan Revolution that agenda had a formula for productive growth that boiled down to lower taxes and stable money it was a plan that was championed by Congressman Jack Kemp from Buffalo New York the former quarterback who played a major role in bringing about tax reform Jack Kemp enthusiastically supported Robert Mandel on the monetary front as well he co-authored this 1983 book with him and like professor Mandel can't believe that gold could provide the lodestar for setting up a level monetary playing field for world growth for Jack that was the key to free trade he wanted people around the world to compete in the Adam Smith sense because he thought that would be the best way to strengthen support for free-market capitalism but the competition would depend on setting up an international monetary system linked to gold convertibility so that everybody played by the same rules well as many of you know that can't paid a political price for those views he was sometimes mocked as mr. gold standard we know how ruthless the press can be not to mention my fellow academics but now let's listen to someone who love him or hate him you have to say he knows something about the impact of monetary policy on economic performance you know something about central bank's what they can and cannot do and whether they do more harm than good here next is Alan Greenspan speaking in October 2007 and keep in mind this conversation is taking place a good year and a half after he stepped down his chairman of the Federal Reserve what that demonstrated which has been true pretty much around the world is that central banks no longer have the capacity to significantly impact on longer-term rates and it's the longer-term rates which create bubbles so then why do we need a central bank well the question is a very interesting one that we have at this particular stage a fired money which is essentially money printed by a government and it's usually the central bank which is authorized to do so so some mechanism has got to be in place that restricts the amount of money which is produced either a gold standard a currency board or something of that nature because unless you do that all of history suggests that inflation will take hold with very dilatory effects on economic activity now you were a great admirer in fact an accolade of the vine ran the great philosopher who the in the absolute most limited role that the government could play in people's lives she probably wouldn't have been a fan of the Federal Reserve Board would she well I don't know because we never discussed that in particular but I think she recognized that there are lots of institutions which we would be better without but nonetheless probably require them if indeed society as a whole decides to do that remember we're live we live in a democratic society and that compromise is the very essence of a democratic society because if we're all individuals with different ideas and we want to live together we have to do that and there are numbers of us myself included who strongly believed that we did very well in the 1870 to 1914 period with the International gold standard yeah we did with the Federal Reserve people forget so where does that bring us to the fact that the person who headed the world's most powerful central bank for 18 years feels compelled to praise how the world economy functioned under an international gold standard without the help of central banks and remember in October 2007 we were just heading into what would turn out to be the most devastating global financial meltdown since the depression here we are today ten years later and I ask you what have we learned has anything really changed have we adopted any bold new ideas with regard to fundamental monetary reform or are we still relying on the wisdom of the Federal Reserve to get it right until we learn too late they got it wrong well we have had somewhat of a political upheaval in this country I am proud to have served as a member of the Trump economic vizor II counsel and on his presidential transition team I was assigned to the Treasury Department as lead advisor on international affairs and I will tell you I was drawn to doing that precisely because of positions Donald Trump had taken which showed his willingness to address this need to restore monetary integrity it started a few years back in 2011 with an interesting initiative by Trump as a private businessman concerned about politic policies affecting our nation's money Donald Trump says gold is better than cold hard cash Donald Trump is renting out the 50th floor of 40 Wall Street for 10 years to APMEX American precious metals exchange and accepting 3 32 ounce gold bars as a security deposit well sadly we all know what's happening to the dollar the dollar is going down and it's not a pretty picture and it's not being sustained by proper policy and proper thinking this was an opportunity and maybe an opportunity to show people what's happening with the dollar so that we can do something about it mr. Trump is also ready to keep doing business and gold I never thought this would happen is the first time it's actually happened and maybe it's gonna set a trend a trend that would turn gold from just a safe haven investment and into a viable business alternative to the US dollar now I consider that a pretty bold move and something he clearly wanted to bring to public attention he said the dollar was not being sustained by proper policies and proper thinking so for me that was interesting and I say that as someone who wrote a book in 1994 while I was out at Stanford that looked at the relationship between international monetary stability and economic growth and I wondered why wasn't there more support for what Reagan had talked about and what Kemp had talked about why pay homage to free trade if you don't believe in a rules-based monetary system the title of my book was money meltdown restoring order to the global currency system and it called for a modernized gold standard not as a throwback to some bygone era but as a sophisticated new mechanism for ensuring that international trade would not break down again as it did in the 1930s because of currency manipulation and the fallout of competitive depreciation among trade partners I liked the candidate Trump was calling out currency manipulators for engaging in unfair trade and I even liked when he accused the Federal Reserve of being political in its decisions look it's healthy to recognize that when you put so much discretionary power in the hands of a very small group and those people don't want to be bound by any kind of rule or automatic discipline you're asking for trouble I believe we should have the right to be able to trust in the value of our nation's legal tender government officials should not have the ability to expropriate the value of dollars you have saved I don't think the Federal Reserve should be able to punish some Americans at the expense of others I don't think it's fair that people who do the right thing who save money in their bank account get virtually nothing on their savings while at the same time big investors can fund their portfolios at extremely low cost its monetary favoritism Trump has long said while still a candidate that it's not fair he said that savers were getting creamed that's how he put it while developers such as himself had access to very cheap money he likes low interest rates of course but at a gut level he recognizes that monetary policy decisions should not make suckers out of savers because saving is a moral virtue it's what underpins faith in the future why sacrifice today if you don't believe the financial seedcorn you are to plant in the field is going to result in a bigger harvest savers are the venture capitalists of the American Dream they are blessed money has to work for them as well as it does for the wealthiest 1% here's another short clip now from very early in the Trump presidential campaign several months before he was even an officially declared candidate there was this comment from Donald Trump during a town hall event now candidate Trump went on to went on to say it would be difficult to go back to a gold standard he said we had lost much of our wealth to other countries through bad government policies that had weakened our economy nevertheless I think his instinct on this was right saying there was something solid about our country when we were on the gold standard when he talks about making America great again I don't think he means going back to the coinage act of 1792 I think his frame of reference is more the 1950s and 60s when America had those high growth rates increasing labor productivity and a closing gap in terms of wealth inequality was it sheer coincidence that the u.s. had that solid economy with so many people sharing in the economic gains during the same period when the global economy operated under the fixed exchange rate rules of the Bretton Woods Agreement when we had that solidly anchored international monetary system based on a gold convertible dollar I say it wasn't just a coincidence stable money is a pillar for productive growth and that's why we need to make case now for new international monetary system we have a golden opportunity with this administration with a president who speaks favorably about the gold standard we need to take up the challenge because if we're going to denounce currency manipulation as an unfair trade practice we have to be willing to put forward our own initiative for ending competitive depreciation we have to acknowledge the role of central banks as currency manipulators now I'm not going to suggest that a proposal along these lines is forthcoming from this administration I do not expect to see invitations going out next week for a Bretton Woods type conference at mar-a-lago but I do think we will see more language coming out of the treasury emphasizing the importance of a stable international monetary system as being an essential contributor to strong and sustainable growth in fact the communique issued last week by the International Monetary and financial Committee of the IMF which reflects the new priorities of the Treasury Department under this administration has that very language referring to the benefits of long term growth from the stability of exchange rates and those words are quite different from past communicate it's important to seek exchange rate stability because we don't want a strong dollar or a weak dollar to work against a pro-growth economic agenda what we want is a dependable dollar or as Ronald Reagan put it we want the dollar to be the most trusted currency in the world we've seen this definition of the goals of the Trump administration I'd say if we're going to make America great again we have to make America's money great again we have to restore the integrity of the dollar how do we do that bringing back the gold standard would be very hard to do but boy would it be Wonder we have a standard on which to base our money well I can't say it any better than that except to add that it's time to get started thank you all very much [Applause]

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Length: 33min 30sec (2010 seconds)

Published: Mon Jul 08 2019