Sixteen months ago, in the pre-coronavirus summer of 2019, President Donald Trump announced his candidates to fill two vacancies on the Federal Reserve Board of Governors. The nominations, formalized in January, languished in the Senate for months. Now, suddenly, Senate Majority Leader Mitch McConnell wants to cram one of them—but only one of them—through the Senate.
One of the nominees is a conservative with extensive central-bank experience, broadly respected by monetary-policy experts. The other campaigned for the job from the lobby of the Trump International Hotel in Washington, D.C., and is widely regarded as a hyper-partisan extremist.
Guess which nomination McConnell is now advancing, and may bring to a vote as early as the end of this week, possibly even this very day?
The nomination that has gone cold is that of Christopher Waller, the current director of research at the Federal Reserve Bank of St. Louis.
The nomination that McConnell has suddenly taken up again is that of Judy Shelton. Shelton’s bid is perched on a knife’s edge, with Republican Senators Lamar Alexander, Susan Collins, and Mitt Romney having already announced their opposition. She can’t afford to lose even a single additional vote—and when Arizona’s newly elected Senator Mark Kelly takes his seat in a few weeks, her window of opportunity might close entirely.
Shelton is noted for her decades-long advocacy of fixing the value of currencies to gold. In 2009, for example, she wrote in The Wall Street Journal:
Now is the time to challenge the exclusive monopoly of Federal Reserve notes as currency. Buyers and sellers, by mutual consent, should have access to an alternate means for settling accounts; they should be able to do business using a monetary unit of account defined in terms of gold.
Advocates of the gold standard often talk about consent and convertibility—the ability of economic actors to switch back and forth from dollars to gold. But that is disingenuous. Americans or anybody else can go to market with every last dollar they own and buy as much gold as they wish. What gold-standard advocates mean by convertibility is that private citizens should be free to convert their dollars into gold at a price set by law, rather than by the marketplace. Congress would pick a price for this one commodity, and then the central bank would forever after raise or lower interest rates to squeeze the dollar into alignment with the price of gold.
Since the coronavirus struck in early 2020, the price of gold has risen from about $1,500 an ounce to the present $1,890. (In late summer, it briefly surpassed $2,000.) Most people would regard that movement as just one economic indicator among thousands, and not an especially important one. From Shelton’s point of view, however, the price of gold is an important indicator—arguably even the supremely important indicator. What has happened, in her view, is not that the price of gold has risen relative to the dollar, but that the dollar has declined relative to the price of gold. Money is being devalued, and dollar holders are being cheated. To redress this wrong, interest rates should spike to increase the value of the dollar until the gold price returns to some predetermined level.
Businesses might be ruined and people might be pushed out of work by those rising interest rates, as they were during the gold-triggered depressions of 1873 and 1893, and when gold-protecting policies magnified the Crash of 1929 into the deep depression of the 1930s. But it’s all worth the sacrifice to preserve the ability of dollar holders to buy or sell gold at a government-fixed price.
There is, however, one asterisk beside the Shelton policy, and this is what has caused the most intense opposition to her nomination.
Shelton’s support for high interest rates fluctuates not only with the gold price, but also with the partisan identity of the presidential administration. During the tenure of President Barack Obama, Shelton endlessly fretted that the gold price was too high and interest rates were too low. Thus, in January 2013, when the price of gold was $1,600 per ounce and trending downward—it would break beneath $1,200 that summer—Shelton viewed the situation with alarm and urged immediately higher interest rates. She wrote that “loose monetary policy is bad for you and for your economic prospects.”
Forward six years. In the summer of 2019, the price of gold had risen past $1,400 and was trending higher. (The price would reach $1,500 by the end of the year.) According to Shelton’s normal views, it should have been the moment for action, a chance for the Fed to raise interest rates and reduce the gold price. But it was also the moment at which she was campaigning fiercely for Trump’s support for a Fed nomination. Trump was then regularly scourging Federal Reserve Chair Jerome Powell for not cutting interest rates deeper and faster. Shelton adopted Trump’s view as her own. She endorsed Trump’s demand for a big, immediate interest-rate cut to juice the economy (and his reelection prospects). The price of gold, such an urgent concern in 2013, apparently no longer mattered so much.
Shelton’s partisan flexibility worries her critics, who are concerned that she might rediscover her affinity for tight money and high interest rates when Joe Biden takes office. And if Republicans retain their majority in the Senate, President-elect Biden will be denied control of fiscal policy. The Senate that voted for Trump’s trillion-dollar deficits will rediscover the importance of balanced budgets under Biden, if the GOP’s behavior during Obama’s presidency is any indication. Monetary policy might be the only tool to accelerate a recovery from the COVID-19 slump during the Biden administration. The Shelton nomination looks like McConnell’s bid to add a pro-recession bias to the Biden-era Fed.
McConnell’s record on the Amy Coney Barrett nomination confirms both his willingness and his ability to execute desperate and unprecedented maneuvers under strict time pressure. Even compared to the Barrett confirmation, however, McConnell’s Shelton maneuver is particularly desperate and unprecedented.
Peter Conti-Brown at the Wharton School of the University of Pennsylvania told me that, since 1935, there have been 24 appointments to the Fed made during a presidential-election year. (Shelton was formally nominated in January.) The three confirmations closest to the election were approved in August. There has never been a confirmation during the lame-duck period of a presidency, he said.
Cornelius Hurley of Boston University told me the story of one of those three late confirmations. In June 1988, Reagan selected a Boston banker named John LaWare to fill a vacant seat on the Federal Reserve Board. LaWare’s supporters were worried that Democrats might interpret his nomination as a ploy to steal a partisan advantage by making an appointment from Massachusetts, the home state of the Democratic presidential nominee, Governor Michael Dukakis, so they reached out to the Dukakis camp for an endorsement. (Through the 1980s, more conservative Massachusetts Democrats like former Governor Ed King had migrated to the Republican Party. Reagan narrowly won the state in 1984.) Dukakis publicly agreed that if he won and the LaWare nomination were still pending, he would resubmit LaWare as his own first appointment to the Fed. In the end, LaWare served successfully from 1988 to 1995.
Approving Christopher Waller’s nomination to the Federal Reserve could be broadly unifying in the same way the LaWare appointment once was. Instead, McConnell is jettisoning the qualified and broadly acceptable nominee to accelerate the hyper-partisan and divisive one. And what is most ominous about this maneuver is what it foretells about McConnell’s attitude to the Federal Reserve during the Biden presidency.
As one governor among seven, Shelton could do meaningful, but finite, harm. But right now, there are two vacancies on the board. If Shelton is confirmed, she will be one of six, not one of seven. And what if Republicans preserve their majority in the Senate after 2020, and McConnell then decides to extend to the Fed the same no-nominations-by-Democratic-presidents rule he formerly enforced on the federal courts? Richard Clarida’s term on the board expires in the spring of 2022. Shelton will then be one of five. Powell’s term as Fed chair expires early in 2022. If not renominated as chair, Powell may quit the board altogether. Shelton would then be one of four.
Could McConnell embargo the Fed as he has embargoed the federal courts, with a view of paralyzing monetary policy in order to hurt Democratic chances in the elections of 2022 and 2024? No such thing has ever happened before, but since McConnell gained the leadership of the Senate majority in 2014, it’s been one instance of no-such-thing-has-ever-happened-before after another. For all their many points of friction, McConnell and Trump have had one point of unity: a deep conviction of the non-legitimacy of government by the other party. That conviction was sharpened on the courts. Is it now to be perfected at the Federal Reserve, with the American economy joining American law and justice as McConnell’s hostage?