The WSJ is promoting Shelton's candidacy again this AM wsj.com/articles/why-t… So, a follow-up to last night's thread on Shelton, gold, and recession ... 
It's a commonplace of monetary theory: There are 3 things you might want a money to do - but no system can do more than 2 of them. Policy must choose.
Here are the tragic 3:
1) Price stability at home.
2) Exchange-rate stability abroad.
3) Free convertibility of money from one currency into another.
It's possible to have two, but never all three. EG:
1) Price stability at home.
2) Exchange-rate stability abroad.
3) Free convertibility of money from one currency into another.
It's possible to have two, but never all three. EG:
a) the classical gold standard (1873-1933 in the US) delivered exchange-rate stability and free convertibility, but at the price of massive price deflation in the 1890s and 1930s;
b) the Bretton Woods system (1945-1971) delivered domestic price stability and exchange-rate stability, but only because of currency controls in almost every developed countries. Almost as soon as those controls were lifted, Bretton Woods collapsed;
c) the present system is freely convertible and has achieved considerable domestic price stability since 1982 - but of course exchange rates move up and down a lot.
Shelton's big idea (backed by the WSJ editorial page) is that the most important goal of monetary policy is the exchange rate, the external stability of the currency. But she - and the edit page - are never clear about what she would sacrifice to achieve that external stability.
If you're going to have gold-linked money, you either must sacrifice domestic price stability (as under the classical standard 1873-1933) or sacrifice convertibility (as under Bretton Woods, 1945-1971). Which is it for Shelton?
The reason Shelton is regarded by professionals as a crank and nut, rather than the dissident the WSJ depicts, is because she refuses to acknowledge the trade-offs of monetary policy and the consequences of her own ideas. She insists that with gold, you can achieve all 3 aims
This mistake is based on her own (and the WSJ's) refusal to understand how the Bretton Woods system worked. They don't acknowledge that the system was based upon exchange controls - because those controls were all imposed by US trading partners, not the US itself.
But there's no economic difference between a French control on exchanging francs for dollars and a US control on exchanging dollars for francs. Either way, the exchange is controlled!
The controls were invisible to Americans who came of age in the 1960s, but they were there: first formal (until about 1960), then informal (1960-1970) - but gradually less effective until Bretton Woods crashed in 1971.
Like so much of Trumpism, Shelton's and the WSJ's monetary policy is based on nostalgia for a past that they themselves fail to understand. And that's why Shelton would be such a poor choice. It's not her ideas exactly, as much as her ignorance about her own ideas. END
ps - A footnote to the below point:
I should not have said that *all* controls were imposed by US trading partners. The FORMAL controls of 1945-60 were imposed by partners; the INFORMAL controls that replaced them in the 1960s were usually imposed by the US, eg the Interest Equalization Tax of 1963.
