All Commentary
Thursday, December 1, 1994

Book Review: Money Meltdown: Restoring Order to the Global Currency System by Judy Shelton

The Free Press • 1994 • 399 pages • $24.95

The importance of a sound monetary system should not be underestimated. Without a solid monetary foundation, markets cannot operate properly and economies crumble. Nonetheless, monetary policy often receives short shrift outside academia and off currency trading floors. The machinations of the Federal Reserve, for example, at times seem too arcane for the average taxpayer or concerned citizen.

Fortunately, Judy Shelton, a research fellow at the Hoover Institution, has come forward with a clear, substantive look at developments in the international monetary system since World War II, as well as balanced assessments of the various schools of monetary thought.

Money Meltdown presents compelling arguments against both floating exchange rates and a pegged rate system based on nothing more than government acclamation. Regarding floating rates, Shelton concludes that “governments cannot resist the temptation to intervene and . . . government intervention causes perverse financial effects. Who ends up paying the price? Con sumers, of course, who are deprived of the benefits of genuine comparative advantage. But also producers—the individuals who would prefer to avoid the risk of currency gyrations altogether and concentrate instead on delivering products that are competitive on their own merit.” The floating exchange rate system turns out to be a “dirty float”—with governments attempting to manipulate currency values in vain efforts to achieve often mythical advantages in the international marketplace. Devaluation seems to be the last bastion of acceptable trade protectionism.

Shelton notes the fundamental difference between a stable exchange rate system based on government fiat and an anchored system: “Turning to an outside anchor permits trading partners to safely transcend politics in their monetary relations. Unlike a pegged rate system, an outside anchor offers an objective monetary point of reference instead of requiring countries to coordinate policies or subjugate their own economic agenda to the domestic priorities of the dominant regional power.” As Europeans attempt to pick up the pieces after the disintegration of their pegged rate system, they should take serious note of Shelton’s arguments.

Though sympathetic in many ways to the theory of privately supplied money, Shelton doubts whether a system of private currencies is workable. She is especially concerned as to whether competing currencies would be accepted by the average person.

More critically, though, Shelton understands that price stability is just as necessary in international markets as in domestic markets. The author explains, “If you can’t evaluate competitive goods and services across borders in terms of their prices, you cannot have a functioning free market.” Shelton continues, “Risk and uncertainty are needlessly increased when firms are unable to discern the real costs of production or estimate potential rewards from investment because they operate in a global economic environment characterized by unpredictable currency values.” The result is slower economic growth around the globe, as the benefits of free trade and investment—the benefits of comparative advantage—are hampered.

Shelton concludes that, “given the disadvantages of other systems—the corruptness of floating rates, the superficiality of pegged exchange rates, the confusion of competitive private currencies—an international gold standard emerges as the most attractive option.” She goes on to neatly summarize a key benefit of gold: “A gold standard, in short, would prevent governments from using their currencies as tools of short-term economic policy, trading the temporary ad vantage of cheap exports against the longer-term problems of decreased purchasing power for their citizens in the global economy. The emphasis among participants in the international marketplace would rightly turn to comparative advantage and genuine competence.”

Shelton’s idea for a gold standard would seek to remove two fundamental flaws of the Bretton Woods system by extending the right of convertibility to private citizens and avoiding reliance upon a single anchor currency. The author explains, “Had private citizens enjoyed the same convertibility rights as foreign central banks under the Bretton Woods agreement, their individual actions would have brought about a more diffused adjustment to changes in the U.S. money supply and alerted officials to dangerous developments long before the integrity of the entire system came under threat.” On the second point of a single anchor currency, Shelton observes, “Monopoly power has an inherent tendency to be abused; this fact is no less true for the key currency issuer than for suppliers of other economic goods.”

Shelton views the economy from a comprehensive supply-side perspective. As such, she not only understands the benefits of lower taxes and less regulation, but also the rewards of sound money—both domestically and internationally. Though the author goes too far in arguing that the government could no longer run a budget deficit under a gold standard; she is correct to note that “the government could not monetize a budget deficit.” Therefore, the incentive to run deficits would be greatly reduced. Shelton also understands how best to eliminate a deficit, as noted in a passage that ventures into the realm of fiscal policy: “Instead of shrinking the nation’s level of productive economic activity by imposing higher tax rates in a misguided attempt to raise government revenues, private business activity should be spurred through lower tax rates. Despite the drubbing supply-side economics has been subjected to, lower marginal tax rates can lead to higher overall levels of tax revenue as individuals respond to opportunities to reap greater personal rewards from their entrepreneurial activities.”

The implementation of a gold standard will enhance the rewards for entrepreneur-ship as well by maintaining price stability and reducing currency risks in the international marketplace. In Money Meltdown, Shelton adeptly explores the benefits of anchoring currencies to gold, and thereby has added another valuable tome to the expanding library of supply-side economics. []

Mr. Keating is Director of New York Citizens for a Sound Economy, and partner with Northeast Economics and Consulting.

  • Raymond J. Keating is an author and serves as Chief Economist with the Small Business & Entrepreneurship Council.