Why Does Rick Santorum Have "Serious Problems" With the Gold Standard?

On a recent episode of the Glenn Beck Show, Beck had an exchange, summarized here, with presidential candidate Rick Santorum.

“I think you've got to put the Fed back in the business of just managing the money supply for the purposes of holding inflation in check,” Santorum said. “If the Fed's only mission was dollar stabilization, then they wouldn't be doing what they're doing right now.”

Glenn pushed Santorum harder on this issue. “There are no checks and balances [on the Fed]. How is this not a criminal organization? Because what they're doing to us…it's the biggest heist in human history.”

“To go that one step forward and say 'Well let's abolish the Fed and go back to a gold standard,' I have some serious problems with that,” Santorum said. Glenn cut in.

“You can't afford the lifestyle we have on gold.”
“The problem is the idea with the gold standard was…gold would increase as economic growth increases,” Santorum continued.

“That's not necessarily true anymore, I mean we don't have a lot of gold supplies in this country that we can increase as the economy increases, and can become – in fact, are – dependent on a lot of not particularly great areas of the world for gold mining.”

Yes, Senator Santorum you do have a serious problem. The conservative movement greatly hopes that your comments represent casual and unconsidered statements … and that future pronouncements will reveal an intelligent open-mindedness on monetary policy (a separate question from abolishing the Fed).

For starters: money supply? This is an anachronism. The premier monetarist, Prof. Milton Friedman, disavowed managing the money supply in a famous June 7, 2003 interview with the Financial Times: “The use of quantity of money as a target has not been a success.”

As Forbes.com columnist and a leading debunker of the quantity theory of money Nathan Lewis wrote in Why the Gold Standard Still Matters Today:

The amount of metal piled in a vault has little relationship to the value (or quantity) of paper banknotes. In 1779 the Bank of England held 953,066 ounces of gold in reserve. In 1783 this had fallen to 339,261 ounces. One year later, in 1784, it had grown to 1,683,724 ounces. A year after that, it was down to 703,692 ounces, but in 1786 it bounced back up again to 1,535,538 ounces.

These gyrations had no effect on the value of the British pound, which was pegged to gold at 3.89375 pounds per ounce.

…
“A gold standard does not place some artificial limit on the supply of money, nor is the supply of money constrained to the output of gold mines. The supply of base money grows or contracts as necessary to maintain the currency's value in line with the gold parity. Between 1775 and 1900, the U.S. base money supply increased by 163 times–in line with an expanding economy and a population that went from 3.9 million in 1790 to 76.2 million in 1900. Over this 125-year period, the amount of gold in the world increased by about 3.4 times due to mining.

“The only thing that mattered was the value. The dollar maintained its link near $20.67 per ounce throughout the 19th century (with a lapse during the Civil War).”

If sheer quantity mattered, which it does not, the pointlessness of worrying becomes even more obvious if one looks at the inventory of monetary gold by the governments of the world. The United States' holdings, as of January 2011, of 286 million ounces, tower above those of most other countries. (China: 37 million ounces. Russia: 27 million ounces.)

As for making America “dependent on a lot of not very great areas of the world for gold mining?” Charles Dickens' satirized this very sentiment by placing it in the mouth of a particularly dimwitted legislator in Nicholas Nickleby:

'Besides which,' continued Mr Gregsbury, 'I should expect … a few little arguments about the disastrous effects of a return to cash payments and a metallic currency, with a touch now and then about the exportation of bullion, and the Emperor of Russia, and bank notes, and all that kind of thing, which it's only necessary to talk fluently about, because nobody understands it.'

Presumably Sen. Santorum, in referring to “not very great areas of the world,” had in mind the modern version of the “Emperor of Russia,” a favorite bogeyman of those opposed to gold convertibility then as now.

Who condemns gold puts himself on the opposite side of Ronald Reagan, Jack Kemp, and a clear majority of the conservative leaders, especially free market ones. Condemning the gold standard aligns one with leading Obamunists such as Paul Krugman, July 6 New York Times blog post, “The Armageddon Caucus“: “Gold bugs have taken over the GOP,” Think Progress' Marie Diamond that “the …Tea Party groups are determined to make returning to the gold standard a litmus test for GOP presidential candidates….” The Roosevelt Institute's Mike Konczal who wrote on April 27, “Conservatives are … rallying around the gold standard wing of their party.” Or Thomas Frank's July 2011 story in Harper's Magazine condemning gold as “yet another eccentricity of the right-wing fringe has moved into the mainstream of American life.”

As my sainted grandmother used to say, Senator… lie down with dogs, get up with fleas. It is an oddity, one hopes not indicative of anything more than a casual misstatement, to see someone of Sen. Santorum's stature — one who proudly styles himself a conservative — aligning, as Nixon did, with economic ultra-liberals.

Presidential candidates — especially newly prominent ones — deserve an opportunity to grow out of casually held old views. No less respectable a source than the Bank of England, summarized by AOL's DailyFinance recently published a paper showing that the current paper-based monetary system is dramatically inferior to the form of gold standard enjoyed by the world under Bretton Woods —destroyed by President Johnson and then repudiated by President Nixon. Economic growth has been much slower, panics and crashes much more frequent, under the current system than under even a dilute form of gold standard.

The conservative movement respectfully asks those who aspire to the presidency at least to reserve judgment on the critical issue of monetary policy. If unwilling to embrace gold with Dr. Paul or to join with Speaker Gingrich in calling for a gold commission, at least emulate Gov. Romney in maintaining an openness to “look at a whole range of ideas on how to have greater stability in our currency and in our monetary policies.”