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The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression
Economic historians have made great progress in unraveling the causes of the Great Depression, but not until Scott Sumner came along has anyone explained the multitude of twists and turns the economy took. In The Midas Financial Markets, Government Policy Shocks, and the Great Depression , Sumner offers his magnum opus—the first book to comprehensively explain both monetary and non-monetary causes of that cataclysm. Drawing on financial market data and contemporaneous news stories, Sumner shows that the Great Depression is ultimately a story of incredibly bad policymaking—by central bankers, legislators, and two presidents—especially mistakes related to monetary policy and wage rates. He also shows that macroeconomic thought has long been captive to a false narrative that continues to misguide policymakers in their quixotic quest to promote robust and sustainable economic growth. The Midas Paradox is a landmark treatise that solves mysteries that have long perplexed economic historians, and corrects misconceptions about the true causes, consequences, and cures of macroeconomic instability. Like Milton Friedman and Anna J. Schwartz’s A Monetary History of the United States, 1867–1960 , it is one of those rare books destined to shape all future research on the subject.
528 pages, Hardcover
First published January 1, 2015
About the author
Scott Sumner
16 books13 followersScott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP.
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Displaying 1 - 4 of 4 reviews
November 12, 2020
Moved to gwern.net.
February 1, 2016
"The intelligentsia generally pick up on a problem some time after market participants become aware of the problem"
April 20, 2016
This is an impressive work of scholarship. Sumner's main contribution is his extensive compilation of news clippings in real time.
He does not get off to a good start in his attempt to explain the 1929 crash. Here begins an annoying thing that Sumner likes to do: he speculates on various explanations, providing no strong evidence for any of them, then moves on. Throughout the rest of the book, he writes as if he has already shown that his preferred explanation for 1929 is the best.
His narrative approach is engaging and useful. On some points he is very persuasive; on others, less so. He has a lot of tables in which he breaks the data into time periods of arbitrary length. The reader can get the impression that they are being carefully misled. Sumner relies on the timing of market moves to make his point when it works for him; when the markets work against him, he makes excuses (such as on page 105).
One of the weakest points in the book is his description of the 1933 devaluation. See Figure 5.1; Industrial Production (Sumner's output measure) responds immediately to the devaluation. This rapidity is highly suggestive that the devaluation is not the reason for the output boost; perhaps it was the decline in wages (see page 209) or something else. Sumner does not consider this. Instead, he assumes that his theory is correct, then he spends the rest of the book repeating the notion that output obviously responds immediately to monetary shocks because we can see that it did in 1933. But he does not provide any direct evidence that the IP surge was caused by the devaluation. His evidence is all about the stock market, which theory (including his theory) says should respond to expectations about future earnings. His equity-market-based theory says nothing about the immediate response of output. He provides no theory of production and no evidence of management decisionmaking that would support the notion that output responds immediately. Throughout the rest of the book, he trumpets his finding that the output response is not subject to a lag--but this is not an empirical causal result; it is an assumption he imposes on the data. This sort of hand waving mars his prose more generally.
There are other issues of this nature. I hoped that this book would be Sumner's chance to move beyond the tautological theories that characterize his blogging. In that I was disappointed.
However, I found his arguments about the "supply-side depression" reasonably persuasive--it is hard to imagine output not responding to the wage shocks of the Great Depression. More generally, despite its flaws, I rate this book highly because of its extensive narrative approach. It provides new insights into the Great Depression, and its gold market approach is very instructive.
He does not get off to a good start in his attempt to explain the 1929 crash. Here begins an annoying thing that Sumner likes to do: he speculates on various explanations, providing no strong evidence for any of them, then moves on. Throughout the rest of the book, he writes as if he has already shown that his preferred explanation for 1929 is the best.
His narrative approach is engaging and useful. On some points he is very persuasive; on others, less so. He has a lot of tables in which he breaks the data into time periods of arbitrary length. The reader can get the impression that they are being carefully misled. Sumner relies on the timing of market moves to make his point when it works for him; when the markets work against him, he makes excuses (such as on page 105).
One of the weakest points in the book is his description of the 1933 devaluation. See Figure 5.1; Industrial Production (Sumner's output measure) responds immediately to the devaluation. This rapidity is highly suggestive that the devaluation is not the reason for the output boost; perhaps it was the decline in wages (see page 209) or something else. Sumner does not consider this. Instead, he assumes that his theory is correct, then he spends the rest of the book repeating the notion that output obviously responds immediately to monetary shocks because we can see that it did in 1933. But he does not provide any direct evidence that the IP surge was caused by the devaluation. His evidence is all about the stock market, which theory (including his theory) says should respond to expectations about future earnings. His equity-market-based theory says nothing about the immediate response of output. He provides no theory of production and no evidence of management decisionmaking that would support the notion that output responds immediately. Throughout the rest of the book, he trumpets his finding that the output response is not subject to a lag--but this is not an empirical causal result; it is an assumption he imposes on the data. This sort of hand waving mars his prose more generally.
There are other issues of this nature. I hoped that this book would be Sumner's chance to move beyond the tautological theories that characterize his blogging. In that I was disappointed.
However, I found his arguments about the "supply-side depression" reasonably persuasive--it is hard to imagine output not responding to the wage shocks of the Great Depression. More generally, despite its flaws, I rate this book highly because of its extensive narrative approach. It provides new insights into the Great Depression, and its gold market approach is very instructive.
April 11, 2016
This may be one of the most important books on the Great Depression ever written. Previous books on the Depression have been essential to the growth of economic theory, from John Maynard Keynes’s General Theory, to Milton Friedman’s Monetary History of the United States, to Barry Eichengreen’s Golden Fetters. This book, however, may offer a broader and more convincing explanation of the facts of the Depression than any of these.
Sumner’s main argument is that the Depression can be explained largely by two, interrelated facts. One is that during the Gold Standard era, prices and spending were largely determined by the total amount of monetary gold in the world, not by the amount of gold in any one country. He shows that changes and expected changes in the amount of international gold had immediate and profound impacts on prices and economic output, not the long and variable effects on different countries as Friedman or Eichengreen argued.
Second, Sumner argues that although Franklin Roosevelt’s move to take the U.S. off the gold standard in 1933 had a profoundly successful effect (the economy grew by 57% in just three months!), his policies, especially the National Recovery Act, which increased wages faster than prices, had the exact opposite effect, and possibly prolonged the Depression by as much as seven years.
Sumner makes a strong case for these arguments by using sources that have not been well used in previous histories, namely, daily financial movements and newspaper reports about these. Sumner takes the efficient markets hypothesis seriously, and argues that if monetary or wage changes affected the economy, they should affect the financial markets immediately. He shows that from 1929 to 1933, concerns about the breakdown in international cooperation between central banks, and, especially from 1931 to 1933, changes in concerns about “gold hoarding” by private individuals, largely determined the fate of the U.S. stock market. Later, he shows that increased wages had immediate and negative effects on financial markets.
Through the gradual accumulation of such evidence, a method similar to that of Milton Freidman and Anna Schwartz, Sumner makes an almost irrefutable case that these two policies had a profound effect on the Depression. I still have lingering questions about how these policies affected international financial markets and economies, yet those would have to be the work of another book. If one wants to understand the Great Depression, and its continuing lessons for today, this book offers the best and most up-to-date explanation.
Sumner’s main argument is that the Depression can be explained largely by two, interrelated facts. One is that during the Gold Standard era, prices and spending were largely determined by the total amount of monetary gold in the world, not by the amount of gold in any one country. He shows that changes and expected changes in the amount of international gold had immediate and profound impacts on prices and economic output, not the long and variable effects on different countries as Friedman or Eichengreen argued.
Second, Sumner argues that although Franklin Roosevelt’s move to take the U.S. off the gold standard in 1933 had a profoundly successful effect (the economy grew by 57% in just three months!), his policies, especially the National Recovery Act, which increased wages faster than prices, had the exact opposite effect, and possibly prolonged the Depression by as much as seven years.
Sumner makes a strong case for these arguments by using sources that have not been well used in previous histories, namely, daily financial movements and newspaper reports about these. Sumner takes the efficient markets hypothesis seriously, and argues that if monetary or wage changes affected the economy, they should affect the financial markets immediately. He shows that from 1929 to 1933, concerns about the breakdown in international cooperation between central banks, and, especially from 1931 to 1933, changes in concerns about “gold hoarding” by private individuals, largely determined the fate of the U.S. stock market. Later, he shows that increased wages had immediate and negative effects on financial markets.
Through the gradual accumulation of such evidence, a method similar to that of Milton Freidman and Anna Schwartz, Sumner makes an almost irrefutable case that these two policies had a profound effect on the Depression. I still have lingering questions about how these policies affected international financial markets and economies, yet those would have to be the work of another book. If one wants to understand the Great Depression, and its continuing lessons for today, this book offers the best and most up-to-date explanation.
Displaying 1 - 4 of 4 reviews