The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression - Hardcover

Sumner, Scott

Hardcover

ISBN 10: 1598131508 ISBN 13: 9781598131505

Publisher: Independent Institute, 2015

Synopsis

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 Paradox: Financial Markets, Government Policy Shocks, and the Great Depression, Sumner offers his magnum opus—the ?rst book to comprehensively explain both monetary and non-monetary causes of that cataclysm.

Drawing on ?nancial 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, which 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 future research and debate on the subject.

About this title

About the Author

Scott Sumner is a Research Fellow at the Independent Institute, Professor of Economics at Bentley University, and Ralph G. Hawtrey Chair of Monetary Policy and Director of the Program on Monetary Policy at the Mercatus Center. He received his Ph.D. in economics from the University of Chicago and he edits the influential blog "The Money Illusion." In 2012, the Chronicle of Higher Education referred to Sumner as “among the most influential” economist bloggers, along with N. Gregory Mankiw of Harvard University and Paul Krugman of Princeton University. In 2012, Foreign Policy ranked Sumner jointly with Federal Reserve Chairman Ben Bernanke 15th on its list of "100 Top Global Thinkers."

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The Midas Paradox

Financial Markets, Government Policy Shocks, and the Great Depression

By Scott Sumner

Independent Institute

Copyright © 2015 Independent Institute
All rights reserved.

ISBN: 978-1-59813-150-5

Contents

Preface, 
PART I Gold, Wages, and the Great Depression, 
1 Introduction, 
PART II The Great Contraction, 
2 From the Wall Street Crash to the First Banking Panic, 
3 The German Crisis of 1931, 
4 The Liquidity Trap of 1932, 
PART III Bold and Persistent Experimentation: Macroeconomic Policy during 1933, 
5 A Foolproof Plan for Reflation, 
6 The NIRA and the Hidden Depression, 
7 The Rubber Dollar, 
PART IV Back on the Gold Standard, 
8 The Demise of the Gold Bloc, 
9 The Gold Panic of 1937, 
10 The Midas Curse and the Roosevelt Depression, 
PART V Conclusion, 
11 The Impact of the Depression on Twentieth-Century Macroeconomics, 
12 What Caused the Great Depression?, 
13 Theoretical Issues in Modeling the Great Depression, 
References, 
Index, 
About the Author, 

CHAPTER 1

Introduction

OVER THE PAST fifty years economic historians have made great progress in explaining the causes of the Great Depression. Many economists now see the initial contraction as being caused, or at least exacerbated, by monetary policy errors and/or defects in the international gold standard. Some argue that New Deal policies delayed recovery from the Depression. But we still lack a convincing narrative of the many twists and turns in the economy between 1929 and 1940. This book attempts to provide such a narrative.

In this book I use an unorthodox approach to monetary economics: one that focuses not on changes in the money supply or interest rates, but rather on disturbances in the world gold market. Others have looked at how the gold standard constrained policy during the Great Depression, and/or how the undervaluation of gold after World War I put deflationary pressure on the world economy. These studies gave insights into the structural inadequacies of the interwar monetary system, but they didn't tell us why a major depression began in America in late 1929, and they certainly didn't explain the seventeen high-frequency changes in the growth rate of U.S. industrial production shown in Table 1.1.

I will show that if we take the gold market seriously we can explain much more about the Great Depression than anyone had thought possible. Three types of gold market shocks generated much of the variation shown in Table 1.1: changes in central bank demand for gold, private sector gold hoarding, and changes in the price of gold. The remaining output shocks are linked to five wage shocks that resulted from the New Deal. This is the first study to provide a comprehensive and detailed look at all high frequency macro shocks during the Great Depression.

In order to be useful, economic history must be more than mere storytelling. Because asset prices in auction-style markets respond immediately to policy news, they can be much more informative about policy than econometric studies relying on estimated "long and variable lags." Throughout the narrative we will see that financial market responses to the policy shocks of the 1930s were consistent with a gold market approach, but inconsistent with many preceding narratives of the Depression.

This model of the Great Depression has radical implications for monetary theory and policy, and particularly for the current economic crisis. Just as in the early 1930s, policymakers in 2008 missed important warning signs that monetary polic

Edition details

• Publisher: Independent Institute
• Publication date: 2015
• Language: English
• ISBN 10: 1598131508
• ISBN 13: 9781598131505
• Binding: Hardcover
• Number of pages: 528