The Midas Paradox

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 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.

“"With special attention to gold and labor market legislation, Sumner's book The Midas Paradox provides an enlightening blend of detailed, warm-bodied financial and economic history of the 1930s with its broad-based statistical counterpart, using both national income accounts and financial data. His perspective will be seen as a unique contribution to the large and still growing literature on the Great Depression." -Roger W. Garrison, Professor Emeritus of Economics, Auburn University”

"Scott Sumner offers a unified view of the Great Depression as seen through the lens of how financial markets' expectations of future monetary policy appeared in the price of gold especially but also in other asset markets like the stock market.In addition, the detailed, rich historical narrative is full of insights about the causal nature of policy (monetary, fiscal, and regulatory) not captured in a single, abstract model. Unlike the gold standard at the time, The Midas Paradox is not orthodox, but it certainly forces the reader to examine critically his or her prior views about the Depression." --Robert L. Hetzel, Staff Economist, Federal Reserve Bank of Richmond

"Scott Sumner has provided a tour de force of the Great Depression in The Midas Paradox. He convincingly shows in this accessible but thorough retelling of the Great Depression that policy errors were behind the long economic slump. In particular, Sumner demonstrates that the combination of contractionary monetary policy working through the gold market and supply-side disruptions arising from New Deal policies created a large drag on economic activity. This is a must read for anyone wanting to better understand the Great Depression and its implications for policy today." --David Beckworth, Assistant Professor of Economics, Western Kentucky University; Editor, Boom & Bust Banking: The Causes and Consequences of the Great Recession

"Whatever you know, or think you know, about the Great Depression, The Midas Paradox will teach you something new. And as Scott Sumner points out, properly understanding what happened in the 1930s matters a great deal for getting policy right in our own time." --Ramesh Ponnuru, Senior Editor, National Review

"Scott Summer offers readers of The Midas Paradox a bountiful harvest of new nuggets about the 'gold standard view' of the Great Depression. This rewarding read begins with Summer's excellent preface--an important element that allows the author to review his own book, a privilege usually denied by journals." --Steve H. Hanke, Professor of Applied Economics, Johns Hopkins University

"Just over 50 years ago, the publication of A Monetary History of the United States, by Milton Friedman and Anna Schwartz, was a crucial episode in the monetarist counterrevolution that overturned the Keynesian dominance over postwar macroeconomics, gradually persuading most of the economics profession that the Great Depression was largely caused by the monumental ineptitude of the Federal Reserve. However, the account of the Great Depression provided by A Monetary History, its many virtues notwithstanding, was defective in a number of respects, the most important of which being that its strictly quantity-theoretic focus on the behavior of the monetary aggregates was inconsistent with the workings of the international gold standard that was in operation for much of the Great Depression. A number of subsequent researchers have since pointed out that the gold standard was a critical factor in causing and propagating the Great Depression. Now in The Midas Paradox, Scott Sumner has, with great theoretical and empirical insight and ingenuity, provided a masterly narrative account of the onset and propagation of the Great Depression, and of its decade-long duration, buttressed by striking quantitative and statistical evidence of the pivotal role played by the international gold standard in the Great Depression. It is no exaggeration to say that The Midas Paradox has completely eclipsed all previous accounts of the Great Depression, and I have little doubt that a half century from now The Midas Paradox will remain the definitive account of that catastrophe." --David Glasner, author, Free Banking and Monetary Reform; Economist, Bureau of Economics, Federal Trade Commission

"The Great Depression is the biggest puzzle in the history of modern capitalism. How could millions of people be prospering one year, then out of work the next? Building on the work of previous scholars and adding fresh insights, Scott Sumner's book, The Midas Paradox, offers perhaps the most ambitious analysis of the Depression yet, which seeks to explain its major ups and downs as well as how it got started. Sumner's book has important (and worrying) implications for today. He argues that the Great Recession of 2008-09 was so severe because economists and central banks still have not fully learned the lessons of the Depression." --Kurt A. Schuler, Senior Fellow, Center for Financial Stability
"The Midas Paradox succeeds in shedding new light on the Great Depression and the gold market approach provides an effective unifying thread as the author navigates through the many shocks and policy shifts occurring over this key period.The integration of international events over this period is also the best I have seen and the connection between the 1930s policy dilemmas and those of today could not be more relevant." --Richard C. K. Burdekin, Jonathan B. Lovelace Professor of Economics, Claremont McKenna College
"Think you know what caused the Great Depression? If so, be prepared to think again: The Midas Paradox bristles with well-mounted challenges to orthodox--and to many unorthodox--accounts of history's most notorious economic crisis. Whether it manages to change your most confidently-held beliefs or not, Scott Sumner's painstaking book is bound to improve your understanding of the deepest and longest-lasting business downturn of them all." --George A. Selgin, Director, Center for Monetary and Financial Alternatives, Cato Institute

"In The Midas Paradox, Scott Sumner provides a fascinating account of how monetary policy under the gold standard got us into the Great Depression and how wage policies under the New Deal slowed the subsequent recovery. The book is deep and rich and has important lessons for today--a must-read for anyone interested in monetary policy and history and the errors of government policy." --Douglas A. Irwin, Robert E. Maxwell '23 Professor of Arts and Sciences, Department of Economics, Dartmouth College
"The Midas Paradox fills a gap in our understanding of the Great Depression. The author continues the work of a long and distinguished line of scholarship that goes back to Rueff and Mundell in pinpointing the role of the gold market and the price of gold as a key factor in some of the salient episodes of the period." --Michael D. Bordo, Board of Governors Professor of Economics and Director of the Center for Monetary and Financial History, Rutgers University
"Having done some recent research myself on the causes of the Great Depression, I have found Scott Sumner's book The Midas Paradox a source of new insights on that subject. In particular, he sheds light on why deflation proved to be such an important factor in disrupting economic activity after the 1929 Crash. He makes a properly global appraisal of monetary policy and concludes that central banks, on balance, were actually tightening the money supply when they should have been easing to offset the loss of liquidity in the financial sector from the 1929 crash. The Midas Paradox is an important contribution to the study of the Great Depression, because it adds another explanation to such known factors as ill-timed protectionism of why producer prices dropped so sharply from 1929 to 1933, causing much distress in a heavily agrarian economy." --George Melloan, former Deputy Editor, The Wall Street Journal; author, The Great Money Binge: Spending Our Way to Socialism
"Scott Sumner is one of the most original economists around. Having been a pioneer in making the case for nominal GDP targeting, he has now turned his insightful talents to economic history, providing an important and fresh reexamination of the causes of the Great Depression and the halting recovery thereafter. Provocative, well argued and well written, The Midas Paradox is an important contribution to our understanding of the roots of the worst economic period in the nation's history." --Robert E. Litan, Non-Resident Senior Fellow and former Vice President for Economic Studies, The Brookings Institution
"Scott Sumner is one of the preeminent monetary thinkers today. The Midas Paradox represents his twenty years' study of the Great Depression, one of the most important economic events of the twentieth century. Highly recommended." --Tyler Cowen, Holbert C. Harris Chair of Economics, George Mason University
"In The Midas Paradox, Scott Sumner adopts an ideal method (for my taste) of writing economic history. He presents plenty of details on episodes, including pending and enacted legislation, and on contemporary consensus or disagreement on explanations and recommendations.Sumner also presents judicious amounts of statistical and econometric evidence. I find all this a gripping story." --Leland B. Yeager, Professor Emeritus of Economics, Auburn University and University of Virginia
"Scott Sumner's wonderful book The Midas Paradox provides a thought-provoking reinterpretation of the Great Depression: it combines a monetary approach based on shocks to the gold market with a supply-side approach based on legislated real-wage shocks that fits the evidence for the entire interwar period. Sumner's insights into the Great Depression are also highly relevant to the global financial crisis. The Midas Paradox is a major contribution both to economic history and to contemporary economic policy issues." --Kevin Dowd, Professor of Finance and Economics at Durham University and Professor Emeritus of Financial Risk Management at the University of Nottingham, England
"With special attention to gold and labor market legislation, Sumner's book The Midas Paradox provides an enlightening blend of detailed, warm-bodied financial and economic history of the 1930s with its broad-based statistical counterpart, using both national income accounts and financial data. His perspective will be seen as a unique contribution to the large and still growing literature on the Great Depression." --Roger W. Garrison, Professor Emeritus of Economics, Auburn University

Scott B. Sumner is Professor of Economics at Bentley University, USA. 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."" Professor Sumner is a contributor to numerous scholarly volumes, and his articles and reviews have appeared in such journals as the Journal of Political Economy; Business and Society Review; Journal of Policy Modeling; and Economic Inquiry.

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