Scott B. Sumner, The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression

In a study with detailed evidence and technical economics, Scott Sumner seeks to explain both the monetary origins of the Great Depression (1929-1932) and its persistence due to government-driven wage shocks (1933-1941). He credits the Mundell-Johnson hypothesis, based on the post WWI undervaluation and shortage of gold, with identifying the deflationary pressure that led to monetary distress. Sumner concludes that interest rates, money supply, and price changes provide inadequate measures of the stance of monetary policy. Sumner’s most important evidence supports his arguments that, first, raising the price of gold in 1933 facilitated price inflation and rapid recovery after years of deflation; and second, that several Roosevelt-era recoveries were stopped in their tracks by New Deal-driven real wage increases. The 1937-38 depression was caused by Treasury sterilization of gold inflows, but aggravated by unionization drives and wage increases. Reviewer considers Sumner’s critique of Keynesian economics, and adds overview to identify two areas where Keynes’ “revolution” set back understanding. He then moves to some intra-New Deal dynamics and to some recent political economy parallels.