*The Midas Paradox*

That is the forthcoming book by Scott Sumner, and the subtitle is Financial Markets, Government Policy Shocks, and the Great Depression.  Here is one of Scott’s brief capsule descriptions of the book:

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.

I would stress that Scott devotes far more attention to asset price reactions than do many other studies of economic history; that is perhaps his main methodological innovation, in addition to the economics.

Scott also insists — correctly in my view — that the artificially engineered real wage increases of the New Deal were a true disaster.  This point is underemphasized in most competing accounts, or perhaps even actively denied by many Keynesians.  Yet the evidence here is overwhelming.

This is a very good book, one of the best on the economics of the Great Depression ever written.


My impression is that -- much as everybody loves to insult economists -- economic policymaking today is a lot more sophisticated than in the past.

There are various historical economic policy events that are mostly explicable upon the assumption that few people in power at the time knew what they were doing. I've seen Paul Johnson offer this explanation for Jefferson banning all foreign trade at one point. Churchill putting Britain back on the gold standard in the 1920s may fall into this category. Nixon's 1971 wage and price freeze seems absurd in retrospect, but was popular and respectable at the time.

Popular frustration at economists over the years includes reaction to their certainty in the face of evidence to the contrary.
They may as well say to consumers "Who are you gonna believe, me or your lyin' eyes".
Alan Greenspan springs to mind as one of those certaintists, and future PhD candidates will mine his works to point out the obvious.

Chuchill and his people new that a reflation is going to be bad. However Britain saw itself, and they were, the finance capital of the world, they could not go back to 90% of the earlier peg, that would hurt their reputation to much.

Keep in mind they did not know that in 1929 depression would happen. They expext another period 1870 to 1914.

"private sector gold hoarding"

*holding. FTFY.

I don't know about you, but I consider my bathtub full of gold coins to be a hoard

I consider my bathtub full of gold coins to be a relaxation tool after a day of hard work whipping cripples (and calling them cripples), evicting widows and sending orphans to the glue factory at the Simon LeGree Satan Inc.'s headquarters (our motto is "Don't be evil, this is our job, not yours"). Knowing my gold (unlike my wife and my children) will be waiting for me at home gives me the strenght I need to survive endure another day at work and survive the corporate meat grinder (as long it is just a metaphor, I would not be able to survive a real meat grinder).

Gold was money. Hoarding money: events (thousands of bank failures) proved holding gold money in your hands was, in many cases, preferable to depositing (without FDIC deposit insurance, adequate laws and regulations) in banks that failed.

Liquidity premium.

I totally agree on the whole New Deal wage increase thing. I think a big problem with discussions about FDR and the New Deal is that a lot of people feel compelled to accept "the whole package" that a person of their tribe put forward. And so you have people on the Left defending even the most ludicrous parts of the AAA, NIRA, etc. My high school history teacher, who was very much of the liberal persuasion, insisted that the AAA was an okay idea. Then you have people on the Right saying everything FDR did was wrong. To me, it's a middle ground: the devaluation was a great idea (though the anticipation of it when FDR was running against Hoover may have worsened things as people hoarded monetary gold) and so was the insistence on not going totally protectionist (FDR, who had Cordell Hull in his administration, was better on this than the Hoover administration) but most of the New Deal was awful. I do not get why people cannot admit that.

"the artificially engineered real wage increases of the New Deal were a true disaster. If that weren't true, wouldn't that imply that microeconomics should probably go in the dustbin? And then there wouldn't be anything of much value left of economics.

Now then, no googling: who said this in a letter to FDR?

"there is much less to be said in favour of rising prices, if they are brought about at the expense of rising output. Some debtors may be helped, but the national recovery as a whole will be retarded. Thus rising prices caused by deliberately increasing prime costs or by restricting output have a vastly inferior value to rising prices which are the natural result of an increase in the nation's purchasing power."

If you do resort to googling, then do read the whole letter: it's diplomatically couched; it doesn't explicitly say "Golly, what a bunch of incompetent and ignorant duffers you are".

Keynes? (I didn't Google, honest.)

Yeah. I think the challenge was slightly subverted by an (earlier) comment below, but if not: congratulations on your prize! Which you'll receive in the long run. As for me, I like to be reminded that Keynes, for all his flaws, at least was not a Keynesian. Anyway, here's my summary of his views. (http://newdeal.feri.org/misc/keynes2.htm)

Para 1: is just a bit of the ritual arse-licking that JMK understands that American Big Chiefs enjoy.

Para 2: “At the moment your sympathisers in England are ” … fearful of the danger that you will cock everything up.

Para 3 means: The Executive Branch of the US government being obviously incompetent, you are in danger of trying taking on too much at the same time.

Para 4 means: Your NIRA policy has been a great blunder.

Para 5 means: Your best bet is that “public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money.”

Para 6 means: your policy of forcing up prices is foolish.

Para 7 links the error discussed in para 6 to the blunder identified in para 4.

Para 8 implies: Pay particular attention, you dim little man, because “I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by Loans and not by taxing present incomes. Nothing else counts in comparison with this.”

Para 9 emphasises the point in para 8, starting with something that speaks for itself: “The set-back which American recovery experienced this autumn was the predictable consequence of the failure of your administration to organise any material increase in new Loan expenditure during your first six months of office.”

Para 10 draws the lesson of paras 8 & 9: For God’s sake get on with it, man, in spite of the disproportionate risk in the US of “waste, inefficiency and corruption”.

Para 11 needs little translation: “I fear the influence … of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt.”

Para 12 appears to mean: Your policy of devaluing the dollar against gold was ill-timed.

Para 13 extends para 12: “the recent gyrations of the dollar have looked to me more like a gold standard on the booze than the ideal managed currency of my dreams.”

Para14 is a bit more ritual arse-licking, deemed necessary, I expect, because JMK has been pretty damning, yet would really like FDR to absorb the next bit and act on it.

Paras 15 & 16 contain the essential advice (i) “In the field of gold-devaluation and exchange policy the time has come when uncertainty should be ended. This game of blind man’s buff with exchange speculators serves no useful purpose and is extremely undignified. It upsets confidence, hinders business decisions, occupies the public attention in a measure far exceeding its real importance, and is responsible both for the irritation and for a certain lack of respect which exists abroad.” And (ii) “you [should] announce that you will definitely control the dollar exchange by buying and selling gold and foreign currencies so as to avoid wide or meaningless fluctuations, with a right to shift the parities at any time but with a declared intention only so to do either to correct a serious want of balance in America’s international receipts and payments or to meet a shift in your domestic price level relatively to price-levels abroad.”

Para 17 says hurray for government expenditure on Infrastructure, as long as it can be done quickly.

Para 18 says that the engineered decline of long term interest rates in Britain has led to “the turn of the tide” so the USA should attempt the same thing. [Was that really a politic way to make the argument?]

Para 19 says that if FDR would only give up his own policies and adopt JMK’s, we’d all live happily ever after.

Yes, this is the exact link from which I had first seen this open letter. I think it is a very under-read document. And the thing people do cite usually is the money-as-a-belt thing, paying less attention to the criticisms. The basic conclusion is that the New Deal was not a Keynesian experiment, it was a corporatist experiment. If FDR et al. had focused on AD more, whether by fiscal policy a la Keynes or monetary policy a la Friedman and Sumner, things might have gone better. Instead, we had a confusion of policies and "experiments" that sometimes contradicted one another and often made things worse.

Right, the way to pay off debt faster is to cut the income of debtors!

The way to increase gdp is to cut wage incomes so profits are higher and thus wealth creates more consumers with lots of money because increased profits increases supply creates more consumers!

After all, workers are never consumers, and consumers are never workers!

Also, what's weird is that forcing up nominal wages is not even a Keynesian policy per se. Keynes himself had written an open letter to FDR criticizing the policies like the AAA. In the letter he essentially pointed out to FDR that the way to cure deflation arising from a shortfall of aggregate demand is to stimulate aggregate demand, not to restrict aggregate supply. I think the confusion arises from conflating "Keynesianism" with statism and/or corporatism and/or left-of-center-ism. Strictly speaking, Keynesianism in terms of policy proposals has only to do with recessions being demand-driven affairs and fiscal policy being effective at rectifying demand shortfalls. The message is run deficits, not cartelize industry, promote labor unions, or anything else. In this sense, it is possible to be a "rightwing" Keynesian if you believe fluctuations in aggregate demand drive the business cycle and fiscal policy is effective in influencing it; tax cuts or spending on the military are as helpful in this model as food stamps--the choice is a matter of preference. (Monetarists (at least the older kind), on other hand, also believe in the importance of aggregate demand, but they think the relative effectiveness of monetary versus fiscal policy in impacting it is the reserve of Keynesians. I think, in fact, the open letter Keynes sent criticizing the wage-increasing policies, he also criticized the idea that a AD shortfall can be cured purely through monetary policy--I recall something about money being a "belt" and that the problem facing the world was not too tight a belt but the fact that the economy was filling up its suit to press against its belt.) As Keynesians in the Fifties like Cary Brown and Abba Lerner pointed out, there was very little activist fiscal policy happening in the New Deal era, and so judgments about the New Deal are not really about Keynesianism but about the specifics of the programs FDR pushed through. But it is curious. In one of Scott Sumner's papers, he pointed out that Peter Temin in one of his history's consider Leon Blum's wage-increasing policies a failure and explicitly says they were unwise in the context of the French government insisting on the gold standard. But then suddenly when it comes to the US, the policies are good, despite the impact effect on asset markets being bad. I think Temin rationalizes this by saying it helped raise inflation expectations when combined by the devaluation, etc. There is this unwillingness to say that the one policy, devaluation, was a good idea, but the other was not. And then you have people like Gauti Eggertsson writing out models that try to rationalize this and people like Krugman and DeLong promoting this on the blogosphere. In a course they co-taught at UC Berkeley the Romers also took this line, telling the undergraduates that the AD curve becomes upward-sloping when the economy hits the zero bound.

A lot of FDR's policies in 1933-1935 were weird Mussoliniesque ploys that practically everybody has forgotten because nobody espouses them anymore, so nobody wants to argue these days over whether they were good or bad.

Something that's worth keeping in mind is that what FDR actually did is not the same as what Krugman implies Keynes would have done. A lot of what FDR did was flail about ... although he did it with so much panache that his personal style probably had a positive effect, while Hoover's personality probably hurt confidence.

"But most Americans paid little heed to these events, choosing instead to believe the comforting words of President Herbert Hoover Dam, who, in a reassuring nationwide radio broadcast, said: 'Everybody STAY CALM, because there is NOTHING TO WORRY ABOUT! Do you HEAR ME? NOTHING!! HA-HA-HA-HA-HA-HA-HA (click).'"


Heh. Classic book.

The classic book being humorist Dave Barry's Dave Barry Slept Here. Wolfgang Schivelbusch's Three New Deals: Reflections on Roosevelt's America, Mussolini's Italy, and Hitler's Germany, 1933-1939 is a thoughtful consideration of similarities and differences--and the spirit of the times. It is not something to which Godwin's law applies.

League of Nations, standings as of 1920: Country/Wins/Losses

Why didn't he include a bit on Stalin's USSR? FDR might have taken some inspiration there for all I know - certainly some members of his administration did.

Federal deficits never exceeded 4% of gdp during Roosevelts first eight years in office and he turned in a balanced budget twice. They were quite circumspect about aggregate demand management.

Hardcover came a couple weeks back, like how Scott jumps into gold prices right in the preface. Won't get too far into it until the Kindle edition, though, hardcover's really a display copy.

Something I've never seen fully explored is the impact of FDR's political/theatrical strategy during the long interregnum between the election of November 1932 and his inauguration in March 1933, when the Depression reached its nadir with a crescendo of bank failures leading up the day of his oath-taking. My impression is that FDR intentionally made things worse by not taking steps to build confidence during these nearly four months, so that when he came to office he could move decisively (e.g., his "bank holiday") in vivid contrast to the stasis and fear of the interregnum.

This turned out to be a brilliant political strategy for him, but the economic cost was steep.

On the other hand, I've never seen anybody assert this reading of history, so I may be getting it wrong.

I do not know the details of this and I agree it is understudied. It is significant that the economy hit bottom right around the time he was inaugurated and began to rebound with the bank holiday and the devaluation (and suspending gold clauses, etc.). It makes you wonder what was going on between the election and the inauguration. As I mentioned in a comment above, something that I think I have seen somewhere is that FDR may have made the depression worse in this period by allowing rumors to spread that he was going to devalue after he became president thus spurring hoarding, which hurt banks as well (worries about convertibility and the exchange rate spur deposit flight). All of which raises the question: what the hell were Hoover and company doing/thinking? This was one of the occasions (of which, historically, there have been many) where the anticipation of a devaluation and all the privately-optimal but socially-destabilizing actions that stem from such an anticipation are much worse than actually going ahead with it. So, consciously or not, FDR may have made the situation worse, but Hoover's reaction seems stunningly incompetent. Perhaps it is because he was a lame duck, but then again, he was not very good before the election either.

So, Obama working with and compromising with Bush meant the economic cost was almost zero and by supporting no penalties for bankers to get the bailout going to prevent massive bank runs that would have taken down the Milton Friedman shadow banking system, Obama is highly credited with preventing a great depression?

I think Obama would have much more popular support today if he had quietly signal led to Democrats inaction until after Jan 20, 2009, because businesses not making payroll because they could get their deposits from only market funds, and the credit markets failing, would have forced Republicans in Congress to support much more intervention in the economy to eliminate rent seeking and monopoly profiteering. The FDIC would have protected bank deposits while those in money market funds would have suffered for their failure to force only market managers to be safer than regulated FDIC bankers, just as Milton Friedman promised money market depositors would do back circa 1970.

If money market depositors had done their job, the rise in debt would never have happened, because it's insane to have debt rise faster than incomes of debtors, public or private.

If I understand correctly, the anxiety was that he would engineer a devaluation of the currency (which he had to do and did). The only way to calm the panic would have been to lie through his teeth and abjure devaluation.

Hoover or Roosevelt? Even if Hoover abjured devaluation, it would not have mattered, since FDR was coming into office in a few months--only if Hoover had bitten the bullet and devalued (somewhat) less expectedly would it have made a difference, in a positive way because a change of regime was necessary to reflate. So the important thing is what people expected of the incoming administration. The question raised above is whether FDR actually wanted stability or wanted things to become so bad that when he became president and things rebounded, he looked good.

And if he did want stability, and did say in public he was going to keep the old gold parity, would it have been credible? People may have foreseen that that was the way to recovery (especially people who had taken notice of Britain, Sweden, and others' recovery after 1931 when they left gold) and FDR and Democrats were more amenable to the action, and so whatever they said beforehand, it would have been cheap talk and people would continue to expect a devaluation, which would have been destabilizing in Hoover's lame duck period.

In general, it is very hard to convince people that a devaluation is not imminent when the rumors start spreading. In 1982, for instance, the president of Mexico insisted he would defend the peso like a dog right up to the moment the old peg was abandoned and the peso devalued. And usually, the actual devaluation is not that bad. A one-off capital loss for people holding assets denominated in the currency being devaluation and perhaps some other complications, but overall reflation and recovery.

Okay, if the preferred policy is to let the price of labor fall, then to be consistent the preferred policy is to let the price of assets fall too. Cowen's colleagues at the Mercatus Center promote such a consistent policy, but Cowen can't, not expressly anyway because serious people (i.e., those who own the assets) will believe him to be a crank and unsuitable for a responsible position in government.

The nominal price of securities fell by 89% between August of 1929 and July of 1932. Corporate profits also completely disappeared and corporations had a collective deficit during 1932 and 1933.

OK, so you must also say that if engineered wage increases were bad for the depression economy,


Why do Republican Congresses continue to support and enact

1930's agricultural price support programs which raise and or stabilize farm prices, using my tax dollar.

Why wouldn't they? Were you under the impression that they are the free market party?

I'm as eager to bash the Republican congress as anyone, but I think it's pretty clear that farm subsidies and price supports are passed to appease donors/lobbyists and get more votes from farmers, not because representatives think it will help the broader economy.

Isn't that the case with virtually all congressional activity?

You want debt related to farm production defaulted on?

I must assume you have no savings.

There is a wonderful passage in Patrick Buchanan's The Greatest Comeback: How Richard Nixon Rose from Defeat to Create the New Majority. Nixon is gearing up to run for the Republican presidentialnomination and is giving speeches. Alan Greenspan has written a free-market speech on agricultural policy and it is leaked to the Republican Senators from North and South Dakota. They can't stand it. Nixon tells Buchanan to write a different speech. Pat's speech, which says subsidies should not only be retained but actually increased, is personally delivered to the Senators, who are now extremely happy. Buchanan ironically quotes Nixon, "You have to have principles, but you also have to be pragmatic."

Tea Party has been mostly against them for years (even most of the Tea Party farmers who themselves actually receive subsidies), as are outfits like National Review, but the GOP establishment is solidly in favor, and Dems are fairly supportive as well.

Things haven't changed at all: w.twincities.com/localnews/ci_29158025/iron-range-reeling-nolan-proposes-bill-ban-steel

The wage increases were hardly the most destructive part of that package - that's the origins of the completely broken health insurance mess we are still making worse. Oh, and the education disaster. For FDR to have done worse, he probably would have had to arrange nuke tests in major cities.

I take it you believe gdp increases the fastest when wages are stagnant or falling because workers are never consumers and consumers are never workers?

Scott also insists — correctly in my view — that the artificially engineered real wage increases of the New Deal were a true disaster.

That and the cartelization program were certainly damaging. Curiously, production grew rapidly during the period running from 1933 through 1936 and from mid 1938 to the end of 1941, even though the labor market was in ruins.

Comments for this post are closed