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By Scott Sumner. 2015. Oakland, California: The Independent Institute, Pp. 507. $36.05 hardcover.
First we had the paradox of thrift. Now Scott Sumner brings us the Midas paradox. In this book, Sumner reopens the discussion of the Great Depression--why it occurred and why it lasted so long. The book is the culmination of 30 years of work and it draws on previously unpublished data to give us a fresh look at the most important economic event in the history of the American Republic. Economists who read it won't be disappointed.
In contrast to the classic work of Milton Friedman and Anna Schwartz, which targets Federal Reserve failure as a large, perhaps even the main, contributor to both the 1929-33 and the 1936-38 declines, he focuses instead on the international market for gold.
Sumner takes the Keynesian idea that while thrift is good for individuals, massive increases in thrift on a national scale spell disaster (at least in the short run) and applies it to monetary theory. Private increases in gold holdings may be a good thing; but for countries on a gold standard, an attempt by everyone to hoard more gold decreases aggregate demand. In turn, if prices (and especially wages) are sticky, this will lead to a decrease in output. Moreover, the timing of the gold demand increases during the Depression years could not have been worse. The combination of gold...