BOOK REVIEWS: The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression ( Oakland: The Independent Institute, 2015 ), pp. xviii + 507, $37.95 (hardcover). ISBN: 978-1-59813-150-5.

Sumner Scott B., The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression (Oakland: The Independent Institute, 2015), pp. xviii + 507, $37.95 (hardcover). ISBN: 978-1-59813-150-5.

The Midas Paradox is the result of Scott Sumner’s many years of contemplating the causes of the Great Depression. Sumner adopts a novel “gold market approach” in this work, holding that the demand-side shocks largely responsible for the worldwide economic downturn were increases in state and private actors’ desire to hoard gold. The “paradox” of the title arises from the logical fact that, with a relatively fixed amount of gold available, it is impossible for all market participants to increase their gold holdings simultaneously. When they try to do so, the result is instead a decrease in economic activity.

The heart of the book is nine chapters of detailed historical analysis of the macroeconomic history from 1929 through 1938, employing Sumner’s gold market approach. To brutally abbreviate Sumner’s narrative, in 1929, monetary policy mistakes, particularly the failure of France and the United States to print an amount of currency commensurate with their rapidly increasing gold stocks, led to the stock market crash and banking panics. Franklin Roosevelt’s decision to inflate by taking the US off the gold standard spurred a recovery that was nipped in the bud by the National Industrial Recovery Act’s high wage policies, which delivered a supply-side shock. The economy recovered again, albeit less than it might have, due to repeated attempts to raise wages by the Roosevelt administration. Then the final Great Depression setback occurred when private gold hoarding caused the “Roosevelt depression” of 1937.

Sumner is a diligent researcher, so there is no point in this reviewer’s disputing the facts on the ground as he describes them. Instead, this review will focus on the methods he uses in handling these facts, which sometimes oscillate uneasily between historical and theoretical analysis.

Throughout this work, Sumner is a strong proponent of the efficient markets hypothesis and the “wisdom of crowds.” For instance, he criticizes those who think anyone can reliably outguess financial markets: “A modern example of this conundrum occurred when many pundits blamed the Fed for missing a housing bubble that was also missed by the financial markets” (p. 12).

What should we...