The Midas Curse

Today is the official launch date of my book on the Great Depression, entitled . . . well . . . do you want the official title (The Midas Paradox) or my preferred title (The Midas Curse)?  The publisher thought the latter title sounded too depressing, and wouldn’t sell.  But in my own mind it will always be The Midas Curse.  The metaphor reflects the fact that attempts to hoard lots of gold ended up impoverishing the countries that got too greedy.  And I’d add that the second theme of the book is that attempts to artificially drive up wages ended up impoverishing workers through high unemployment.

A few observations about the book:

I began research on this subject in 1986.  I was interested in McCloskey and Zecher’s critique of Friedman and Schwartz, and tried to reconcile the two studies on my own terms, by developing a model of discretionary monetary policy under a gold standard.

Then I tried to get empirical estimates of both national and global monetary policy. At that time I defined monetary policy not as expected NGDP growth, but rather changes in the gold currency ratio.  Even today, I would defend that seeming inconsistency as follows: Under a fiat money regime there are no significant constraints on monetary policy, hence it makes sense to think of the stance of policy in terms of the goal variable (NGDP, or something similar).  Under a gold standard, policy is sharply constrained; hence it makes sense to think about the stance of policy in terms of deviations from the rules of the game, i.e. changes in the gold reserve ratio.  That’s what central banks actually controlled, not the money supply or interest rates.

Then I started noticing that private gold hoarding was also an issue.  And finally, I added changes in the price of gold (1933-34) to complete the demand-side model. I noticed that real wages seemed highly (negatively) correlated with output, and thus added New Deal policies aimed at boosting wages as the supply-side of the model. (Based on research with Steve Silver.)  Obviously other factors matter, but I still think these are the key drivers of high frequency fluctuations in output from 1929-39.

I had a lot of frustrations along the way.  Most of my empirical data (on “Minitab”) was eventually lost when Bentley changed it’s computer system. I once lost a notebook with almost a year’s worth of notes on the New York Times I had read from the 1930s.  I read virtually the entire NYT from that decade, on microfilm.  I also read many old dusty volumes at Bentley, Brandeis and Harvard Baker Libraries.

I think I worked far too carefully, trying too hard to be accurate.  At the time I was working on my own (I did not use research assistants) and didn’t know how other economists did research.  I was very careful collecting all sorts of obscure data like the stock of Estonian kroons (monthly) in the 1930s, to make data sets as complete as possible.  (To give you an idea how old this research is, Estonia didn’t exist at the time.) Later I learned that most researchers cut lots of corners, and I doubt that any tiny improvement in accuracy from my painstaking approach was worth all the time I spent.  (I wasn’t thinking like an economist.)  If I had known how difficult the project would be, I probably never would have done it.  And even with all that effort, the book undoubtedly has some mistakes.

By around 2005 the book was done.  After a long period at Cambridge University Press it was rejected.  The reviewer was not at all helpful.  Then I set it aside, before sending it to Princeton after I started blogging in 2009.  Another rejection (at least the reviewer was acceptable—just wasn’t their cup of tea.)  Then Independent Institute, and again more delays.  Unfortunately that means the book is somewhat out of date in terms of the literature review.  Once I started blogging I had no time to keep up with my research.  But the good news is that my work is so out of the mainstream that I doubt anyone else was doing the same sort of thing. It’s a throwback to the approach taken by Friedman and Schwartz.  The differences from F&S include:

1.  Defining monetary policy in terms of the global gold/currency ratio, not the domestic money supply.

2.  Focusing on both supply and demand shocks, instead of mostly demand shocks as F&S did.

3.  Looking at market reactions to policy shocks, which led me to abandon the F&S “long and variable lags” approach.  I noticed that policy shocks, the market reaction, changes in the WPI, and changes in industrial production all tended to occur at roughly the same time, or perhaps a month lag, which is impossible if there are long and variable lags.  If there actually are long and variable monetary policy lags then my entire book is utterly worthless, and should be thrown in the trash.

Ideally, my book should have been done using NGDP instead of the price level.  But I had better price level data at the monthly frequency, and it turns out that during the 1930s you get roughly the same results either way, both the WPI and NGDP fell roughly in half during 1929-33.  (Both the WPI and NGDP were also highly correlated, as output was highly correlated with prices during this period.)  But if I were doing a similar study with postwar data I’d definitely use NGDP.

I sort of regret having to be so critical of the Fed’s performance during the Great Recession.  This material was added after the book was finished, and I would still defend everything I say.  But when I wrote the book I always envisioned Bernanke as the “ideal reader.”  I think he might have liked the book when it was finished in 2005, but would now hate it, due to just a half dozen pages out of 500.

I looked briefly at the 1920-21 recession, and it seems to have had the same cause—central bank gold hoarding.  I seem to recall that the Fed alone hoarded enough gold in 1920-21 to reduce the entire world price level by about 17%.  I did not study the 1893 depression, but I suspect that gold hoarding (perhaps private) associated with devaluation fears explain some of that depression too.  I also suspect there were a few other factors as well.  Someone could do the same sort of study of 1893-96 as I did for 1929-33, and it would be interesting to compare results.

For better or worse this is my life’s work.

PS.  Scott Alexander (who I had the good fortune of meeting last week in Boston) said the new title sounds like an airport thriller.  (I’ll bet Robert Ludlum could have made it into a real page-turner.)  Speaking of Alexander, I hope everyone saw his list of suggested hardball questions for the next debate. Funniest post of the year.

PPS.  I also have some comments over at Econlog.

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47 Responses to “The Midas Curse”

  1. Gravatar of BJH BJH
    1. December 2015 at 06:27

    Congrats :)

  2. Gravatar of Ray Lopez Ray Lopez
    1. December 2015 at 07:05

    Sumner: “For better or worse this is my life’s work.” – for worse, Scott. But I’m so moved by your candid account of your inadequacies that I might just buy the book, if they have a Kindle version. Thanks for this post.

  3. Gravatar of Ray Lopez Ray Lopez
    1. December 2015 at 07:39

    If you want to understand how economies work under the Gold Standard, and whether going off the Gold Standard during the Great Depression was good, bad or (my view) indifferent, simply go to the Wikipedia page on “Gold Standard”, and view this chart: https://en.wikipedia.org/wiki/File:Graph_charting_income_per_capita_throughout_the_Great_Depression.svg

    And just eyeball how Per Capita Income (in 1996 PPP dollars) changed after a country went off the Gold Standard (Up = increase = +; Down = decrease = -; not clear = ~)

    Quick Table of results:

    United States: Up (clearly the USA benefited from going off the Gold Standard, if you accept money non-neutrality)

    UK: Up (same as the USA)

    Belgium: Not clear (sideways)

    France: Not clear (sideways, and BTW France ‘hoarded’ gold)

    Argentina: DOWN. Put that in your pipe and smoke it Sumner.

    Germany: Up (Nazis in power going off the Gold Standard, and adopting severe exchange rate controls, financial repression and rationing was “good” for the economy. Sumner has ‘good company’ lol)

    Italy: Not clear. Note the trend line was going up even before Italy went off the gold standard, so arguably the gold standard was irrelevant

    Hungary: Not clear. Flat line, going off gold was irrelevant

    Japan: Not clear. Flat line with very small upward bias. More likely Manchuria and war production was the reason for the upward trend.

    Conclusion: in exactly three countries, the UK, US, and Nazi Germany, going off gold was good. In one country, Argentina, going off gold was bad. In five countries, going off gold was irrelevant.

    Conclusion: money is neutral, more or less. Great Depression scholar and economist Christina Romer has even said that output for economies under the gold standard was largely the same as with today’s fiat money.

    I’m sure Sumner as a different “take”, probably along the lines that the US, UK and Germany were the “engines” for the world, and Argentina was an anomaly due to their unique economy. Sumner is good at parsing words, phrases and facts to fit his warped world-view.

  4. Gravatar of WleB WleB
    1. December 2015 at 07:42

    The legacy of a Life’s Work? That the ‘Little Recession’ of 2088 is so named.

  5. Gravatar of Britonomist Britonomist
    1. December 2015 at 08:39

    Found a theme song for your book: https://www.youtube.com/watch?v=aop03iwTsyM

  6. Gravatar of Greg G Greg G
    1. December 2015 at 08:40

    Ray,

    >—“Sumner: “For better or worse this is my life’s work.” – for worse, Scott. ”

    So then what does that say about you when your life’s work is sex tourism and trolling Sumner?

  7. Gravatar of Britonomist Britonomist
    1. December 2015 at 08:50

    “But I’m so moved by your candid account of your inadequacies”

    Wow, isn’t harassment a bannable offense here? I admire your commitment to free speech Scott but I feel it’s totally reasonable to suspend people for repeated flaming.

  8. Gravatar of Tuesday assorted links Tuesday assorted links
    1. December 2015 at 09:08

    […] 7. Scott Sumner on Midas and his book. […]

  9. Gravatar of Philo Philo
    1. December 2015 at 09:14

    I don’t consider Ray’s comment *flaming*. He just slightly misconstrued Scott’s non-superhuman self-description as a confession of *inadequacies*.

    There’s no need to ban Ray: what harm does he do?

  10. Gravatar of Saturos Saturos
    1. December 2015 at 09:56

    Congratulations! have ordered.

  11. Gravatar of Thanos Thanos
    1. December 2015 at 10:46

    Congratulations Mr Sumner!!!

  12. Gravatar of Aaron J Aaron J
    1. December 2015 at 10:47

    Scott, one of foreign policy’s top thinkers in the world, life’s work is a total waste because all we need is Ray Lopez’s insightful analyses of “up” “not clear” and “DOWN.”

  13. Gravatar of E. Harding E. Harding
    1. December 2015 at 11:43

    “Speaking of Alexander, I hope everyone saw his list of suggested hardball questions for the next debate. Funniest post of the year.”

    -Nothing funny about it at all. Very long-winded.

    Midas Curse sounds like how Murphy interprets you. Also more clear. It took me a while to get the Midas Paradox title.

  14. Gravatar of Mike Rulle Mike Rulle
    1. December 2015 at 11:49

    Bought it today—hope I get thru it!

  15. Gravatar of ssumner ssumner
    1. December 2015 at 12:24

    Thanks BJH.

    Ray, Excellent. Citing Romer who would totally disagree with you, and then confusing log and linear scales. Well done!

    WleB, I had to read that 3 times to figure it out–but yes.

    Britonomist, No one has been banned yet, and there are worse commenters than Ray. (Beefcake makes Ray seem polite and mature by comparison.)

    Unfortunately that song is blocked in this country.

    Philo, And it’s fun to have someone you can mock everyday without a guilty conscience.

    Thanks Saturos.

    Thanks Thanos.

    E. Harding, There’s no accounting for (bad) taste in humor. :)

    Yes, Midas Curse is better.

    Mike, It has a surprise ending; the Great Depression never happened, it’s all a hoax. (Oops, I just gave it away.)

  16. Gravatar of Marco Marco
    1. December 2015 at 13:24

    Ordered! Looking forward to reading this. Are you familiar with Clark Johnson’s book on gold and the depression? Did it influence your position at all?

  17. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. December 2015 at 14:25

    Am enjoying the book greatly. On the gold/currency ratio. A gold standard sets a value in gold to the unit of account, making gold the medium of account. So, no matter how many (e.g.) currency dollars are in circulation, the value of gold sets their value. If gold rises in value (relative to output), the value of money rises relative to a given level of output (deflation). If gold falls in value (relative to output), the value of money falls relative to a given level of output (inflation).

    Hence Cassel’s concern about the future path of gold supply not keeping up with the future path of output, as if output growth systematically outstripped gold production, that would systematically raise the output-value of gold, having a deflationary effect. (This, of course, turned out not to be a problem and, while fluctuations in the relative paths of gold and output did produce inflationary and deflationary swings in the C19th, they were relatively minor–the upsurge in demand for gold from the French/German/US switch to the gold standard in the 1870s was more important, for example–and cancelled out over the long run.)

    So, as long as the currency in circulation can fluctuate according to the “needs of trade”, gold provides the anchor. (Hence, the plausibility of the “real bills” doctrine.)

    Why would the gold/currency ratio matter? (1) The plausibility of the peg. If the currency in circulation becomes sufficiently large that the guarantee to redeem in gold is in doubt, that could be seriously de-stabilising. Hence the gold standard constrains currency issue, hence states abandon the gold standard when they go to war. (Unless you are Napoleon; an autocrat who so does not want to invoke recent dire memories of Revolutionary hyperinflation, so you run a strict bullion–gold & silver–standard financed by looting Europe.)

    (2) The output-price of gold. Having more gold in the vaults than is needed to ensure the plausibility of the peg tends to raise the value of gold relative to a given level output. And the more so, the more so. Since the central banks so dominated gold holdings in the interwar period, they dominated the output-price of gold, with the gold/currency ratio being an indicator of their “gold stance”. A factor enhanced if private folk began to also hoard gold.

    Is that a fair description?

  18. Gravatar of Christian List Christian List
    1. December 2015 at 14:53

    I had to order one fast, there are only 6 books left at the German version of Amazon at the moment.

    I also admire (in some way) that Scott doesn’t even ban Ray. I just got banned at Tyler Cowen’s blog for a very harmless comment. I was really surprised. So now I admire Scott’s nearly endless tolerance even more.

  19. Gravatar of bklyn77 bklyn77
    1. December 2015 at 15:46

    Any planned book signings ??(Barnes and Noble Union sq ?)

  20. Gravatar of Benjamin Cole Benjamin Cole
    1. December 2015 at 17:02

    Congratulations Scott.

    Does the Independent Institute publish detective novels? I’ve written a couple doozies, can’t get a publisher…

  21. Gravatar of TravisV TravisV
    1. December 2015 at 19:19

    Dear Commenters,

    If possible, could someone please provide an old Sumner post where he explains the following in detail?

    “A given policy shock can be expansionary in one setting, and contractionary in another. For instance, expectations of dollar depreciation were contractionary under Hoover (when pegged to gold), but expansionary in 1933, when they led to a weaker dollar.”

    http://econlog.econlib.org/archives/2015/12/the_midas_parad.html

  22. Gravatar of Ray Lopez Ray Lopez
    1. December 2015 at 19:28

    @everybody except Sumner and Aaron J: you wish to ban me for not just saying “wow, great book, way to go!!!”?? That’s retarded; you sound like a bunch of spoiled children who want to pick up their ball and go home if they lose. This post about Sumner is not just a ‘tribute post’ where we just say ‘thank you’, it’s a substantive post as well on his book’s topic.

    @Sumner – what log scale? The link I showed is not log scale but linear. What are you talking about, please explain? Sumner: “Citing Romer who would totally disagree with you” – no, by email Tyler Cowen informed me that was C. Romer’s views. Do you wish a cite? I can politely ask him to provide me one. I’m good with Tyler (who discovered you, so you owe him forever, lol).

    @Christian List – TC banned you? For what? I think it’s not a ban but a technical problem. Posting from overseas on US servers runs into problems all the time I found. TC is so mild mannered and I have often flamed others without being banned.

    @Lorenzo from Oz – I enjoyed your commentary, you are a scholar and gentleman. “So, as long as the currency in circulation can fluctuate according to the “needs of trade”, gold provides the anchor. (Hence, the plausibility of the “real bills” doctrine” – yes, that is true, and a real bills is an acknowledgement of money neutrality. Hence C. Romer’s statement that things worked out under a gold standard largely same as now. I will say this in defense of monetarism: when things go bad, arguably money is not neutral, and arguably there’s some small advantage to fiat currency. But the link is very weak (recall Bernanke’s FAVAR paper, 3.2% to 13.2% for the period 1959 – 2001, where there were many US recessions) and the entire premise is arguable, since it depends on such unproven factors as strong price/wage stickiness and money illusion, not to mention somewhat constant money velocity. It’s more accurate to say that depressions and recessions are caused by either real factors (70s Oil Shock, war), paying down debt (Richard Koo’s ‘balance sheet recession’, though I disagree with his Keynesian fix), simple panic (1907, 19th century) that takes a while to work out (see Rogoff et al’s book; often 20 years). Monetarism and Keynesianism arguably can help, mostly psychologically (placebo effect) and maybe to smooth over some slight sticky wage factors, but again it’s 5%, not 75% of the fix. Doing nothing and letting the storm pass (citing Keynes famous comment favorably here) is probably best. Given a choice between monetarism and Keynesianism, I would choose the former, since it’s largely harmless (money is neutral), whereas gov’t deficit spending is largely bad, as it leads to sclerosis of the economy).

    I could go on, but I’m not supposed to be giving lectures, that’s our host’s job. Let’s see if he bothers to further reply on my previous post other than to criticize the scale. It’s best to ignore a damning critique, and hope your readers forget it.

  23. Gravatar of Ray Lopez Ray Lopez
    1. December 2015 at 19:38

    @TravisV – I’ll let Sumner apologists answer, but I my understanding is that Sumner, like Krugman, uses the ‘expectations fairy’ popularized by Lucas in the 70s/80s (remember ‘rational expectations’? what a cult that was). So when things don’t turn out as planned when the bank prints money (monetarism) or the gov’t spends money (Keynesian-ism, multiplier is zero) the economists say: ‘it’s because your attempt to print or spend was not credible with the public; they thought you would later reverse your actions’. It’s complete untestable and completely unscientific. You might as well say, like Shiller suggests, the economy is non-linear due to ‘animal spirits’ which can’t be predicted nor planned for.

  24. Gravatar of meets meets
    1. December 2015 at 19:59

    I remember reading Scott’s first posts on this blog at the start (or was it the middle?) of the Great Recession, and I was hooked.

    It was like reading the only person in the world who understood what was happening and could publicly convey it.

    The readable style and good humor helped too.

    Pre-ordered this.

    Congrats Dr. Sumner!

  25. Gravatar of TravisV TravisV
    1. December 2015 at 21:00

    Nick Rowe asked some interesting questions in a new post:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/12/questions-for-moneymacro-historians-of-thought.html

  26. Gravatar of James Alexander James Alexander
    2. December 2015 at 03:56

    Your nearly selfless work matches your nearly endless tolerance. An example to us all. But you do enjoy it all too, hopefully. Psychic income is real.

  27. Gravatar of Beefcake the Mighty Beefcake the Mighty
    2. December 2015 at 05:15

    The nut-huggery is strong here.

  28. Gravatar of ssumner ssumner
    2. December 2015 at 07:40

    Marco, Yes, Clark’s book is excellent. He is trained as an historian and has a much greater understanding of the political nuances than I do. As far as influence, we were both working on this at roughly the same time, as were people like David Glasner and Barry Eichengreen. Even Bernanke. I was influenced by all of them, but reached many of my key themes independently.

    I think Clark started from the Mundell worldview, whereas David Glasner was influenced by Earl Thompson. I was influenced by Friedman and Schwartz, and also McCloskey and Zecher at the very beginning.

    Lorenzo, Yes, central banks had a big effect on the real demand for gold, and hence the value of gold. They held a large proportion of all gold mined since the beginning of time (I think over 50%.) The real demand for gold is equal to the gold ratio times the real demand for currency. So if the public’s real demand for currency is stable, and the gold ratio rises by 9%, then the real demand for gold rises by 9%. This reduces the global price level by 9%, ceteris paribus. It’s roughly what happened between October 1929 and October 1930. After that, big rises in the real demand for currency created a higher derived demand for gold.

    Thanks Christian.

    Bklyn, Nothing planned now.

    Ben, Mine is a sort of detective novel, a who dunnit.

    Travis, I may have mentioned the idea in one or two posts, but I don’t recall where.

    Ray, Yes it’s linear but you are treating it like a log scale. In percentage terms the Japanese recovery is quite impressive.

    Thanks Meets.

    James, Well I’m definitely not doing this because I enjoy it. (Unless you define “enjoy” tautologically in terms of whatever one chooses to do.)

    I wish I had more time for films, novels, music, etc.

  29. Gravatar of Kevin Erdmann Kevin Erdmann
    2. December 2015 at 08:17

    Congratulations, Scott.

    And, yeah, those SSC questions for the political debate were off the charts.

  30. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    2. December 2015 at 09:03

    Congratulations on the outstanding work, Prof. Sumner. Will read the book, I am glad there is a kindle version.

  31. Gravatar of Michael Rulle Michael Rulle
    2. December 2015 at 10:04

    Where does a thought go when it is forgotten?

  32. Gravatar of meets meets
    2. December 2015 at 10:06

    Ray, this is a tribute post.

    Shutup and get with the program

  33. Gravatar of ChargerCarl ChargerCarl
    2. December 2015 at 11:41

    Awesome, this will be a great christmas gift to myself.

    Now only if we could Kevin Erdmann in touch with an editor so he can release his U.S Housing magnus opus…

  34. Gravatar of Mike Mike
    2. December 2015 at 12:11

    Could you make it eligible for Kindle Matchbook? I bought the hard copy but would love to get it for my Kindle too for a little extra.

  35. Gravatar of Tobias Tobias
    2. December 2015 at 14:45

    Congratulations! Looking forward to it Scott. Pre-ordered it two weeks ago in the Netherlands. Hope to be reading it soon. You have a true passion for your subject and would love to read all the little details you collected to support your case as carefully as you possibly could. Thank you for writing a book like this.

  36. Gravatar of Christian List Christian List
    2. December 2015 at 16:51

    @Ray Lopez
    No it is a ban. I can still post under different name and email addresses. At first I thought it might have been a wordfilter only. But the comment appeared and got deleted like one hour afterwards, then my name got banned.

    I’m surprised also because the most anti-Semitic and racist comments don’t get deleted, even by open Nazis. I got banned for saying that certain minorities like Chinese/Japanese/Jewish people are not famous for committing terrorist attacks in the US while another minority group is infamous for it. World-wide. Integrated or not. In many very different countries.

    Maybe an admin misread something I don’t now. I assume that TC is not doing this work himself.

  37. Gravatar of Major.Freedom Major.Freedom
    2. December 2015 at 18:32

    “The metaphor reflects the fact that attempts to hoard lots of gold ended up impoverishing the countries that got too greedy. And I’d add that the second theme of the book is that attempts to artificially drive up wages ended up impoverishing workers through high unemployment.”

    Without the latter, the former would not even appear to be (but still not actually) a fact of impoverishment.

    Rising cash preferences results in falling prices. There is no impoverishment. People get what they want. They get more money and lower prices, and the costs associated with this choice, are positive just like every other choice has positive costs.

    Asserting from one’s armchair that free market driven costs of reshuffling of labor and capital, “impoverishes” people, is socialist minded “My values overrule your values”.

    Gold, which was the market driven money of choice up until that time, had literally nothing to do with the Great Depression. It was 100% caused by central banking and government intervention in the labor and capital markets.

    Blaming gold hoarding, which was merely an effect of prior deviation from gold inflation and credit expansion, is blaming a chimera.

  38. Gravatar of Ray Lopez Ray Lopez
    2. December 2015 at 19:11

    @Sumner – Thank you! Sumner: “Ray, Yes it’s linear but you are treating it like a log scale. In percentage terms the Japanese recovery is quite impressive.”

    -OK, I stand corrected (though to be honest I don’t agree such a small linear rise is significant UPDATE: see O’Neil’s website graphic, the original source, and you can see it is significant, as the resolution of the graphic is better).

    So add “Japan” to the list of countries that recovered after dropping the Gold Standard. But that leaves the other countries that need to be explained. Explain: Belgium, France, Argentina, Italy. I will even GIVE YOU Hungary, since, like Japan, it shows a very small linear rise after leaving the Gold Standard. However, I just noticed at the bottom of the graph there’s Brazil! And it clearly shows going off gold had no effect (even a small initial negative effect).

    So in sum, let’s total the countries:

    Countries that did better after going off the Gold Standard in the Great Depression (the topic of Scott’s book!):

    USA, UK, Germany, Japan, Hungary.

    Countries that did no better or worse (Argentina):

    Belgium, France, Argentina, Italy, Brazil.

    Five vs five. That’s pretty much the definition of random, isn’t it?

    Please reply. Better yet, do a whole blog post on this topic, it’s very interesting.

    Update: the original graphic is from O’Neil’s website: www [dot] analysis [dot] williamdoneil [dot] com/Great_Depression_Facts_Figures [dot] htm

    And the graphic is much clearer, and derived from the eminent economic historian Angus Maddison.

    PS–O’Neil seems to be very balanced, in his paper on the Great Depression (http://www.analysis.williamdoneil.com/Depression_Facts.pdf) viz., he doesn’t believe Smoot-Hawley tariffs were a big deal (Douglas Irwin’s book makes this very clear), and, significantly, he actually believes, as I think Sumner does, that the US Fed *was* expansive very early in the Great Depression, just not expansive enough (NGDPLT!), see, pp. 26-7 of O’Neil’s paper, citing public expectations and bank runs as the reason for the initial collapse of 1930-33.

    In short, I respectfully ask Dr. Sumner to explain why the countries not positively impacted by going off the Gold Standard don’t matter. What is your argument Dr. Sumner? That they were peripheral to the world economy? Special cases? That the countries such as UK, USA, Germany that did go off gold and were better for it somehow affected the countries that did not, for the better, perhaps via trade? I’m all ears. (I think however you probably don’t know, since such a study has never been made, but I invite you to speculate).

    Until you rebut me, I say I defeated the central argument of your book.

  39. Gravatar of Ray Lopez Ray Lopez
    2. December 2015 at 19:21

    Off-topic: @Christian List- very interesting you got banned from TC’s blog for such a mild mannered (and factually accurate) post that seemed anti-Semitic. I would say it’s probably indeed an administrator at GMU. I’ve been banned from Econlog for commenting in the same way as I do here vs Sumner, and it was not Sumner’s decision but some admin (maybe the same one, since I think GMU hosts Econlog). She doesn’t like me, lol, I even have an email from her asking me to tone down my rhetoric. (You have to admit though readers my rhetoric is good, isn’t it?)

  40. Gravatar of Pietro Poggi-Corradini Pietro Poggi-Corradini
    2. December 2015 at 19:29

    Congrats! Book reads well so far. Not overly technical.

    About the Ray/Sumner banter, my only problem is that it’s too hard to avoid. It draws my attention, but then I don’t get much out of it, especially on days when Ray is especially aggressive. Basically, for lack of time, I tend to skip forward to Scott’s responses and then go back and read the original comments that were responded to. It’s a way of filtering the comment section through Scott’s reactions.

  41. Gravatar of Ray Lopez Ray Lopez
    2. December 2015 at 21:18

    @Pietro Poggi-Corradini – thanks for sharing your thoughts. I wish you would read O’Neil’s paper on the Great Depression, which is amazingly good. He’s a UCLA math major, not an economist, and he took two weeks to research the topic in 2009, but despite or because of the short time, his conclusions are very sound.

    Essentially, O’Neil says that the Great Depression was largely in the USA due to an Irving Fisher Debt-Deflation cycle, but was made worse by ‘expectations’ (the expectations fairy, akin to saying the economy is non-linear and cannot really be predicted exactly), citing the recent work in 2006 by Fed economist Gauti B. Eggertsson and Benjamin Pugsley. O’Neil does give credit to monetarism for making worse temporary factors, and gives a nod to Keynesianism, mainly in setting expectations, as the slight expansionary effect of government in the 1930s was too small (by today’s standards) to have really changed anything, but it did “set the tone”. As for Eichengreen’s (and Sumner’s) argument about golden fetters, O’Neil does acknowledge that these fetters may have played a role in setting worldwide expectations, but there’s no hard evidence, only suggestions as given by the graph I linked above (i.e. many leading countries–certainly by weighted GDP–got better once they got off the gold standard, suggesting monetarism was a force, albeit mild). O’Neil correctly dismisses Smoot-Hawley tariff’s and the Fed’s 1937 reserve ratio change as big causes for the 1930/1937 downturns, see his paper for details.

    As for Friedman et al’s monetarist critique of the Great Depression, O’Neil gives it credit for any short term effects but correctly dismisses it. It’s that 13.2% to 3.2% effect found by Bernanke I’ve been harping on. (O’Neil: “But most economic models predict that a change in money supply should cause only a brief, tempo- rary effect in the real economy, not a deep and lingering depres- sion. Moreover, close examination has failed to show the right time relationships between money changes and many of the changes in the course of the Depression. Recent experience seems to cast some light on the limitations of the monetarist view. Over the course of the latter half of 2008 the Fed, under Bernanke’s leadership, has done everything in its power to avoid the mistakes of the Depression era, but as Paul Krugman has pointed out, this seems to have had little effect.” [Naturally our host would say the Fed did not do enough, but that’s metaphysics; what they did do did not amount to much, showing monetarism as practiced is impotent–RL]

    All in all, a very good paper that is short and to the point.

  42. Gravatar of MFFA MFFA
    3. December 2015 at 05:07

    Out of topic: France unemployment is now at its highest since 1997 (http://www.rte.ie/news/business/2015/1203/750878-france-unemployment/). What good words will PKrugman have about the way french people run their economy? Will he look at France in the same way he looks at Ireland?

  43. Gravatar of ssumner ssumner
    3. December 2015 at 09:31

    Thanks Kevin, Jose, Tobias, Pietro.

    Michael. That’s actually a much more profound question than it seems—gets at the nature of consciousness. But even better would be “Where does a thought go when it’s neither forgotten nor remembered”?

    Mike, They are planning to do a kindle.

    Ray, Well at least we got Japan out of the way. France elected a bunch of socialists who sharply raised wages. Remember the musical chairs model?

    MFFA, His worldview can’t explain the difference in unemployment between Germany and France, and would be admitting that left wing labor market policies are a cause of a high natural rate of unemployment.

  44. Gravatar of Ray Lopez Ray Lopez
    3. December 2015 at 18:51

    @Sumner – I was going to write a string of obscenities and hope that you ban me….this is torture! You are employing the Socratic Method of Q&A online…that don’t work pedagogically even live, much less now where I’m 12 hours ahead of you. Give me the answer! GIVE ME THE DATA NOW! please…

    Sumner: “Ray, Well at least we got Japan out of the way. France elected a bunch of socialists who sharply raised wages. Remember the musical chairs model?” – OK I’ll research this (sigh)…Musical chairs model Scott Sumner…OK got it: (Economist) The musical chairs model says that shocks to nominal GDP—or total spending in the economy—drive unemployment. When nominal GDP falls, there is no longer enough spending to sustain the same number of jobs unless wages fall. Because wages are slow to adjust, unemployment rises instead

    OK: France didn’t rise more after going off gold because wages were too high (note Hoover & Roosevelt, in response to 1930s economists, also did try and keep wages high to prevent depression).

    OK let’s strike France from the list, as anyway the curve shows they did improve a bit after going off gold.

    How do you explain Italy (bump before going off gold, is that ‘expectations’ of going off gold?; then not much of a rise); ditto Belgium (flatline after going off gold).

    More importantly, how to explain Brazil and Argentina (both went down after going off gold)? The only way I can do it is if you assume whatever meager trade they did with the USA in commodities would somehow impact their economies. Is that it? Please explain.

  45. Gravatar of TravisV TravisV
    4. December 2015 at 21:14

    Lorenzo from Oz: “Why gold/currency ratios mattered in the interwar period”

    http://lorenzo-thinkingoutaloud.blogspot.com/2015/12/why-goldcurrency-ratios-mattered-in.html

  46. Gravatar of ssumner ssumner
    5. December 2015 at 07:09

    Ray, Argentina and Brazil saw the prices of their exports collapse in 1930 and 1931. In any case, the graph for Brazil is hard to read, it’s a lousy graph.

    Thanks Travis.

  47. Gravatar of TravisV TravisV
    5. December 2015 at 11:27

    Fantastic video where Prof. Sumner explains the Great Depression in detail:

    https://vimeo.com/11700175

    https://www.youtube.com/watch?v=kNbpb1UNxWE

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