OAKLAND, CA—Economic historians have made great progress in unraveling the causes of the Great Depression, but until now no one has fully explained why it began in America in late 1929 or explained why the resulting economic malaise was prolonged and deepened, taking a multitude of twists and turns from 1929 to 1940.

The puzzles of the Great Depression are at last solved in The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression, by Scott Sumner. Published by Independent Institute, this landmark work offers both a narrative of the Great Depression and a critique of modern monetary analysis, which the author shows has led policymakers astray in their effort to deal with the Great Recession that began in 2008.

Selected findings of The Midas Paradox:

• Gold hoarding led to deflation and a deflationary contraction during 1929–33 and again during 1937–38. Five attempts to artificially raise wages during the New Deal slowed the recovery.
• Governments that hoarded gold the most aggressively typically ended up creating the most suffering when the rising value of gold led to deflation. Persistent (and often justified) fear of currency devaluation led to four key episodes of private gold hoarding, each of which destabilized global assets markets and plunged the economy deeper into depression.
• President Roosevelt’s devaluation of the dollar in the spring of 1933 produced the fastest economic growth in U.S. history, but the record upswing lasted only four months because the president’s National Industrial Recovery Act was so destructive. The Act’s failure to spur economic recovery prompted Roosevelt to try to raise wage rates four more times, with each attempt causing a sharp slowdown in the recovery.
• Modern policymakers were wrong to attribute the recent recession to financial market instability. The deeper problem was falling nominal spending caused by the Federal Reserve.

Scott Sumner is Research Fellow at Independent Institute, Professor of Economics at Bentley University, and Director of the Program on Monetary Policy at the Mercatus Center at George Mason University.

The Independent Institute is a non-profit, research and educational organization that promotes the power of independent thinking to boldly advance peaceful, prosperous, and free societies grounded in a commitment to human worth and dignity. For more information visit independent.org.

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