17 Jun 2016

Murphy Review of Sumner

Scott Sumner, Shameless Self-Promotion 23 Comments

My review of Scott’s book, The Midas Paradox, in the latest QJAE.

23 Responses to “Murphy Review of Sumner”

  1. Gene Callahan says:

    “How can it be that the classical gold
    standard is largely responsible for the Great Depression, when
    the classical gold standard was operating during several previous
    financial panics and depressions (small “d”)? To blame the Great
    Depression on the gold standard is akin to blaming a particular
    plane crash on gravity”

    But Sumner offers an explanation for this! (The gold standard was breaking down, and especially France and the US were not playing by the rules.) You may not like the explanation, but I’m surprised you don’t even mention that he does try to explain why this is not like “blaming gravity.”

    You may not like it

    • Andrew_FL says:

      But, in other words, it was Cantral Banks *not following* the Gold Standard “rules” that “caused” the Depression, not the Gold Standard itself.

      Say what you will about the previous generation of Monetarists, but their story of the Great Depression is very different from Sumner’s *on this specific point*. Friedman always maintained that the pre-Fed clearing house associations under the Classical Gold Standard would have prevented anything like the Great Depression from happening. He thus put responsibility for the Depression on the existence of the Fed. On this point, where he differs by implication from Sumner, Friedman is clearly right and Sumner wrong.

      • Gene Callahan says:

        “On this point, where he differs by implication from Sumner, Friedman is clearly right and Sumner wrong.”

        Have you read the book, Andrew? I just reviewed it, and I don’t recall Sumner even looking at this issue, let alone being “wrong” about it. He starts his analysis in the 1920s, accepting its institutional framework as his starting point.

        ANY historical analysis can always go back further and ask what if something earlier hadn’t been done: perhaps if it wasn’t for 1776, the US and Britain would have been one country and been able to coordinate monetary policy!

        Sumner simply chose a certain slice of time and analyzed what went on during it. I don’t see how he can be termed “wrong” for not going back further.

        • Andrew_FL says:

          Has Sumner, who claims to be a Monetarist read the seminal work of monetary history from a Monetarist viewpoint? That’s the question you should be asking. Evincing no evidence of having done so is reprehensible.

      • E. Harding says:

        Simple; Andrew. Sumner decouples monetary policy and banking. Thus, though the banking crisis, which might have been prevented by the existence of the Fed, might have been what made the U.S. Great Depression the worst of any country in the world, it was the Midas curse that led to the international GD.

        • E. Harding says:

          *by the lack of existence

          • Andrew_FL says:

            But it’s also the case, at least in the US, that Fed would have been less contractionary if it merely had been following established standard operating procedures for the old gold standard. It doesn’t make sense to blame gold for binding policymakers, who really only bound themselves, especially with wrong headed notions, completely unrelated to the gold standard.

            I blame the depression primarily on two false economic doctrines then in vogue. The High Wage Doctrine, and the Real Bills Doctrine.

    • Bob Murphy says:

      Gene wrote:

      But Sumner offers an explanation for this! (The gold standard was breaking down, and especially France and the US were not playing by the rules.)

      Gene, so do you think Scott would be OK if I had summarized his book like this?

      “Sumner argues that the ultimate cause of the Great Depression was that major powers departed from the gold standard.”


      • Gene Callahan says:

        There is a couple of pages toward the end where he talks about how sometimes either more extreme policy might work while one in the middle can fail. (So, he in fact actually says that a pure Austrian approach probably would have been better than what was actually done!)

        So, he indeed thinks:
        1) Following the gold standard would have been better than actual policy; AND
        2) Leaving the gold standard would have been better than actual policy (circa 1928-1932).

        Given the choice of 1) or 2), I believe he would say 1 was less likely, since their is really no way to keep countries from “cheating.” 1) for Sumner is like a theoretically great diet plan that is simply too rigorous for anyone to ever follow.

        • Bob Murphy says:

          1) for Sumner is like a theoretically great diet plan that is simply too rigorous for anyone to ever follow.

          Right, so can’t I point out that people had been following it and staying trim for a century (or whatever, depending on the person)? It’s not like the person encountered a New Year’s Eve party and couldn’t resist the temptation to cheat in 1931–the person had been to several NYE’s parties earlier and never had that problem before.

          • Gene Callahan says:

            Hmm, my post below could be read as a response to this, even though I hadn’t seen it yet!

            You certainly can point that out, and make an argument that the diet wasn’t too rigorous at all. I just didn’t think the passage from your review I quoted was fair to Sumner: he *does* try to address why this is different from blaming gravity for a plane crash. Maybe his explanation doesn’t work, but he did try!

          • Gene Callahan says:

            And I think we really only see the classic gold exchange standard (https://en.wikipedia.org/wiki/Gold_standard#Gold_exchange_standard) from the late 19th century to WWI, then a decade-long attempt to resume it in the 20s. So we really only have a couple of decades of it working. We get a major crisis (WWI) and it breaks down. It’s certainly not unreasonable to suggest that perhaps that shows it was fragile and bound to break down. (I’m not saying the opposite argument can’t be made as well — a contest of historical counter-factuals is notoriously hard to judge!)

            • guest says:

              “It’s certainly not unreasonable to suggest that perhaps that shows it was fragile and bound to break down.”

              Counterfeit Gold Standards

              “While I have no doubt that the jerry-rigged gold exchange standard that was cobbled together by government bureaucrats and central bankers at the Genoa conference of 1922 was better than Richard Nixon’s fiat money monstrosity that has plagued the world for 39 years and 11 months, it was a pseudo-gold standard from the beginning. It was not a full gold-coin standard under which anyone could exchange a nation’s currency at a fixed rate for gold coins of a fixed weight and fineness.

              “The full gold-coin standard that prevailed in the second half of the nineteenth century was itself a doomed experiment. It turned into the fiat money standard (1914), which became the gold exchange standard (1922), which became the Bretton Woods standard (1944), which became today’s fiat money standard (1971). Why? Because the full gold-coin standard relied on government promises. “Yes, we guarantee that we will exchange our currency for gold. You can trust us.” It was not a 100% gold standard. It was a 100% trust your national government standard.

              “In August 1914, European governments that entered the war broke their monetary promises, confiscated the gold that was on deposit in commercial banks, turned this gold over to their respective central banks, which then inflated to fund World War I. It was the biggest bank heist in history. There was no resistance by the public.

              “The gold exchange standard of 1922 was Europe’s attempt to maintain the trappings of the pre-war gold coin standard, but without full redeemability. It was a central bankers’ gold standard among themselves. It was never intended to be a gold standard for the masses.

              “That was the problem. It was a gold standard for the elite of elites: the central bankers. It blocked out the secondary elite, namely, government civil servants.”

            • guest says:

              Also this, from the same source:

              “Any time that you see someone in an Establishment media outlet suggest that we need a return to a gold standard, look carefully at the details of his proposition. Does it involve the reintroduction of gold coins by the national mint? If there is legally guaranteed rate of exchange between the national currency and these gold coins, meaning full redeemability? Can anyone go to his local bank and exchange money in his bank account for gold coins? That would get us back to 1914.

              “Yet even that gold standard would be fake. Why? Because no one is being charged for a service: storing the gold coins. Any time you find a valuable service being offered for free by any bank, you can be sure that there is a ringer somewhere in the arrangement. The bank is luring you into a deal by means of a promise that cannot be met under all circumstances. In this case, it is free gold coin storage. Somewhere in the bank’s operations there is a liability against the gold coins — a liability superior to any depositor’s claim.”

      • Gene Callahan says:

        I have attended a conference at a manor house in Wales that two sisters donated to the university. When I was there, there was a bartender in the basement who shut down the drinking at midnight. My friends said it used to be just a bar, no tender, people helped themselves, and stayed as long as they wanted. Then one conference a group of attendees stayed in the bar right until the morning session, which they came to plastered and stinkin’ of booze.

        Then the bartender was hired.

        The “classic bar system” worked great… so long as everyone followed the rules. But it was almost inevitable that everyone would not. And once they stopped doing so, simply talking of the virtues of the classic bar system was not likely to fix the problem.

        • Major.Freedom says:

          “But it was almost inevitable that everyone would not.”

          That is true about EVERY rule.

          You may not realize it now, are maybe now you do, but the underlying premise of your position here is that any and all rules will fail to “fix the problem”.

          • Keshav Srinivasan says:

            Well, at least rules without enforcement teeth and which people have incentive to break.

            • Major.Freedom says:

              Those aren’t really “rules” per se.

    • E. Harding says:

      +1 Gene.

  2. Bob Murphy says:

    Gene: You, Sumner, and I all agree that it was a combination of things (including federal interventions) that produced the Great Depression. But Sumner’s book is titled The Midas Paradox, not The Wage-Fixing Paradox. Scott has clearly gone on record saying that the gold standard was a big factor in the explanation for the Great Depression. One of his favorite arguments is that FDR devalued the dollar (vis-a-vis gold) and this led to a surge in output.

    • Major.Freedom says:

      If the gold standard, the actual gold standard, cannot be blamed for the Depression, then Sumner’s whole intellectual investment cannot be justified as worthwhile.

      It is apropos. More inflation rather than accept the malinvestment.

    • Silas Barta says:

      “Guys, guys, it turns out that in bad economic times, if we loot all the haves and give the stuff away, consumption goes up! I mean, for the next few years, anyway. Who knew???”

  3. E. Harding says:

    BTW, Sumner offers two explanations (IIRC) related to the October crash. The first is expected increases in British gold demand (which Sumner considers mostly unconvincing, due to careful scrutiny of other market reactions to this). The second, which Sumner finds more convincing, is the debate over the Smoot-Hawley tariff act, the enactment of which resulted in a quick contraction in NGDP.

    BTW, my other email’s still banned.

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