Re-reading Irving Fisher

Irving Fisher had it all figured out in real time. His investment advice was famously ill-timed, but he redeemed himself in macro. As the Great Depression was unfolding, he identified the disease and the cure. That’s old news, but it’s debatable if it’s widely understood. But it can be, and for free. The St. Louis Fed has generously re-published several of Irving Fisher’s books, including 1932’s Booms and Depressions: Some First Principles. Among dead economists with relevant advice in the here and now, this dismal scientist is the first among equals. The details of our current troubles are different, and the disinflation/deflationary winds are comparably mild by the standards of the early 1930s. But it’s hard not to recognize the parallels across time. History doesn’t repeat, but it does seem to rhyme at times. The same might be said of the recommended cures. There’s nothing new under the sun, even if we’re told otherwise. Maybe we didn’t see it coming, but it still looks rather familiar in hindsight. Judge for yourself with a few excerpts from Booms and Depressions… and then read the book.

► As will be seen, the main conclusion of this book is that depressions are, for the most part, preventable and that their prevention requires a definite policy in which the Federal Reserve System must play an important role….

► There are those who ascribe this individual impoverishment to the very fact of collective wealth—not overpopulation, but “over-production”—too much food and too
much of all else.

Later in these pages there will be more about this. It is enough here to note that those who, at the beginning of a depression, cry “over-production” and expect recovery as soon as over-production ceases usually become disillusioned when later almost universal poverty appears. If, in 1932, anyone thought there was still over-production, he should follow his own argument all the way through as follows: “How do I know there is over-production of goods? Because more goods are for sale than the public will buy. And why, then, will the public not buy? Because they haven’t the money. Why haven’t they the money? Because they are not earning it. Why aren’t they earning it? Because they are not producing: men and machines are idle!” But if non-production is the trouble, why call it overproduction?

► What, now, are the consequences of a mistake of judgment on the part of debtor or creditor or both? First, consider the individual debtor. If he has not borrowed enough, he can, under normal conditions, easily correct the error by borrowing more. But, if he has gone too far into debt,—especially if he has misjudged as to maturity dates—freedom of adjustment may no longer be possible. He may find himself caught in a trap….

► When over-indebtedness, whether by sheer bulk or by rashness as to maturity dates, is discovered and attempts are made to correct it, distress selling is likely to arise….

► Distress selling perverts the operation of the law of supply and demand….

► Few people look at money for their explanations, because most people simply look through money, think in terms of money, take money for granted, assume that a dollar is always a dollar. Since we measure everything else in dollars, it does not readily occur to us to measure the dollar itself. Few people realize, for instance, that the depression dollar of 1932, as compared with the pre-depression dollar of 1929, became really a dollar and two thirds; and still fewer realize the tremendous significance of this fact. Yet its significance is all the greater just because it is not clearly realized….

► And it should be equally clear that deflation, or dollar bulging, is not an “Act of God” with a special mandate to baffle the human race. We need not wait for a happy accident to neutralize deflation. We ourselves may frustrate it by design. Man has, or should have, control of his own currency….

► But the mere fact that the debt disease may lead to the dollar disease does not prove that it must do so. The dollar disease will be unavoidable only “if other things remain equal.” Should other elements in the body of the currency not remain equal—should gold coin, for instance, become copious in the nick of time—this gold inflation might counteract the credit deflation. Prices might even go up instead of down; that is, the dollar might dwindle instead of swell. And the same result might come from paper inflation—for instance, by way of financing a war.

And it should be equally clear that deflation, or dollar bulging, is not an “Act of God” with a special mandate to baffle the human race. We need not wait for a happy accident to neutralize deflation. We ourselves may frustrate it by design. Man has, or should have, control of his own currency.

Such a control, so exercised as to neutralize the influences which tend to swell the dollar, would, of course, not avert from any rash initial debtor the measured consequences of his own rashness j but his punishment would be due to the nature of his separate debt and would, there fore, be chiefly confined to himself and perhaps a small circle of associates. The rest of the community would not suffer from any vagaries of the universal dollar. And even the rash debtor has a right to pay his debt in the same dollar in which he contracted it. It is manifestly unfair to require even a rash debtor to pay $1.50 or $2.00 for every dollar he really owes. The principle of simple justice implied in the term “real wages” is no more applicable to wage earners than it is to debtors.

In a word, if we must suffer from the debt disease, why also catch the dollar disease? If we catch cold, why let it lead to pneumonia?

2 thoughts on “Re-reading Irving Fisher

  1. Ekim

    There is more to the story. Excessive printing in the 1920’s led to misallocated capital. It was permanently lost from the system, and took many years to replace. You can’t simply print more capital, it must be produced widget by widget.

  2. JP

    Ekim, right you are. There’s always more to the story in macro. But on the narrow but all-important issue of new recessions and preventing contractions from turning into depressions, monetary policy is front and center. That wasn’t understood very well in the early 1930s. We know better now… maybe. In the long run, real growth is the solution, but sometimes in the short term there are other factors to consider to help us from drowning.

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