Before you read on: days before the 1929 crash, what did Irving Fisher say about share prices?
In mid-October 1929 Fisher told a business audience that share prices looked set to stay high. Within two weeks the market crashed.
- Lived
- 1867 to 1947; born in Saugerties, New York
- Nationality
- American
- Work
- Whole career at Yale, which awarded him its first economics doctorate (1891); professor of economics 1898 to 1935. Grew rich from a card-index filing system he invented
- Key works
- The Purchasing Power of Money (1911), Booms and Depressions (1932) and the paper The Debt-Deflation Theory of Great Depressions (1933)
- School
- A quantity theorist; monetarism later took up his approach
What Fisher was reacting to
Fisher trained in mathematics and brought equations and measurement to economics.
The quantity theory of money, the idea that more money in circulation pushes up prices, was centuries old but loosely stated. Fisher set out to restate it precisely. He saw swings in the general price level as a cause of booms, crises and depressions. Measuring those swings, and then preventing them, became the thread of his work.
Fisher's key ideas
Can you name Fisher's four key ideas?
MV = PT. Money in circulation (M) times velocity, how often each unit is spent in a year (V), equals the average price level (P) times the volume of trade (T). Fisher argued that if velocity and trade stay the same, doubling the money supply doubles the price level.
Can you think of an example?
An island has £1,000, each pound is spent five times a year, and 500 goods are sold at £10 each. Double the money, and the average price rises to £20.
The nominal rate is the interest a loan pays in money. The real rate is the gain in buying power, roughly the nominal rate minus expected inflation. Fisher was the first to set out this gap clearly; the link is now called the Fisher equation.
Can you think of an example?
A loan pays 7 per cent while prices are expected to rise 3 per cent, so the real return is about 4 per cent. If inflation reaches 7 per cent, the lender gains nothing.
A single number tracking how a group of prices changes, against a base year set at 100. In The Making of Index Numbers (1922) Fisher tested which formulas were most reliable.
Can you think of an example?
A basket costs £50 in the base year and £52 a year later. The index moves from 100 to 104.
Fisher's 1933 account of great depressions. Heavy debts force borrowers to sell assets in a rush. Prices fall, so each pound still owed is worth more in real terms. Fisher's paradox is that the more debtors repay, the heavier their real debt can become. Bankruptcies follow.
Can you think of an example?
A farmer owes £10,000. If crop prices halve, she must sell twice as much grain to repay the same debt.