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Professor Fisher and the Quantity Theory - A Significant Encounter

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Abstract

Irving Fisher's encounter with the Quantity theory of Money began in the 1890s, during the debate about bimetallism, and reached its high point in 1911 with the publication of The Purchasing Power of Money. His most important refinement of the theory, derived from his recognition of bank deposits as means of exchange, was to treat their out of equilibrium recursive interaction with inflation as integral to it. This treatment underlay both his 1920s work on the business cycle as a "dance of the dollar" and his advocacy of subjecting monetary policy to a legislated price stability rule, initially to be based on his "compensated dollar" scheme. Fisher's failure to recognize the onset of the Great Depression even as it was happening was directly related to his faith in the quantity theory's seeming implication that price level stability in and of itself guaranteed the continuation of prosperity, while his subsequent work on the debt deflation theory of great depressions initially failed to repair the damage that this failure did to his reputation, and to that of the quantity theory. In the 1930s Fisher nevertheless remained an active supporter of various schemes to reflate and then stabilize the price level. His subsequent influence on the quantity theory based Monetarist counter-revolution that began in the 1950s lay, directly, in its deployment of his analysis of expected inflation on nominal interest rates, and, indirectly, in its espousal of the case for subjecting monetary policy to a legislated rule.

Suggested Citation

  • David Laidler, 2011. "Professor Fisher and the Quantity Theory - A Significant Encounter," UWO Department of Economics Working Papers 20111, University of Western Ontario, Department of Economics.
  • Handle: RePEc:uwo:uwowop:20111
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    References listed on IDEAS

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    1. Arnon,Arie, 2011. "Monetary Theory and Policy from Hume and Smith to Wicksell," Cambridge Books, Cambridge University Press, number 9780521191135, April.
    2. Philip Cagan, 1965. "Determinants and Effects of Changes in the Stock of Money, 1875–1960," NBER Books, National Bureau of Economic Research, Inc, number caga65-1, April.
    3. Laidler,David, 1999. "Fabricating the Keynesian Revolution," Cambridge Books, Cambridge University Press, number 9780521641739, April.
    4. Wesley Clair Mitchell, 1927. "Business Cycles: The Problem and Its Setting," NBER Books, National Bureau of Economic Research, Inc, number mitc27-1, April.
    5. Patinkin, Don, 1969. "The Chicago Tradition, the Quantity Theory, and Friedman," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 46-70, February.
    6. Wesley Clair Mitchell, 1927. "Introductory pages to "Business Cycles: The Problem and Its Setting"," NBER Chapters,in: Business Cycles: The Problem and Its Setting, pages -23 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Michael T. Belongia & Peter N. Ireland, 2016. "A Classical View of the Business Cycle," Boston College Working Papers in Economics 921, Boston College Department of Economics.

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    Keywords

    Quantity theory; Price level; Inflation; Deflation; Business cycle; Depression; Money; Interest; Fisher effect;

    JEL classification:

    • B1 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925
    • B2 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925
    • B3 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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