Was Irving Fisher the First Monetarist?

by Jerry O’Driscoll 

In most respects, Irving Fisher appears to be the precursor of Milton Friedman and the first monetarist. In 1911, Fisher published The Purchasing Power of Money. It was his restatement of the quantity theory of money.  In 1925, he authored “The Business Cycle Largely a ‘Dance of the Dollar,’” in which he attributed business cycles to changes in the value of money.  

Yet by 1933, Fisher felt the need to add some additional factors to explain the magnitude of the Great Depression. He did so in “The Debt-Deflation Theory of Great Depressions.” In his History of Economic Analysis (1964), Joseph Schumpeter states that Fisher downplayed the importance of his own theory.  Schumpeter argues (1122) that the Debt-Deflation theory “applies to all recorded business cycles and is in essence not monetary at all.”  

So is Fisher a monetarist or a real theorist of the business cycle?  

In the Monetary History of the United States (1963), Friedman and Schwartz cite Fisher but not for his debt-deflation theory.  In “Money and Business Cycles” (1963), they cite the “Dance of the Dollar” article.  Perhaps Friedman and Schwartz were chary of the later Fisher for a reason.  

This issue has come up again in Charles Rowley and Nathanael Smith’s Economic Contractions in the United States: A Failure of Government (Locke Institute 2009). They argue that Friedman and Schwartz overreached in their monetary explanation of the Great Depression. Rowley and Smith find the theoretical basis for the Friedman-Schwartz view to be “weak” (p. 11).  And Rowley and Smith cite Fisher (1911) against Friedman and Schwartz.  

My question is not rhetorical. Fisher is a complicated figure, and only becomes more so if one considers his relationship with the Austrians.  Mises and Hayek had great respect for him, as did Schumpeter.

11 thoughts on “Was Irving Fisher the First Monetarist?

  1. I have never understood why so many economists, Austrians in particular, seem to feel that there must be one overarching explanation for business cycles that is true in every circumstance. What is wrong with saying that there are many explanations for business cycles; in some cases, one explanation may predominate, in others a different explanation, but that there are elements of all business cycle theories in every business cycle?

  2. Having read about half of the Purchasing Power of Money,I can’t answer the questions, but Friedman’s general macro outlook seems to be defined by Fisher’s ideas and concepts.

  3. Bruce,

    You ask a legimate question, but I don’t see why my post prompted it. I’m just trying to understand where to place Fisher.

    I would describe Bogdan’s view as the consensus one. If anything, Friedman downplays the connection and one wonders why. This is particularly evident in “The Monetary Theory and Policy of Henry Simons.” Simons and Keynes are the two protagonists, and Fisher is conspicuous by his absence.

  4. Bruce, it wouldn’t be much of a cycle if it had a different cause each time. Why should the economy have “cycles” at all? Why should lots of smart business people seemingly make errors at the same time on a regular basis?

    For me, it just seems obvious. The Austrian Business cycle theory makes sense. What particular issue do you have with ABCT other than that it seeks to explain something the cause of a phenomenon? Are you similarly against the food theory of obesity?

  5. Jerry,

    I think that this depends on who you ask. There seem to be two camps among monetary theorists.

    First, the credit channel camp such as Ben Bernanke, Mark Gertler, Simon Gilchrist, and others seem to see the debt-deflation story as something that exacerbates the monetary shock. They routinely cite Fisher’s debt-deflation theory, but they also cite a certain passaged from The Purchasing Power of Money in which Fisher discusses the role of net worth in monetary shocks.

    The second camp is the monetarist camp. Although they don’t always cite Fisher directly, they emphasize that changes in net worth are endogenous to the monetary change. Contrary to Bernanke’s early work — and some subsequent work on the credit channel — they do not believe that there are exogenous shocks to net worth that exacerbate the monetary shock. This view has predominantly been emphasized by Karl Brunner and Allan Meltzer. There is a great discussion of the differences between B&M and Bernanke’s early work in their Mattioli lectures:


    Personally, after reading the Purchasing Power of Money, I would tend to side with Brunner and Meltzer as it seems to me that Fisher is emphasizing the role of net worth as an endogenous result of the monetary shock.

  6. Jerry,

    I am glad they were helpful. One quote for your amusement. In Brunner and Meltzer’s Mattioli lectures they write of Bernanke’s early literature:

    “Bernanke draws an important policy conclusion from the destructive effect of the debt crisis. Since he view the debt crisis as an exogenous event, he argues for selective bailouts of bankrupt firms. We find this proposal ill-advised and unnecessary. It is ill-advised because it disregards the serious moral hazard associated with such a policy and the incentives it creates in the political process. It is unnecessary, we believe, because the debt crisis, like the banking crisis, is avoidable if the monetary authority prevents the destructive effect of the money-credit decline and the wave of bankruptcies. We conclude that banking crises and debt crises can be prevented with the aid of a suitable choice of monetary arrangements.”

    Those lectures took place in the late 1980s!

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