“I consider you one of the dozen or so finest economists of all times and countries, and, if I did not know that, my work in the history of economic analysis which I hope to complete in the current year would have brought the fact home to me.”

Irving Fisher remains immensely important in the history of economic thought, and of economic policy. He was the most influential of academic economists in the period of the Great Depression. He had been an important influence on the English economist, John Maynard Keynes, with whom he corresponded. During the slump Fisher had access to President Roosevelt and helped to influence the President’s response to the Depression.

In the early 1930s there was the same feeling that now exists that the experts have been taken by surprise and do not know how to respond. It is a mark of Fisher’s stature that he always had a rational proposal — and many of them still seem to have good sense behind them. Even on his deathbed, he did not hesitate to write a letter of warning to President Truman, who had succeeded Roosevelt, against the dangers of deflation. “I am in hospital, but so far as facts have reached me, the talk in Washington is to the effect of lower prices, which are sure to lead to disaster” (Letter dated March 21, 1947; Irving Fisher died April 30, 1947).

With Franklin Roosevelt it is seldom possible to know whose advice he took. He flattered almost every adviser by praising his work. The notes that Fisher took after his meetings with the President suggest that he was — like everyone else — overwhelmed with Roosevelt’s charm. Nevertheless, Fisher provided some of the arguments that supported Roosevelt’s own preference for a reflationary policy. It was Roosevelt who told Fisher, at their meeting on September 6, 1934, he wanted to get all the unemployed at work as soon as possible and estimated that it would cost “five billion dollars to provide for the five million men for one year.”  Roosevelt rather naively asked Fisher “how the money could be obtained.”

After Britain came off the gold standard in 1931, Fisher sent one of his letters to the British Prime Minister, Ramsay MacDonald. It contains one particularly telling sentence: “The irony of the present situation is that the world is being put deeper and deeper into debt by its very struggles to get out.”

That certainly strikes a note in the week of the U.S. nationalisation of Fannie Mae and Freddie Mac, at a cost of $5.4 trillion, which has to be added to the existing liabilities of the Federal Government. In 1934, President Roosevelt talked of public expenditure rising by $4 billion, in 2008 President Bush has increased U.S. exposure by $5 trillion — a thousand times as much.

Irving Fisher’s objective was stable money. He was the author of the equation of exchange, which states that MV = PT (Money x Velocity = Price x Transactions). He thought that a commodity-based standard would be the most stable substitute for the gold standard.

In terms of the economic debates of the 1930s, the nationalisation of Fannie Mae and Freddie Mac is a potentially inflationary commitment of the U.S. Government. It transfers $5 trillion of liabilities to the public sector, or, as they were already in the public sector, it acknowledges and guarantees those liabilities.

The early opinion polls suggest that many American taxpayers are concerned that the $5 trillion will eventually land on them. It is, in any case, a huge experiment, an economic experiment on the scale of CERN. Other nations may observe it with awe. I think Irving Fisher would certainly have supported it.

Regards,
Lord William Rees-Mogg
September 11, 2008

Bailout of Fannie and Freddie was originally featured on Whiskey and Gunpowder

The peculiarity of the Great Depression of 1929-33 was that the American economy proved not to be self-stabilizing, although some other major economies of the period, including the British, did recover spontaneously in the early 1930s. Indeed, for Britain, the 1930s, with industrial expansion in automobiles and extensive building of houses, was a record decade.

However, recovery in the United States was later and weaker. When one compares Franklin Roosevelt’s first term, from 1933-37, the performance of the U.S. New Deal was not as good as that of Germany, rearming under Hitler, or of the United Kingdom, building cars and houses under Stanley Baldwin and Neville Chamberlain.

This is important, because there appear to be two types of depression, one of which is much stronger and longer lasting than the other. Panics, like those of 1907 or 1987, are steep, but relatively brief; great depressions can last for a decade or more. As Irving Fisher observed — prematurely — “The Depression out of which we are now (I trust) emerging is an example of a debt-deflation depression of the most serious sort.”

He argues, “The debts of 1929 were the greatest known, both nominally and really, up to that time. They were great enough not only to “rock the boat,” but to start it capsizing. By March 1933, liquidation had reduced the debt about 20%, but had increased the dollar about 75%, so that the real debt — that is, the debt as measured in terms of commodities — was increased about 40%.”

Obviously, the combination of the need for debt liquidation with falling prices means that debt has to be redeemed in money that is harder to earn. By contrast, debt can be liquidated by currency inflation, as happened in the 1970s. The relationship between the level of U.S. debt and the level of the U.S. dollar, therefore, becomes critical. Fortunately, the dollar has been very weak, allowing excess debt to be repaid in depreciating dollars. The length of the Japanese depression after 1990 must have been affected by the high relative price of the yen, so that debts in the 1990s were being repaid in terms of a high-value currency.

Irving Fisher argues that the “big bad actors” in the Great Depression were “debt disturbances and price level disturbances.” In 2008, we certainly have debt disturbances, though these are more important in the housing market than in the stock market. However, the global economy is, on balance, in an inflationary stage, with energy prices very high and the dollar weak. China is experiencing significant inflation, and commodity prices are high, if somewhat nervous.

This is a relatively favorable situation, in that the global authorities have to deal with debt and inflation, rather than debt and deflation. As inflation helps to liquidate excess debt, these conditions are more likely to generate panics than great depressions. At any rate, one can hope so.

Regards,
Lord William Rees-Mogg
March 31, 2008

Lessons of the Great Depression was originally featured on Whiskey and Gunpowder