(C) Daily Kos This story was originally published by Daily Kos and is unaltered. . . . . . . . . . . Irving Fisher: Fictional Money and the "Business Cycle" [1] ['This Content Is Not Subject To Review Daily Kos Staff Prior To Publication.'] Date: 2023-12-30 In mathematics it has been said that everything is either trivial or false. In economics, all too often, popular ideas are both trivial and false at the same time. Irving Fisher gave a clear explanation of inflation and deflation in 1928, in The Money Illusion, and nevertheless fell headlong into the 1929 boom illusion. Fisher was perhaps the first celebrity economist, but his reputation during his lifetime was irreparably harmed by his public statement, just nine days before the Wall Street Crash of 1929, that the stock market had reached "a permanently high plateau". He lost both wealth and reputation as results. He then tried to explain booms and crashes, commonly known as “the business cycle”, partly in terms of asset bubbles and their bursting, but mostly the variable value of money, including gold. 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. It turns out to take a lot more than that. We must start by ignoring the Markets Can Do No Wrong cohort of Market Fundamentalists. Then we need to invest in people and the country in good times and bad, including health, education, jobs, human rights, and more, and burst any possible asset bubbles before they can take their full form—essentially self-working Ponzi schemes. See Bill Clinton’s Dot-Com Bubble and W’s housing bubble. APPROXIMATE TYPICAL CHRONOLOGY OF THE NINE FACTORS The Debt Factor The Currency-Volume Factor The Price-Level Factor The Net-Worth Factor The Profit Factor The Production Factor The Psychological Factor The Currency-Turnover Factor Rates of Interest The depression tendencies of the first three of these factors (Debts, Currency, and Price-Level) are closely locked together, and the key that locks them is distress-selling. In the period from the 1929 crash to 1932, all nine went wrong. All of that is Fisher beginning with the crash, not the cause of the “Irrational Exuberance” that preceded it. So let us come to the point. This is Fisher’s only comment on an actual modern bubble and its causes. The year 1921 was the trough of a short depression. The stock market was full of bargain prices. About 1923, the bull market began its unprecedented climb. An ideal investor, buying an average assortment of stocks in 1926 and holding them till September 7, 1929, could have turned every $100 invested into $200—all in three years. By starting in 1913, he could, by the same policy of holding on, have turned every $100 into $400. It was during substantially this period that investment trusts, having been a mania, became a full blown bubble. Buying at the bottom drove stock market prices up, leading to more buying and bigger rises. This soon led to the delusion, shared by Fisher himself at the time, that This Time Was Different and that prices could never come down again. His book, in 20/20 hindsight, then gave a fairly detailed account of all of the areas where government and industry and finance went wrong, including France provoking the German hyperinflation by demanding more gold than there is in reparations. In the boom period the really gross over-indebtedness usually springs from the upward movement of the price level, which, by expanding profits unduly, over-excites the profit maker so that he expands his undertakings unduly, with too much borrowed money. As to remedies, Fisher held that preventing inflation and deflation was the most important policy, not reining in speculation or countercyclical spending/investment. The problem, therefore, is: by regulating the quantity of money and also by influencing its velocity, to keep the price level essentially steady. At any rate the mandate of the law should not only make the integrity of the price level paramount,—it should take it wholly out of irresponsible, chance controls and put it under responsible controls, guided by an exact, scientific and openly published criterion determined by the Index Number. Much easier said than done, and in fact, very close to total nonsense under price shocks like the supply chain disruptions from covid and war in Ukraine, along with Republican malfeasance and corporate price gouging. At no point in the book does Fisher address the Keynesian prescription of increased governmental expenditures, or better yet, investments and employment guarantees. It goes without saying that the recent notion of an Undalanced Budget Amendment, to raise taxes in boom times and have a rainy day fund to invest in recessions, had not been thought of in official economics at the time. Of course, That Old Pharaoh Could Tell Christians About Taxes to lay away food in fat years for a coming famine. (Even though that Pharaoh is actually mythical.) Crashes proceed on another scale. Mild Gloom and Shock to Confidence Slightly Reduced Velocity of Circulation Debt Liquidation Money Interest Falls on Safe Loans But Money Interest Rises on Unsafe Loans Distress Selling More Gloom Fall in Security Prices More Liquidation Fall in Commodity Prices Real Interest Rises; REAL DEBTS INCREASE More Pessimism and Distrust More Liquidation More Distress Selling More Reduction in Velocity All of these things do happen in major downturns, but none is the cause. However, If money, by any chance, should become deranged, is it not at least possible that it would affect all profits in one way at one time? Fisher had previously explained in some detail how money is fictional, even when based on gold, which fluctuates wildly as mines open and close. He repeated some of this prior argument from The Money Illusion in Booms and Depressions. References Further Reading A Nation of Deadbeats: An Uncommon History of America's Financial Disasters , by Scott Reynolds Nelson , by This Time is Different: Eight Centuries of Financial Folly , by Carmen M. Reinhart and Kenneth S. Rogoff (excellent historians, but dud analysts who made major errors in research on debt and growth) READERS & BOOK LOVERS SERIES SCHEDULE If you’re not already following Readers and Book Lovers, please go to our homepage (link), find the top button in the left margin, and click it to FOLLOW GROUP. Thank You and Welcome, to the most followed group on Daily Kos. Now you’ll get all our R&BLers diaries in your stream. 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