The very healthy influence of Scott Sumner has induced me to read the Irving Fisher works I had never looked at before. Wow. It’s Fisher, not Keynes, who is the prophet of our times and the superior analyst of the Great Depression. Circa 1932, Fisher wrote:
…in the depression of 1929-32, while the volume of deposit currency in member banks was falling 21 per cent, the velocity of it was being reduced by 61 percent….a mere new supply of money, to replace what has been liquidated or hoarded, might fail to raise the price level by failing to get into circulation…a mere increase in M might prove insufficient, unless supplemented by some influence exercised directly on the moods of people to accelerate V — that is, to convert the public from hoarding.
One wishes that Keynes were so clear. And what is the best way to restore confidence and break the liquidity trap? Restoring confidence in banks, so that a multiplier, working through credit, may be effective again. Fisher also suggests negative interest on reserves and he outlines in detail how this might be done.
That is all from his Booms and Depressions, First Principles, a very sophisticated work. Pigou, Hawtrey, and Viner are also all worth reading; they are more advanced in their thinking than Keynes was willing to admit.
Hail Irving Fisher, still one of the most underrated economists of the 20th century. By the way, 1936 – 1932 equals 4.
velocity of money: cause or effect?
I’ve been a disinterested reader about banks and money supply for almost 10 years now, and it is still odd to talk about it in terms of something to be liberated from being held hostage by consumers. It’s as if consumers are only not spending because the money is sad that it can’t run free.
Sectoral shift: Now, the question is, did people stop buying stuff because they are ready to move on to other stuff, or because they realized the last few houses and plasma TVs they bought were dumb buys? Are businesses de-leveraging because they have soberly decided that it is time to pay as they go, or because they are scared witless over being lulled into too many obligations in a correcting economy? Are people really losing confidence in the institutions or are they losing confidence in the ability for purchases on credit to improve their lives? It’s not just about accepting a theory, it’s about having a model to move forward.
Velocity is inversely related to real interest rates.
Apparently at real rates of over 4% velocity falls.
So we are back to you post of the other day that using MV=PQ is just another way
to look at the same issues.
Keynes introduced the concept of liquidity, e.g., hoarding and its relation to windfall losses
in his Treatise (1930), using the quantity theory framework. It is likely
that one could find Fisher’s statement somewhere in the Treatise.
“And what is the best way to restore confidence and break the liquidity trap? Restoring confidence in banks, so that a multiplier, working through credit, may be effective again. ”
Are you implying that what our governemnt is doing is
restoring confidence?!
Having a out of control kleptocracy confiscate trillions
from taxpaying, working people and giving it to people who
created and sold fradulent insurance contracts(AIG) or giving it
to politically connected groups(GS JMP) who invested in fradulent
inusrance contracts ABSOLUTELY DESTROYS confidence!
Private property rights are under furious attack!
Do you feel more confident seeing what Paulson and Geitner
have done?
Where is that quote specifically from?
fisher rocks
Tyler, you’re a disgrace to your profession for even thinking about non-Keynesian economics produced prior to, say, 3 years ago.
Didn’t you get the memo?
“History of economics” is not economics, and isn’t even of antiquarian interest. Paul Krugman told me so.
Your tenure should be withdrawn.
This stuff was banned from the grad schools years ago. Time to get up to date with Paul and the cool kids.
Why not just force the populace to take pills that will keep them in a free-spending, risk-taking mood? (This is only slightly more coercive than typical Keynesian solutions ….)
brainwarped, Andrew is asking correct questions.
The idea is not that we’ve achieved spiritual satisfaction or even material satisfaction. It’s that we bought everything there was to buy and NOT MUCH ELSE HAS INNOVATED SINCE. The world didn’t spend all of the money since 2001 in the tech sector or bio sector or chem or defense or anything but housing. The only companies innovating are Amazon and Apple, and everyone’s bought an IPhone, and they might or might not need a Kindle given their IPhone.
So until we deleverage enough that innovations start happening again, we’re not much in the mood for buying new stuff. Which is too bad, because I’m not going to be able to afford anything after hyperinflation comes
Allison-
I am very excited for the next 5-10 years. If you follow some of the science blogs, there are lots of new inventions (see nanotechnology) that are in the process of entering the market place. With interest rates low, these products are likely to get the needed funding, as long as banks are willing to lend. People seriously underestimate how every college with PhD students in engineering fields have to invent/discover something to graduate. All the banks/government/angels/investors need to do is visit a college campus and pick something to market…. People SERIOUSLY stopped buying stuff because either they lost their jobs or fear losing their jobs (See BLS). All we need are 10 of the 100′s of new inventions to take off and people will start buying again.
I would suggest you also look at his “The Nature of Wealth and Income”, a much more sophisticated work finished in 1906, stolen, reworked in 1907 as “The rate of interest” and then released in 1913 somehow…. Fisher is the missing Macroeconomic link
Google’s massive trove of scanned books could be useful for researchers studying the evolution of culture.ed hardy t shirts
In a paper published Dec. 16 in Science, researchers turned part of that vast textual corpus into a 500-billion-word database in which the frequency of words can be measured over time and space.
Their initial subjects of analysis, including cultural trajectories of popular modern thinkers and the conjugation of irregular verbs, hint at what might be done.
“There are many more questions, that we could never think of, that this data makes possible,† said Harvard University evolutionary dynamicist Jean-Michel Baptiste. “What we present in the paper is our first explorations of what becomes possible when you have this dataset.†
The new research is part of an emerging approach to applying rigorous statistical analysis, traditionally known from the study of biological evolution, to cultural evolution.
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