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.