Irving Fisher on the International Transmission of Booms and Depressions Through Monetary Standards

Abstract

The role of monetary standards in the international transmission of economic fluctuations, particularly the role of the gold standard in the Depression, has attracted considerable recent attention, for instance from Choudhri and Kochin (1980), Hamilton (1988), Temin (1989, 1993), Eichengreen (1992), and Bernanke (1995). However, this literature has overlooked a pioneering precursor: Irving Fisher, "Are Booms and Depressions Transmitted Internationally Through Monetary Standards?" (1935), which has also been neglected in the literature on Fisher. I examine Fisher's contribution in the context of later research on the topic and explore the place of Fisher (1935) in Fisher's work.

Over the last twenty years, considerable attention has been devoted to the role of monetary standards in the international transmission of booms and depression, particularly the role of the gold standard in transmitting the Great Depression (see Choudhri and Kochin, 1980, Huffman and Lothian, 1984, Eichengreen, 1988, 1990, Fremling, 1985, Hamilton, 1988, Temin, 1993).¹ Peter Temin entitled one of his Lionel Robb ins Lectures "The Midas Touch: The Spread of the Great Depression" (Temin 1989, Lecture 2) while Barry Eichengreen wrote about Golden Fetters: The Gold Standard and the Great Depression (Eichengreen 1992). This literature attributes to the gold standard a key role in causing and transmitting the Great Depression, and stresses comparative study of the economic performance of countries between the world wars, both between countries under different monetary standards and the same countries before and after leaving the gold standard. Eichengreen and Temin (1997) examine the pervasiveness of a gold standard mentality among political leaders and central bankers, and the role of the Great Depression in overcoming those convictions. Temin (1993, 87n) summarizes the generally accepted view of how this literature developed: "This view was foreshadowed by Kindleberger (1973) and Choudhri and Kochin (1980). It was formalized and tested by Eichengreen and Sachs (1985, 1986). The test has been extended outside Europe by Hamilton (1988), Campa (1990), and Bernanke and James (1991). The new view has been incorporated into synthetic narratives of the Depression by Temin (1989) and, in greater detail, Eichengreen (1992)." However, an important precursor exists, predating by nearly four decades Kindleberger's call for such a study: a 27-country comparative study on "Are Booms and Depressions Transmitted Internationally through Monetary Standards?" presented by Irving Fisher to the International Statistical Institute's annual meeting in London in 1934, and published in the Institute's Bulletin the following year. This path-breaking work (reproduced as an appendix below) is not cited by any contributor to the subsequent literature on its topic, and the only notice taken of it in the literature on Irving Fisher is a single paragraph near the end of a working paper by Giovanni Pavanelli (1996, p. 25). Fisher's study anticipated conclusions reached by later researchers, and displayed technical sophistication, making use of distributed lags, which Fisher had invented. The study is also important to understanding Fisher's macroeconomic contributions in the 1930s, when the stock crash and Depression forced him to rethink his approach and when Fisher, once the English-speaking world's most-cited economist, lost his audience to Keynes and Hayek (see Dimand 1995).

Although ignored for a time as an old-fashioned quantity theorist whose judgment was discredited by his notorious October 1929 assertion that "Stock prices appear to have reached a permanently high plateau," Fisher is increasingly recognized as a remarkable precursor of later developments in economics (see Tobin, 1985, Dimand, 1997, 1998). Fisher's 1907 two-period consumption diagram and his 1896 equation relating interest rates in different standards (which led him beyond the real/nominal interest distinction to uncovered international interest parity, and the expectations theory of the term structure) are central to modern macroeconomics. Keynes identified his marginal efficiency of capital with Fisher's rate of return over costs. Fisher's (1926) "A Statistical Relation between Unemployment and Price Changes," was reprinted in the Journal of Political Economy in 1973 as "Lost and Found: I Discovered the Phillips Curve-Irving Fisher." As Robert Solow (1997) notes, Fisher looked at the effect of inflation on...