Abstract
Taming the “Dance of the Dollar”: From the Compensated Dollar to 100% Money: While Fisher argued that money was neutral in the long run, from Fisher (The Purchasing Power of Money. Macmillan, New York, 1911, Chapter IV) onwards he held that in the short run the “so-called business cycle” was really a “dance of the dollar” in transition periods driven by monetary shocks and slow adjustment of inflationary expectations. His 1926 article “A Statistical Relation between Unemployment and Price Changes” was reprinted in the Journal of Political Economy in 1973 (a quarter century after Fisher’s death) as “Lost and Found: I Discovered the Phillips Curve—Irving Fisher.” To stabilize the economy, Fisher campaigned for a “compensated dollar” that would vary the dollar price of gold to hold a price index constant, and, with his political ally Senator Robert L. Owen, managed to insert in the Senate version of the Owen-Glass Bill a mandate for the Federal Reserve to stabilize the price level (but Rep. Carter Glass kept it out of the final version of the Federal Reserve Act).
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Notes
- 1.
In fairness to Jevons , it should be recognized that it was reasonable for an economist to accept the conclusion of meteorologists about what caused weather fluctuations, and that, in another part of his work on cycles, his pioneering study of seasonality in the London money market has proven of lasting value. But when astronomers changed their mind about the average length of the sunspot cycle, Jevons recalculated the average length of the trade cycle so that the lengths of the two cycles still coincided to the second decimal point (see Mitchell 1927).
- 2.
Fisher (with Brown 1911, p. 70) accepted that adjustments to shocks would be oscillatory but the oscillations would fade and there would be further shocks before adjustment was complete: “In most cases the time occupied by the swing of the commercial pendulum to and from is about ten years. While the pendulum is continually seeking a stable position, practically there is almost always some occurrence to prevent perfect equilibrium. Oscillations are set up which, though tending to be self-corrective, are continually perpetuated by fresh disturbances.” Fisher (1925, p. 191) compared economic fluctuations to the fluctuation of “the luck at Monte Carlo” around its mean, which provided no valid reason to speak of “the Monte Carlo cycle.”
- 3.
Kinley of the University of Illinois wrote two National Monetary Commission studies, on statistics of bank clearings and on the history of the Independent Treasury System, Sprague of Harvard Business School wrote on the history of crises under the National Banking System, Andrew (formerly of Harvard and then at the Treasury) was Aldrich’s main adviser, and other economists wrote studies of the banking systems of other countries.
- 4.
Despite anti-Aldrich rhetoric by Glass and other Democrats, the Glass-Owen Bill strongly resembled the Aldrich Plan, as Paul Warburg (1930) showed by a side by side comparison of the two bills. The main difference is that Aldrich envisioned a single central bank resembling the Bank of England or Banque de France, while the Glass-Owen Bill created a system of twelve regional banks with a Federal Reserve Board appointed by the President subject to Senate confirmation. In practice, the regional banks were unable to set different discount rates based on regional conditions because of arbitrage.
- 5.
See Dimand (2003) for references.
- 6.
Fisher first collaborated with Owen as founder of the Committee of One Hundred on National Health, in support of Owen’s unsuccessful bill in 1908 to establish a federal Department of Health. Later, through the Committee of One Hundred and when he was president of the American Association for Labor Legislation, Fisher worked with Owen in support of national health insurance (Fisher 1997, Vol. 13). Their collaboration continued: in 1933 and again in 1937, after Owen left the Senate in 1925, Fisher and Owen collaborated in drafting price-stabilization bills (Fisher 1956, pp. 274, 304; 1997, Vol. 14, p. 57).
- 7.
Kemmerer was not persuaded, and he continued to uphold the gold-exchange standard against the compensated dollar , for example as a discussant of Fisher’s paper at the December 1912 AEA meeting.
- 8.
In 1914, Fisher discovered that Simon Newcomb , to whom he had dedicated The Purchasing Power of Money because of Newcomb’s 1885 equation of exchange , had proposed a stable price level rule (Newcomb 1879), so Newcomb also shared, with two other precursors, the dedication of Stabilizing the Dollar (Fisher 1920). Kesterton (1996, p. 9) reports a suggestion that Newcomb was Arthur Conan Doyle’s inspiration for Professor Moriarty, the Napoleon of crime: both Newcomb and Moriarty published papers on the binomial theorem at the age of twenty and later wrote about the orbits of asteroids.
- 9.
Dowd (2001, p. 9) nonetheless held that “even the weaknesses in [Fisher’s] scheme are very instructive … Fisher still has a lot to teach us and all modern monetary reformers should study him properly.”
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Dimand, R.W. (2019). Taming the “Dance of the Dollar”: From the Compensated Dollar to 100% Money. In: Irving Fisher. Great Thinkers in Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-05177-8_5
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