The Role of Credit in Fisher’s Monetary Economics

Abstract

Irving Fisher expounded the quantity theory of money in his Purchasing Power of Money (assisted by Harry Gunnison Brown, 1911, 2nd ed. 1913), arguing that causation ran from changes in the stock of money to changes in the price level. In the long term, an exogenous increase in the quantity of money would lead to an increase of the same proportion in the price level, with fluctuations in real economic activity during the transitional period being driven by the slow adjustment of nominal interest rates to price changes (Dimand 1993). Both in the short run and long run, Fisher stressed price level movements driven by exogenous changes in the money stock. Fisher (1913: 58–72), citing an 1897 article by Knut Wicksell and following in the tradition of John Stuart Mill, examined the credit cycle, with attention to how the volume of credit varied over the cycle and how these variations affected prices. I propose to investigate how much the role of credit in Fisher’s Purchasing Power of Money weakens Fisher’s (1932, 1933) causal link from money stock to prices, and, secondarily, to what extent debt-deflation theory of depressions was rooted in his credit cycle analysis of two decades earlier.