Booms & Depressions: Some First Principles

by Irving Fisher

This book is an 'historical document' and explains Booms and Depressions from the point of view and analysis of a highly respected American economist of the twentieth century who has lived through the Great Depression of the 1930s.
Fisher writes: "This book grew out of an invitation to speak on the Depression of 1929-32 before the American Association for the Advancement of Science and is an elaboration of my address at the meeting of the Association, held at New Orleans, Jan. 1, 1932.
The vast field of "business cycles" is one on which I had scarcecly ever entered before, and I had never attempted to analyze it as a whole.
The scope of the present work is restricted, for the most part, to the role of nine main factors, not because they cover the whole subject, but because they include what seem to me to be the outstanding influences in the present, as well as in most, if not all, other major depressions…"

Genres: Economics, History

260 pages, Paperback

First published January 1, 1932

About the author

Irving Fisher was an American economist, inventor, and social campaigner. He was one of the earliest American neoclassical economists, though his later work on debt deflation has been embraced by the Post-Keynesian school.
Fisher made important contributions to utility theory and general equilibrium. He was also a pioneer in the rigurous study of intertemporal choice in markets, which led him to develop a theory of capital and interest rates.[4] His research on the quantity theory of money inaugurated the school of macroeconomic thought known as "monetarism." Both James Tobin and Milton Friedman called Fisher "the greatest economist the United States has ever produced."
Fisher was perhaps the first celebrity economist, but his reputation during his lifetime was irreparably harmed by his public statements, just prior to the Wall Street Crash of 1929, claiming that the stock market had reached "a permanently high plateau." His subsequent theory of debt deflation as an explanation of the Great Depression was largely ignored in favor of the work of John Maynard Keynes. His reputation has since recovered in neoclassical economics, particularly after his work was revived in the late 1950s and more widely due to an increased interest in debt deflation in the Late-2000s recession. Some concepts named after Fisher include the Fisher equation, the Fisher hypothesis, the international Fisher effect, and the Fisher separation theorem.

Reviews

[Clif · Rating 4 out of 5]

Not long ago I read and reviewed Fisher's "The Money Illusion" (1928) that sought to familiarize the public with inflation, reasoning that a dollar is variable in value and should never be considered a standard of value in itself.

This book, written in 1932, looks at the cycle of enthusiasm followed by panic that has been a characteristic of capitalism since it began.

Debt is what drives the cycle. When people are enthusiastic about the financial future, they increase their debt with the idea that better times ahead will not only repay the debt but put them ahead of the game by putting money into investments that "cannot fail". Think of the housing boom where flipping houses became a way to make a killing. One would take out a big mortgage sure that the house would appreciate rapidly, the house could be sold for more than enough to pay off the mortgage and another house would be bought. Everyone was running to jump into the pool of debt, convinced that what they owed was just a short term thing. A complex web of debt results, where person A owes to bank A, bank B owes to bank A and bank C while owed money by person B, etc. Any failure of some threads in the web can easily bring the whole thing down.

Increasing debt puts more money into circulation. Since banks are only required to hold ten percent of the money people deposit with them, they are able to create up to 90% more money by extending credit and are eager to do so if they think times are good. The normally sober creditor becomes giddy with the lure of great profits and credit becomes easy for even the worst risks. All of this credit created out of thin air makes each individual dollar worth less, the inflation that Fisher explained in "The Money Illusion". Everybody and his brother have loans and are buying.

The crash comes when for one reason or another people must reduce their debt. Banks start to worry that not only will they be unable to get the money they loaned back, they might also be unable to pay the money they owe to other banks. The housing boom became a bust and banks went into a panic, refusing to lend each other money, even over-night, because all of them were holding huge debts as assets not worth anywhere near their face value because the debtors could not come up with the money to repay what they owed.

All the money created out of thin air by the banks returned to thin air. With that money extended on credit evaporated, suddenly an individual dollar was worth more than before because there were many fewer then before - that's called deflation. With deflation, if you have a loan you took out yesterday in "cheap" dollars, you are faced with having to pay it back with "expensive" dollars that are hard to obtain. Those banks that were passing out bucks to all, now won't lend to anyone, prices collapse; that fancy new home that you bought for $500,000 is now worth only $200,000, if you are lucky, and the bank that was happy to make you a loan based on the value of your house is pounding on your door for their money back.

Fisher carefully identifies all of the events that go along with a boom or a bust. He writes clearly and all of what he says makes perfect sense. The trouble is nobody can ever accurately predict when a boom will top out, or when a depression will end. For all of the knowledge you can obtain from this book, it will not help you beat the market. Nobody can do that consistently.

The takeaway from Booms and Depressions is the need for caution with money. To have a secure future you simply must keep a significant pool of money that is not invested in risky things. You must not get into debt any more than is necessary. As my dad (a survivor of the Great Depression) once told me - only take on debt for things you must have but cannot afford in one lump sum, such as a house. When the Great Depression came, it destroyed those who had taken on debt to buy stocks. Not only had they lost the investment value, they were left with a huge debt with no funds to pay it. That means bankruptcy unless you are a big bank and can have Uncle Sam rescue you with taxpayer money as was recently done by the Federal Reserve, a creature of the banking system, not a government agency. That is what "too big to fail" is all about.

Booms and Depressions is a great tutorial, a great companion to The Money Illusion and just as quick a read.

[Gregg Wingo · Rating 5 out of 5]

Irving Fisher was almost a tragic-comedic figure in US business and academic economics. A self-made millionaire, a brilliant economist, and rabid New Era promoter, Fisher paid the high price of hubris by declaring the ongoing growth of the American economy up to the Crash of 1929 and the breakout of the Great Depression. He lost his wealth, his reputation as an economist, and his status as a public figure. However, the man did not go into seclusion but formulated the Debt Deflation Theory of the Depressions expounded on in this book.

The material in this work is not limited to a study of the early Great Depression but also includes an analysis of the general cyclical pattern seen since the Industrial Revolution. His groundbreaking work on monetarism provides the basis for his nine critical events in debt-deflation:

1) Debt liquidation and distress selling.
2) Contraction of the money supply as bank loans are paid off.
3) A fall in the level of asset prices.
4) A still greater fall in the net worth of businesses, precipitating bankruptcies.
5) A fall in profits.
6) A reduction in output, in trade, and in employment.
7) Pessimism and loss of confidence.
8) Hoarding of money.
9) A fall in nominal interest rates and a rise in deflation-adjusted interest rates.

All, of course, resulting in the near total collapse of the world economy. His theory directly links Marx and Keynes to Minsky and Keen, and their opposition to the Neo-classical synthesis. While Fisher clearly - like the Hoover administration - underestimated the Herculean task of the recovery he did recognize many of the key institutions requiring funding and establishment for success.

The book is both a great historical document and a compelling economic text still at the center of the field.

[Adwaitvedant Mathkar · Rating 4 out of 5]

Nice book, which qualitatively explains, from first principles, the various factors that catalyses a depression. Some of these factors - volume of deposits for example - and the way they interact with the broad economy were new and interesting to me.

The book was written back in 1935, hence some terminologies/examples might be dated, but the principles remain true.

[Grace Appler · Rating 5 out of 5]

Brilliant description and analysis of the deflationary process in the Great Depression. Hit right home the point that the amount of real debt actually increased after liquidations. All important concepts without single bit of terms or math. Easy but essential read.