Fisher, the Crash and an ‘Economics of the Whole’: Sylvia Nasar
Illustration by Bryan Dalton
For Yale’s Irving Fisher, inventor of the Rolodex and America’s economic oracle, the madness of World War I was epitomized by his daughter Margaret’s descent into insanity after her fiancé was drafted. When a bizarre surgery touted as a miracle cure killed her, Fisher saw Margaret as another of the war’s senseless casualties, and rededicated himself to finding remedies for the nation’s economic and other ills.
Fisher was convinced that the loss of so many lives and the blighting of so many more would lead to a greater public commitment to protecting and extending life. He co-authored a guide to healthy living, “How to Live,” that sold 15 million copies. He championed the cause of “national vitality” by promoting, among other causes, the League of Nations, Prohibition, eugenics, environmental conservation, limits on immigration, civil rights for African Americans and, notably, national health insurance.
But perhaps his most lasting contribution to the nation’s vitality was his role in the development of an “economics of the whole,” or macroeconomics.
‘The Living Age’
Trained in mathematics and natural sciences during the Progressive Era, the Connecticut Yankee and preacher’s son had gravitated to economics out of a desire for “more contact with the living age.” Initially inclined to believe that all attempts to interfere in markets did more harm than good, Fisher lost his faith in strict laissez faire in the course of a successful battle with tuberculosis, the disease that had killed his father. Overcoming TB convinced him that nations as well as individuals need no longer let nature take its course. When markets failed, as they did in financial panics, intervention might improve the outcome.
By the Panic of 1907, Fisher had concluded that most extreme fluctuations in economic activity resulted from monetary disturbances. He had identified too much money as the source of inflationary booms, too little as the source of deflationary depressions.
By tracing seemingly unrelated economic pathologies to a single variable, money, he had identified a potential cure: Stabilize the value of money -- that is, avoid inflation or deflation -- and so stabilize economic activity. This was a cure that government, which issues money and determines its value, could dispense.
‘Permanently High Plateau’
The acute economic disorders that erupted after the war made monetary reform Fisher’s Holy Grail. Bubbles, panics, hyperinflations and depressions were not acts of nature, and could not be left to nature’s whims without jeopardizing the future of free markets and democracy.
After the steep but brief recession of 1920-21, the rest of the Twenties were golden. Three downturns in the decade were so brief and shallow that most Americans weren’t aware of them. The newly created Federal Reserve seemed to confirm Fisher’s theory that avoiding inflation and deflation would prevent wild swings. His personal fortunes had flourished. By the time he turned 60 in 1929, Fisher was a director at Remington Rand, an investor in a half dozen start-ups and the head of a successful forecasting service. When he addressed a group of business executives in mid-October of that year, he told them confidently that stock prices had reached “what looks like a permanently high plateau.”
Shortly thereafter, the stock market crashed and the entire U.S. financial sector began collapsing like a house of cards. In the following months, when Fisher’s ideas and energy were most needed, he had lost not only his fortune, but his credibility.
His over-optimism had made him a figure of ridicule. The media skewered him for “always insisting that all was well and talking of prosperity, a new era and increased efficiency of production.” His proposals for repairing the damage were sound, and have become conventional wisdom today. But then no one was listening anymore. His son recalled hearing two strangers on a train say of his father, “Gosh, he’s supposed to know all the answers, and look how he got burned.”
The Bon Vivant
Fisher’s unlikely ally in promoting international debt relief and managed money instead of strict adherence to the gold standard was John Maynard Keynes, now a City speculator, part time Cambridge don, and bon vivant who is said to have quipped on his deathbed that his only regret in life was not drinking more champagne.
World War I had also focused Keynes’s attention on the systemic forces that caused growth to proceed in bursts interrupted by slumps. Like Fisher, he had argued that economic and financial interdependence were the sine qua non of the prewar prosperity and that political stability required both victors and vanquished to cooperate to stabilize currencies and revive trade and lending. And like Fisher he was convinced that governments could no longer leave extreme inflation and unemployment to cure themselves.
Keynes, too, was blindsided by the 1929 crash. The damage to his personal finances was so great that he was forced to put some of his beloved Impressionist paintings up for sale. Fortunately there were no takers. Keynes was able to recoup his losses within a few years by scooping up depressed U.S. bank stocks in 1936 and hanging on to them when the market collapsed again in 1937.
Keynes sounded the most optimistic when things looked bleakest. While others were proclaiming the end of the West, Keynes used his newspaper columns, radio talks and newsreel interviews to promote monetary stimulus to fight the slump. He reassured all those who were, as the historian Arnold Toynbee observed, “seriously contemplating and frankly discussing the possibility that the Western system of society might break down and cease to work.”
An Easy Fix
Instead, Keynes told his readers, the economy was suffering from a mechanical breakdown - “starter trouble,” as he blithely put it in one column -- for which there was a (relatively) easy fix. Falling prices made it impossible for farmers and businesses to cover their costs, so they were forced to cut back, which made prices fall even further. All the government had to do was to pump up the money supply until prices started rising again, reversing the deflation.
Keynes’s advice wasn’t followed either. When too little, too late monetary policy failed to arrest the Great Depression, Keynes struck out in a new direction. In 1934, at a meeting in New York, Keynes gave a paper arguing that under certain conditions cheap money would not prevent unemployment from persisting in a free market. The economy could stagnate unless government stimulated private investment and consumption with tax cuts and public works. The paper was a preview of “The General Theory of Employment, Interest and Money,” which appeared two years later.
Fisher and Keynes suffered the fate of many innovators. The conviction required to adopt their unorthodox advice simply didn’t exist when it might have prevented the Depression from becoming “great.” But for Keynes there would be one more chance when World War II broke out -- and memories of the failure to promote economic recovery in 1919 made Winston Churchill and Franklin D. Roosevelt determined to do better than last time.
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