Posted by: Dirk | October 2, 2013

Irving Fisher on the Great Depression

I am still re-reading Irving Fisher’s 100% money book, and while I disagree with his idea of fractional reserve banking, his view on quantity theory and on the role of money in determining the price level and exchange rates, there are sometimes paragraphs where I find myself in rough agreement with his ideas. On pages 104/105 Fisher writes:

Open market operations in the form of Federal Reserve bond buying have been tried for the purpose of reflation; but the only large effect has been to “clutter up” the Federal Reserve Banks with unwanted stacks of United States bonds and to supply member banks with “excess reserves” which they either would not use (because they were afraid to lend) or could not use (because merchants would not borrow).

The result was that President Hoover’s and President Roosevelt’s bond buying, which would, under the 100% system, have been immediately effective as far as adding to the amount of public circulating medium was concerned, proved, under the 10% system, for long periods almost ineffective. That was the situation for several years, everybody waiting for somebody else to go into debt to the banks in order to supply the public with the circulating medium which all needed. Finally the Government stepped in and itself went deeply into debt with the banks.

Apart from the fact that reserves are not lent, this is a quite acceptable description of what the problem was during the Great Depression and what was need to solve it. And here we are, in 2013, with US banks holding excess reserves so high that the Fed apparently could not stand the view so that they decided not to record excess reserves anymore:

xs reserves

The problem is that we’re still waiting for the happy ending: “Finally the Government stepped in and itself went deeply into debt with the banks.” Instead, the news today are rather showing us the opposite, as the NY Times reports in this headline:

U.S. Government Shuts Down in Budget Impasse

One wonders why politicians would actively sabotage the national economy and make the cake smaller. Either they are ignorant – but I hardly believe that – or there are some people who will gain and some that will lose from this. This is probably about distribution. Remember that in the 1930s Soviet Russia and Communism placed a restriction on the ambitions of the wealthy to increase their share. In a possible all out war, national output would be crucial. Today there is no real threat. While this is good news in general, it seems that it has upset the political “equilibrium” in many Western democracies – also in Germany, as this OECD note shows.


  1. Did the last para requier a lot of courage or it was so obvious that there is no visible risk in saying that?
    If it is so obvious that is just absurd to look at the risk, then noting a class war is saying something, isn’t it?

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