Irving Fischer and “Debt Deflation”
June 5, 2016
Recently, I’ve been thinking about the credit contraction of the early 1930s. This generally gets far too little attention today, but people have thought about it somewhat in the past. One such person was Irving Fischer, a prominent economist of the time. He called it “debt deflation.” Here is a nice summary of his views:
In general, this theory is not so much of a “cause,” as it is a description of the events of his time. It is, in my view, more in the nature of symptoms or characteristics. For example, here is what he wrote about causes:
This is not an explanation at all, but is rather more in the nature of the typical Keynesian “autonomous decline in aggregate demand” (“It just happened”) version of things. An economy is “delicately poised,” such that, for some minor reason — here unidentified, despite causing a Great Depression — “instability ensues.” It is sort of like the twitch of a butterfly’s wings leading to a hurricane.
Here is a little more on original causes:
16. I am not sufficiently familiar with the long detailed history of these disturbances, nor with the colossal literature concerning their al- leged explanations, to have reached any definitive conclusions as to the relative importance of all the influences at work. I am eager to learn from others.
17. According to my present opinion, which is purely tentative, there is some grain of truth in most of the alleged explanations commonly offered, but this grain is often small. Any of them may suffice to explain small disturbances, but all of them put together have probably been inadequate to explain big disturbances.
18. In particular, as explanations of the so-called business cycle, or cycles, when these are really serious, I doubt the adequacy of over- production, under-consumption, over-capacity, price-dislocation, maladjustment between agricultural and industrial prices, over-confidence, over-investment, over-saving, over-spending, and the discrepancy between saving and investment.
While quite ready to change my opinion, I have, at present, a strong conviction that these two economic maladies, the debt disease and the price-level disease (or dollar disease), are, in the great booms and depressions, more important causes than all others put together,
As we can see, he really has little to say about the originating factors. There’s a floppy hypothesis regarding “overindebtedness,” which doesn’t apply in this case, because, as we saw earlier, debt levels in the 1920s were actually rather modest, and not rising particularly.
Note the total blindness here to the very great causes that were happening all around him: in particular, the global trade war set off by Smoot-Hawley in the U.S., and the drastic “austerity” domestic tax hikes that followed.
That is all for Irving Fischer today.