This 1932 book is Fisher's most thorough description of his cash flow analysis of economic cycles. Classical economics, neoclassical economics and the Austrian school of economics all treat money as a commodity that is traded along with all other commodities as an economically neutral "medium of exchange". Fisher sees that this explanation only applies to a barter economy and these theories are incapable of adequately explaining the business cycle in a "money economy", especially the booms and depressions. It is changes in the quantity and distribution of the money supply that drive business cycles, not economic factors. A more concise version of Fisher's thinking along with his recommended solution is found in "100% Money and the Public Debt", his last booklet, published 1936. A recent update of this view, though with less radical and less permanent prescriptions for solving the depression problem, is Richard Koo's, "The Holy Grail of Macroeconomics" which is a post-2008 meltdown update of his 2003 "Balance Sheet Recession". Koo advocates the current programs of fiscal stimulus and "quantitative easing" as solutions to the balance sheet woes that follow after booms go bust. A most thorough history and theoretical description of the money issue is found in Ellen Brown's 2007 "Web of Debt", revised in 2010. "MMT", modern monetary theory, is another recent reflection of Fisher's understanding of money.
Most people think governments create our money but this is not how it works, though Fisher advocates restoration of the money issuing function to governments as an essential part of his solution. Modern money is created by private banks as accounting entries. When a bank makes a loan it does so by adding a deposit to the borrower's account balance. Bank account balances function as "money", and almost all of our money today is nothing other than these numbers in computers…
During the irrational exuberance preceding a crash, borrowers are anxious to take out loans to purchase "can't lose" investments like stocks in the 1920s or real estate in the 2000s; and bankers are happy to accommodate them by creating loans because banks earn their money by charging interest on loans. Bank loans increase the money supply and in the runup phase banks are creating more money than the economy can absorb at current prices so we get asset price inflation in stocks or real estate or whatever is the 'hot' asset class. Eventually prices get so high that buyers experience sticker shock or seriously exceed their repayment ability and stop borrowing money and stop buying. When the loans-driven upward pressure on prices stops the prices flatten then start falling as borrowers try to "cash out" at high prices so they can repay their loans for fear of getting stuck owing big money on an "underwater" investment. Greed turns to fear, buying pressure turns to selling pressure, and asset prices are driven down. Loan defaults and repayments reduce the money supply, and this is the "debt deflation" Fisher is writing about in his "Debt-Deflation Theory of Great Depressions", which is also the thesis of his "Booms and Depressions" book. Debt expansion inflates the boom, debt deflation drives toward depression.
Fisher's writing [freely available for download from the Federal Reserve Archival System for Economic Research at the St. Louis Fed — Editor] is entertaining and historically interesting and he is able to explain his subject, money, clearly so that you don't have to be a macroeconomist to understand the money system that he is accurately describing. Our bank-debt money system hasn't changed since Fisher's time. Anyone who wants to understand money should read some Fisher. (By DERRYL)
Fisher spent much of the 1920's through 1931 extolling the virtues of investing in common stock. Technological changes (radio, the spread of electricity, mass production of autos etc) and the evolution of the capital markets (spread of consumer finance and regulatory ove
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