Irving Fisher, Simon Newcomb, and their plans to stabilize the dollar

Abstract

Irving Fisher dedicated Stabilizing the Dollar (1920) to Simon Newcomb for anticipating him “in proposing plans for stabilizing monetary units.” The congruence of Newcomb’s and Fisher’s monetary theories and reform proposals was not as straightforward as Fisher’s book dedication suggested. Their plans had different theoretical roots: Fisher’s compensated dollar plan was the outcome of his quantity theory of money, while Newcomb held a classical monetary theory. We compare Newcomb’s and Fisher’s plans to stabilise the dollar and explore the theoretical rationales behind them offering an illustration of how similar proposals can be the result of different theories.

Keywords:

• Irving Fisher
• Simon Newcomb
• compensated dollar
• quantity theory of money
• commodity theory of money

JEL classifications:

• B31 History of Economic Thought: Individuals
• B1 History of Economic Thought through 1925
• E31 Price Level • Inflation • Deflation
• E42 Monetary Systems • Standards • Regimes • Government and the Monetary System • Payment Systems

Acknowledgments

We wish to thank the participants of the 2021 ESHET conference, as well as the two anonymous referees for their helpful comments. All errors remaining are our responsibility.

Notes

1 Fisher published on his compensated dollar plan in the Economic Journal in 1912, in the 1912 conference supplement of the American Economic Review (reprinted as an appendix to the 1913 reissue of The Purchasing Power of Money), in the New York Times (Dec. 22, 1912, reprinted in Fisher 1997, Vol. 4, 568–575) and the Commercial and Financial Chronicle, in the Quarterly Journal of Economics and Revue d’Économie Politique in 1913, and “Objections to a Compensated Dollar Answered” in the American Economic Review in 1914. By 1913, scholarly journal articles about Fisher’s plan had been published in Danish, Dutch, French, German, Italian, Japanese and Swedish, and in 1912 Fisher compiled a list of 344 articles on it, 305 in newspapers. However, Richard Timberlake and Alan Meltzer held that Fisher first published his compensated dollar plan in his 1920 book, too late to be part of debates surrounding the Federal Reserve Act of 1913 (Dimand 2019, 67, 121–24).

2 Fisher’s equation of exchange (1897, 517), like that in Fisher with Brown (1911), allowed currency and bank deposits to have different velocities of circulation, an advance beyond Newcomb (1885). Humphrey (1984) credited John Pease Norton in 1902 and Edwin Walter Kemmerer in 1903 with formulating the equation of exchange before Fisher (with Brown, 1911) but did not notice that Fisher had previously used that equation in 1897 in an article repeatedly cited by Norton and Kemmerer or that Norton’s 1902 equation of exchange was in a Yale doctoral dissertation by one of Fisher’s students (see Dimand 2019, 57–58).

3 The citation of Newcomb (1879b) in the list of “Economic Writings of Simon Newcomb” at the end of Fisher (1909, 644) had incorrect pagination (223–7 rather than 223–37), consistent with Fisher having not yet read the article.

4 Fisher’s careful attention to possible precursors, as in his book dedications to Newcomb, reflected his shock as a graduate student when, having almost completed but not yet submitted a dissertation independently inventing general equilibrium analysis (Fisher 1892), he was able to obtain copies of books by Walras and Edgeworth (see Dimand 2019, Chapter 2).

5 Michael Kesterton (1996, 9) reports a suggestion that Arthur Conan Doyle’s Professor Moriarty, the Napoleon of crime, was inspired by Newcomb, who, like the fictional Moriarty, published on the binomial theorem at the age of twenty and later wrote about the orbit of asteroids.

6 Fisher (1909, 641) could “well remember hearing Newcomb’s book ridiculed as ‘Astronomical Economics.’” Barber (1987, 181n3) quoted an 1885 review article by Albert Shaw that characterized Newcomb’s Principles of Political Economy as written by an “astronomer who has seen the stars, and nothing else, all his life.”

7 Newcomb followed the tradition of Richard Cantillon, Adam Smith, Henry Thornton, John Stuart Mill, and the Banking School. According to Niehans (1978, 1987, 1990), Glasner (1985, 1989, 2000), Skaggs (1991, 1994, 1995) and Le Maux (2014) the latter tradition is different from the quantity theory of money as formulated by David Hume, David Ricardo and the Currency School. The main difference between the two schools is that the classical monetary theory, as expressed by the Banking School and their predecessors, distinguished a mechanism of adjustment for each kind of issue while the quantity theory of money applied the same mechanism for all kind of issues. Quantity theorists such as Fisher were of course aware that gold and silver mining changes the quantity of precious metals but were primarily focused on time spans in which the quantity of currency could be taken as exogenous.

8 The monetary authority would buy or sell gold for dollars at the fixed dollar price of gold, thus changing the quantity of dollars in circulation until the changing quantity of money had made the price level equal to the target price level consistent with the announced gold price, at which point the public would have no further incentive to buy gold from or sell gold to the monetary authority.

9 Later Newcomb accounted for the possibility of an improvement in productivity resulting in an increase of the average product of labor (Newcomb 1893b, 507).

10 Since level of real transactions (proportional to real income) and velocity or rapidity of circulation appear in Newcomb’s equation of societary circulation and Fisher’s equation of exchange, Newcomb’s phrase “influence the price level proportionately” did not deny or ignore the effect of changes in real income on the price level. Like any monetary economist applying the equation of exchange, Newcomb referred to the price level being proportional to the quantity of money in the equation of exchange taking the values of the other variables as given (but not necessarily constant over time). Newcomb, who came to economics through consideration of inconvertible paper currency during and after the Civil War, was well aware of the dramatic rise in rapidity of circulation of Confederate currency as confidence in the survival of the Confederacy declined.

11 Quantity theorists such as Fisher or, later, Friedman (1952, 1992) and Friedman and Schwartz (1963) argued that the link between the price level and the quantity of money (not just the supply of gold) held both under a metallic standard or with inconvertible paper money but that changes in the quantity of money were determined differently in the two cases. They analyzed how changes in prices and in the cost of production of gold would affect gold production, with adjustment coming through changes in both the stock of gold and the price level: “For example, there can be no doubt that the long period of declining prices before the 1890’s was an important factor in stimulating the search for gold and for economical techniques for extracting gold from low-grade ore. And the subsequent rapid rate of growth of the world’s gold stock was bound to taper off after a time because of the exhaustion of the newly discovered fields, but more fundamentally, because of the rise in prices which reduced the incentive to mine gold” (Friedman and Schwartz 1963, 188, see also 78).