Revitalizing the Quantity Theory of Money: From the Fisher Relation to the Fisher Equation

Abstract

Revitalizing the Quantity Theory of Money: From the Fisher Relation to the Fisher Equation traces Fisher’s revitalization of the quantity theory of money from Appreciation and Interest (1896) to The Purchasing Power of Money (1911a, with Harry G. Brown), as Fisher upheld the quantity theory (with money neutral in the long run but not the short run) against populist bimetallists (who saw long-run real benefits from increasing the quantity of money, e.g. William Jennings Bryan) and their hard-money opponents (who denied that the price level was determined by the amount of money, e.g. J. L. Laughlin of the University of Chicago): the 1896 “Fisher relation” between interest rates in any two standards (real and nominal interest, uncovered interest arbitrage parity between two currencies, the expectations theory of the term structure of interest rates) and the 1911 equation of exchange or “Fisher equation” (MV + M′M′ = PT, first presented by Fisher with different notation in the Economic Journal in 1897, but drawing on an earlier single-velocity equation of exchange by Simon Newcomb, to whose memory Fisher 1911 was dedicated).