The Crackpot Economist Who Provided Milton Friedman With His Monetary Theory

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In my article on the hijacking of Milton Friedman’s monetary helicopter, I contrasted him with Murray Rothbard. This goes back to the battle of their respective mentors, half a century earlier: Irving Fisher and Ludwig von Mises.

Fisher was the most influential economic crank in American history. Fisher offered a simple formula that supposedly enables economists to understand the complexities of monetary policy and its effects on the price level: MV=PT. It relies on an intellectual construct, namely, the price level. This must be created by statisticians and economists. The formula does not explain cause-and-effect in terms of the transmission and spread of newly created money throughout the economy. It is totally an aggregate concept. It ignores individuals who make decisions: in government, central banks, commercial banks, and specific markets.

Ludwig von Mises’ theory of money begins with real central banks, real borrowers, and the spread of fiat money over time: none of which is considered by Fisher or Friedman.

Fisher proved in 1929 that he was the most highly educated economic fool in the world. He went public with two predictions.

“There may be a recession in stock prices, but not anything in the nature of a crash.” (New York Times, Sept. 5, 1929)

“Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.” (Oct. 17, 1929)

Then, over the next four years, he lost his own personal fortune. He was so poor in 1933 that Yale University had to subsidize housing for him. Yet this consummate fool, whose economic theories not only led to a catastrophic personal error, but which to a great extent were responsible for the original monetary policies of the Federal Reserve, which it pursued in the late 1920s, is now heralded as some kind of economic genius. Friedman regarded him as “the greatest economist the United States has ever produced.” (Money Mischief, p. 37).

Fisher was a crank, and Mises exposed him as a crank within a year of the publication of Fisher’s 1911 book. If you want to get an idea of how different their theories are, read Mark Thornton’s article. Fisher believed that we can safely trust the government or its central bank to formulate monetary policy. He opposed the gold coin standard, because he thought it is inefficient. That was also true Friedman. Neither of them ever understood that the free market is capable of providing a sufficient quantity of money, by means of gold mining, for a market economy. Supply and demand for goods and services are regulated by means of a private currency system that itself is created by market processes. Neither Fisher nor Friedman ever believed this. They both believed that the government must intervene in order to create a reliable monetary system, so that there can be economic growth, market clearing processes, and individual liberty. They both believed in the wisdom and power of the state with respect to the central commodity in an economy, namely, the money supply.


Fisher was a crank in other areas. He was a great promoter of eugenics. He wanted the scientific regulation of marriage and birth so as to promote the influence of the white race. Thomas Leonard in 2005 brought this to the attention of mainstream economists in The Journal of Economic Perspectives in an article about the Progressive movement and eugenics. He quoted Fisher’s statement in 1907: “The world consists of two classes — the educated and the ignorant — and it is essential for progress that the former should be allowed to dominate the latter. . . . [O]nce we admit that it is proper for the instructed classes to give tuition to the uninstructed, we begin to see an almost boundless vista for possible human betterment.” He cited Fisher’s textbook on economics.

In the latter half of the Progressive Era, race-suicide and proposed eugenic solutions had enough currency to appear in leading textbooks. In his Elementary Principles, Irving Fisher (1907, p. 715) declared that “if the vitality or vital capital is impaired by a breeding of the worst and a cessation of the breeding of the best, no greater calamity could be imagined.” Fortunately, said Fisher, eugenics offered a means, “by isolation in public institutions and in some cases by surgical operation,” to prevent the calamity of “inheritable taint.”

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January 22, 2013

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 31-volume series, An Economic Commentary on the Bible.

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