Wednesday, November 15, 2017

Journal graphics in a bygone era

To illustrate MV = PY. (It was MV=PT then.)  In  Irving Fisher, "The Equation of Exchange 1896-1910," The American Economic Review Vol. 1, No. 2 (June, 1911), pp. 296-305, via JSTOR.


  1. Oh my goodness Professor, you are going to make me cry of nostalgia... I already have tears in my eyes... :-)

  2. Cool! Abstract formula made intuitively clear! Need more of that stuff in Economics.

  3. Some help in reading the graph from the article:

    The smaller weight at the left (represented by a purse) represents money in circulation (M). The distance to the left from the fulcrum represents the velocity of circulation (V) for that money in circulation.

    The larger weight at the left (represented by a bank book) represents checkable deposits (M'). The distance from the fulcrum represents the velocity of those deposits (V').

    The weight on the right side represents the total volume of goods that are bought and sold (T). The distance from the fulcrum to the right represents the price level (P).

    And so:
    M * V + M' * V' = P * T

    Later in the article, Fisher makes the connection between money (M) and gold and between checkable deposits (M') and credit. He also attributes a significant portion of the rise in prices from 1896 to 1899 not from the increasing use of credit / checkable deposits (M' / M) but instead from the ease with which checkable deposits are spent versus their hard money brethren ( M' * V' / ( M' * V' + M * V) ).

    Fisher doesn't specifically identify the difference between hard money and checkable deposits, but I think I can take a stab.

    1. Exact amount transactions are more convenient and more easily achieved with checkable deposits / credit. (Time and effort wasted making change).

    2. Monetary transportation costs are significantly smaller for checkable deposits than they are for hard money. (Time and effort wasted physically transporting money).

    What Fisher hints at is that checkable deposits can circulate through an economy with higher velocities than hard money can. Meaning a significant portion of the price level increase from 1896 to 1899 was a direct result of higher velocities achieved with checkable deposits.

    -- Milton Friedman now rolls over in his grave. --

    Of note, Fisher (1911) in this article had this to say:

    "So extensive a use of checks must certainly tend to aggravate those periodic collapses in credit which follow a crisis."

    The Federal Reserve Act was passed in 1913 (2 years after this publication).

  4. M as the volume of money, he has. let's change that to M is a set of volumes, each with a relative frequency V/Y set of {f[i]}, the relative frequency of volumes m[i]. he products m*f, are the significance, the price of trade for that particular m at frequency f. In this casting we get a value added channel, a designed flow of m such that the channel is full and there are no backups. If the m are chosen properly, the system appears to be an optimally queued network. The m[i] should be -log(f), f being the relative frequency, less than one. Like he egg industry, from chickens, farms, pick ups, cases; the whole channel would obey the law, so two eggs most likely appear on the breakfast table.


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.