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

Dimand Robert, Brock University

From "The Mechanics of Bimetallism" (EJ 1894) and Appreciation and Interest (1896) to The Purchasing Power of Money (Fisher with H. G. Brown 1911), Irving Fisher took a leading role in revitalizing the quantity theory of money. Fisher (and, starting with his 1903 thesis, Edwin Kemmerer) upheld the quantity theory (with money neutral in the long run but not the short run) against populist bimetallists (e.g. W. J. Bryan, W. Harvey) who saw lasting real benefits from monetary expansion and their hard-money opponents (e.g. J. L. Laughlin and his Chicago students Sarah McLean Hardy, Wesley Mitchell, and Parker Willis). Two concepts were central to this revival of the quantity theory: 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'V' = PT (first presented by Fisher with different notation in EJ in 1897, but drawing on an earlier single-velocity equation of exchange by Simon Newcomb, to whose memory The Purchasing Power of Money was dedicated). This paper is part of a larger project, the Irving Fisher volume of Palgrave Macmillan's Great Thinkers in Economics series.

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Keywords: Irving Fisher, quantity theory of money, Fisher relation, equation of exchange, bimetallist controversy

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