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Debt Deflation theory in the 1930-1940s: Irving Fisher's Influence on Cycle Theory and Keynesian Thought

Gomez Betancourt Rebeca, University of Lyon 2-Triangle
Vila Adrien, Ecole des Hautes Etudes en Sciences Sociales (EHESS)

In his 1933 article, “The Debt-Deflation Theory of Great Depressions”, Irving Fisher developed one of the most remarkable explanations for the 1929 crisis. His analysis mainly rested on the combination of the macro-economic effects of debt and deflation on aggregate demand. In it, he introduced an original mechanism in which economic agents simultaneously seeking to reduce debt paradoxically produced a rise in real debt. Nevertheless, according to part of the literature dedicated to this theory, as in James Tobin (1987) and Robert Boyer (1988), Fisher's contributions in this article were largely ignored after its publication. This lack of recognition could be explained by academic discredit, which he would have suffered following his excessive optimism throughout the crisis. The aim of our work is to study the veracity of Tobin & Boyer assertion. Contrary to them, we think that the debt deflation theory was notably cited by the Austrians as Gottfried Haberler (1937) and Joseph Schumpeter (1954) as a reference for the cycle theory. Above all, these mechanisms were known to all the major macroeconomists of this period and contribute to revolutionize the analytical framework of economic imbalances. In particular, the effects of the theory were at the heart of the debate on the consequences on employment of a fall in monetary wages between John M. Keynes (1936) and Arthur C. Pigou (1936, 1937). The subsequent common knowledge among the economist of the debt-deflation theory partly explains eventually the large reception of the 1933’s article. Doing this we want to analyse the Debt Deflation theory in the 1930-1940s and to show the influence of Irving Fisher’s debt deflation theory on the cycle theory of the period and on Keynesian thought.


Keywords: debt, deflation, Fisher, Keynes

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