by Sylvia Nasar
Again and again, Fisher argued that history was a bad guide to human potential. In a 1926 speech before a public health group,33 Fisher argued that human beings had no more reached the limit of longevity than they had the limit of consumption. The true limit, he argued, was one hundred. He pointed out that by 1931, the life expectancy of an English boy would be nearly twenty years longer than in 1871.34 Equally important, seven in ten people were healthy enough to enjoy life and do a day’s work. At the end of the war, by contrast, six out of nine had ranged from “infirm” to “physical wrecks” to invalids “with a precarious hold on life.”35 He predicted—accurately as it turned out—that the average life span would increase from fifty-eight to eighty-two by 2000.36
Fisher’s faith in the improvability of man and the limitless possibilities of science and free enterprise grew in tandem with the twenties boom:
The world is gradually awakening to the fact of its own improvability. Political economy is no longer the “dismal science,” teaching that starvation wages are inevitable from the Malthusian growth of population, but is now seriously and hopefully grappling with the problems of abolition of poverty. In like manner hygiene, the youngest of the biological studies, has repudiated the outworn doctrine that mortality is fatality, and must exact a regular and inevitable sacrifice at its present rate year after year. Instead of this fatalistic creed we now have the assurance of Pasteur that “It is within the power of man to rid himself of every parasitic disease.”37
Fisher became one of the founders and first president of the American Eugenics Society. Eugenics—the application of genetics to marriage, health, and immigration practices—was by no means only a Fabian cause. Selective breeding of human beings has of course been practiced by most societies in varying forms from Spartan infanticide to the arcane mating rituals of the British aristocracy. In the late Victorian era medical and scientific advances and the spirit of reform endowed eugenics with its name and immense popularity. One of Richard Potter’s closest friends, Charles Darwin’s cousin Francis Galton, is regarded as the father of the field. Major Leonard Darwin, Charles Darwin’s son, established the International Eugenics Society in 1911. Beatrice and Sidney Webb and, indeed, most prominent Fabians, including G. B. Shaw and H. G. Wells, were enthusiastic eugenicists. Keynes, who served as vice president and board member of the British Eugenics Society as well as treasurer of its Cambridge branch, considered eugenics “the most important, significant and, I would add, genuine branch of sociology.”38 Eugenics was a bipartisan cause. Conservatives such as Arthur Balfour, the Conservative Prime Minister from 1902 to 1905; Winston Churchill; Lord Beveridge, architect of the post-WWII British welfare state; the writers Leonard Woolf and Virginia Woolf; and feminists Victoria Woodhull and Margaret Sanger were all enthusiastic eugenicists.
To be fair, eugenics hardly meant in 1910 or 1920 what it came to signify in the 1970s after it was discredited by association with the Nazi genocide and Jim Crow. The “general spirit” of the first international congress in London in 1912, which Fisher attended, was “conservative.”39 He and Keynes were libertarians, and Fisher in particular was an antiracist who was committed to “eliminating . . . race, prejudice, as well as other anti-social prejudices, such as underlie the Ku Klux Klan.”40 That said, Fisher and the American Eugenics Society were major forces behind the 1924 immigration law aimed not only at, as Fisher put it, “the immigration of the extremely unfit such as formerly were dumped into our population out of the public institutions of Europe”41 but at radically reducing all immigration from southern and eastern Europe.
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Fisher had focused on the evil effects of inflation and deflation on debtors and creditors, the arbitrary redistribution of wealth they caused, and the “vicious remedies” that governments adopted at the behest of victims but that “like the remedies of primitive medicine, they are often not only futile but harmful.”42 He had not yet linked fluctuations in the price level to ups and downs in employment and output, far less assigned them a primary role. Indeed, his Principles of Economics, published in 1911, has no index entries for boom, depression, or unemployment.
The brief but steep recession of 1920–21 focused Fisher’s attention on what the government could do to fight unemployment. In 1895, the US federal government had neither the means nor the responsibility to manage the overall level of economic activity. It was small relative to the economy. Taxes were a means of financing government activities, mainly military, and tariffs were a way to aid specific industries. Money creation was left to the banks, and, under the nineteenth-century gold standard, its pace was strictly governed by the rate of growth of the world’s gold supply.
Now the United States had a central bank—the Federal Reserve, created in 1913—and more discretionary power to influence the level of economic activity by encouraging or discouraging money creation and lending. The severity of the downturn convinced Fisher that in attempting to roll back wartime inflation, the Fed had slammed the brakes too hard and too long. The widespread distress among farmers—reminiscent of the 1890s—and factory workers convinced him that the greatest evil associated with unstable prices was their effect on output and employment. That chain of causation stretching from money creation to job creation became the focus of Fisher’s research during the twenties.
Fisher’s concerns were gradually shifting to booms and busts, and the role that money played in the economy’s stability or volatility. He suspected that fluctuation in the supply of money and credit not only caused inflation and deflation but also accounted for the ups and downs of economic activity and employment. He was becoming convinced that better monetary management could lead to a “lessening of cyclical fluctuations.”43
In addition to a steady stream of academic articles, Fisher spent more and more of his time writing for newspapers. Like Keynes and the Webbs, he knew that his best shot at selling his ideas to government policy makers was indirectly and as an outsider. In article after article, he did his best to convince the public that inflation and unemployment had a common monetary cause. He admitted that any connection between the banking system and “a matter as intensely human as the unemployment program” would strike most people as far-fetched. True, commentators had recognized the link between a general decline in the average price level and a rise in unemployment in the severe postwar recession in the United States and Britain. Likewise, inflations were associated with upswings in production and hiring. Yet theories of the “business cycle”—the alternation of boom and bust in output and employment—typically bore no mention of changes in the price level, and other researchers could find no correlation between prices and employment.
As Fisher discovered, other forecasters had missed the empirical link between prices and employment. They had confounded the level of prices with changes in the level—the distinction that had come to him in a flash in the Swiss Alps—a mistake comparable to mixing up the rate at which water flows into a bathtub with the depth of the water in the tub. As Fisher put it, other analysts had “missed the clear distinction between high prices and rising prices and likewise, between low prices and falling prices. In short they scrutinized the price level but not its rate of change.”44 One reason for the confusion was that there were no good gauges of how fast the average level of prices in the economy was changing. Fisher devoted most of the 1920s to developing and publishing accurate price measures that could be used to forecast economic activity and let the public keep track of changes in the dollar’s purchasing power.
Fisher was convinced that once the causes of economic cycles were correctly identified, forecasters would be able to “predict business conditions in a truly scientific manner . . . much as we forecast the weather.” In 1926 he wrote that “monetary theory ought, for instance, to help us analyze and predict the price level.” He assumed that once the central bank could forecast prices accurately, it could forestall anticipated price swings and, hence, eliminate or at least moderate booms and depressi
ons. For Fisher, means typically dictated ends. “We should be led to control and reduce the so-called business cycle” instead of ascribing “a sort of fatalistic nature” to depressions and booms, he argued.45
In short, by the mid-1920s, Fisher had added business cycles to the list of economic ailments that, far from being untreatable, were shortly to give way to modern cures: “The idea that it’s inevitable and unpredictable is entirely false. On the contrary, the causes are well known, in the main, and we know now in large degree to prevent the intensity of these alternate chills and fevers of business.”46 He attributed his confidence to the apparent success with which the Federal Reserve was already achieving a “rough stabilization of the dollar,” citing the central bank’s efforts to prevent periods of speculation. “We have in our power, as a means of substantially preventing unemployment, the stabilization of the purchasing power of the dollar, pound, lira, mark, crown and many other monetary units.”47 Like Keynes, he insisted that a stable currency was primarily a societal issue. “If our vast credit superstructure is to be kept from periodically falling about our ears,” he wrote, “we must regard banking as something more than a private business. It is a great public service.”48
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In a 1925 piece for the Battle Creek Sanitarium’s health newsletter, Fisher explained “Why I would rather be a Sanitarium Employee than a Millionaire.”49 Yet while there were many things he valued more than money, he had always secretly wanted someday to become his wife’s equal in financial terms. The first of his inventions to achieve commercial potential was the product of his impatience. Having to thumb through boxes of dog-eared index cards drove him mad with frustration, so he fashioned an ingenious device that held the cards in place and kept them visible to the user. Fisher tried to convince a dozen office equipment manufacturers that his nifty gadget was the perfect solution to the increasingly voluminous record-keeping requirements of modern business and that companies would leap at any product that let them organize and store records more efficiently.
Initially, the Rolodex suffered the same fate as many other inventions: the inventor was forced to go into the business himself using his own, or rather his wife’s, money. Fisher set up a tiny factory in New Haven with a staff consisting of his brother, a carpenter, and a helper. The firm’s capital consisted of a loan of $35,000 from Margaret. A year after the war, Index Visible needed a three-story factory to house its operation, as well as a sales office in the New York Times Building on Nassau Street in downtown Manhattan. Fisher’s first big client was New York Telephone, which helped push the company into the black in 1925. Seizing the moment, Fisher engineered a merger with his chief competitor to form the nucleus of Remington Rand. Having by this time poured a total of $148,000 into his start-up, he swapped Index Visible’s common stock for $660,000 in cash, a bundle of preferred stocks, bonds, options, and dividends, and a seat on the board of the new entity, Rand Kardex. Afterward, he confessed to his son that paying his own way had been one of his “suppressed desires ever since I was married . . . Inventing offered the one chance I saw of making money without a great sacrifice of time.”50 At fifty, Fisher realized his dream and became a millionaire many times over.
Meanwhile, economic forecasting was really taking off. The boom created a market for economic forecasts. Fisher began writing a syndicated economic outlook column. He also began publishing a weekly Purchasing Power of Money index, one of several price measures that the US government eventually adopted. Before long, he had set up the Index Number Institute and was mailing wholesale price data to dozens of newspapers from its headquarters in his home office at 460 Prospect Street in New Haven. After the sale of Index Visible, Fisher moved his forecasting and data operation into the New York Times Building and his indexes and charts started to appear in the Philadelphia Inquirer, the Journal of Commerce, the Minneapolis Journal, the Hartford Courant, and other newspapers.
Always keen to apply his ideas in the real world, Fisher had begun indexing his office workers’ pay to inflation during the war. He was probably the first employer to ever grant an explicit, annual, automatic “cost of living” adjustment. Ironically, the experience taught him that indexing was not a practical solution to the problems created by inflation and deflation. He explained:
As long as the cost of living was getting higher, the Index Visible employees welcomed the swelling contents of their “high Cost of Living” pay envelopes. They thought their wages were increasing, though it was carefully explained to them that their real wages were merely standing still. But as soon as the cost of living fell they resented the “reduction” in wages.51
Fisher cited his employees’ reaction as proof of the omnipresent “money illusion.” He also hazarded a guess that Wall Street traders were as prone as typists to be misled by the false perception that their own currency’s value was steady while the price of goods and services, or other currencies, bobbed up and down. A total return on a stock of 10 percent might look like a terrific investment. But if inflation was 11 percent, the investor would actually be losing money. Fisher bet that investors and unions would pay for a yardstick that enabled them to figure their “real” rates of return or whether a pay offer was a “real” increase or not.
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Interest in monetary stabilization had led Fisher to an interest in index numbers, and now led to an interest in studying stock returns. The US stock market collapsed in 1921 when the Federal Reserve raised interest rates to quash wartime inflation, but share prices rebounded sharply the following year. By mid-1929, stock prices were three times higher in nominal terms than in 1921 and roughly nineteen times as high as after-tax corporate profits.52 Fisher’s Remington Rand stock had appreciated tenfold in real terms between 1925 and 1929.
As early as 1911, Fisher had argued that a diversified portfolio of stocks was a better long-term investment than bonds. The value of bonds reflected only the government’s ability to repay its debt and its willingness to resist inflation. Stocks, on the other hand, could capture the effects of private sector productivity gains on profits and, hence, had far more upside potential. As the twenties boom continued, Fisher grew more and more bullish. By 1927, he had become the New Economy’s most prominent promoter and was borrowing hundreds of thousands of dollars to invest on margin. He had a few scares. Once, when he returned from a trip to Paris and Rome that fall, his personal secretary was waiting for him at the New York dock. A plunge in the market had forced her to use $100,000 in his agent’s account to repay short-term bank loans. Within a month, however, Fisher was urging Irving Jr. to “risk half of your present holdings by borrowing on it as collateral and using proceeds of loan for buying more. Six months or a year later you could probably sell at substantial advance and then diversify.”53
In August 1929, unemployment was 3 percent. The tempo of innovation had picked up after the war. More patents had been filed in the previous ten years than in the previous century. Not surprisingly, an economic commission appointed by Herbert Hoover, the newly elected president and former head of the American effort to avert starvation in Europe after World War I, concluded, “Our situation is fortunate. Our momentum is remarkable.”54 When bearish investors such as Roger Babson warned that stock prices had risen too far too fast, Fisher countered that they were not out of line with corporate profits. On another occasion, he listed reasons why corporate profits were likely to keep growing: mergers were increasing scale economies and lowering production costs; companies were spending more on R&D; recycling was on the increase; management was becoming more scientific; automobiles and better roads would increase business efficiency; and the growth of business unionism presaged less industrial strife.
By 1929, Fisher was a director of Remington Rand, an investor in a half dozen start-ups, and the head of a successful forecasting service. Meanwhile, he spent most of that year revising his 1907 masterpiece, The Theory of Interest. Reflecting on one of the most spectacular bull markets in the history of the U
S stock market, Fisher attributed the surge in stock prices to an explosion of innovation since the war and the resulting growth in profitable investment opportunities. He delivered his manuscript in September and immediately began work on a book about stocks. He was scheduled to address a group of loan officers at the Hotel Taft in New Haven on October 29. Two weeks earlier, the New York Times reported, Professor Irving Fisher of Yale University had confidently told members of the Purchasing Agents’ Association that stock prices had reached “what looks like a permanently high plateau.”55
Chapter X
Magneto Trouble: Keynes and Fisher in the Great Depression
Men and women all over the world were seriously contemplating and frankly discussing the possibility that the Western system of society might break down and cease to work.
—Arnold J. Toynbee, 19311
Keynes spent the first half hour of every day in bed in London reading the financial pages and talking to his broker and other City contacts on the phone. But his daily research turned up no early warnings of the American stock crash of October 1929. The King’s College endowment, which he managed as bursar, plunged by one-third, and his personal portfolio fared even worse. The trouble, explains Robert Skidelsky, wasn’t that Keynes owned much American stock. Rather, he had gone long in rubber, cotton, tin, and corn in the expectation that the American boom would drive commodity prices higher, and he had done so by borrowing on a ten-to-one margin. When commodity prices began to weaken in 1928, Keynes was forced to sell most of his stock in a falling market to cover his commodity positions. By the end of 1929, his net worth had plummeted from £44,000 to less than £8,000.2 The experience converted Keynes into a value investor, convincing him that “the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.”3