Book Review: “Booms and Depressions”

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Book Review: “Booms and Depressions”

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The 1932 book "Booms and Depressions" by Irving Fisher, along with his 1933 Econometrica paper "The Debt-Deflation theory of Great Depression" earmarked the start of a new era for modern macroeconomics and financial literature. This article reviews the book in light of the current economic and financial scenario.

The Author

Irving Fisher is a revered mathematical economist and is considered by some to be "the greatest economist the United States has ever produced" (Schumpeter, 1997), despite his record of promoting harmful ideas (Fisher was known to be a proponent of eugenics, and endorsed racist ideas). Nevertheless, his books and reports in economics have been praised for their clarity and ease of understanding. Known in economics for his inveterate outlook, Fisher is credited with championing a range of reforms to the monetary system, including the compensated dollar, price level stability rule, 100% Money, Stamped Money Prohibition, and government-funded medical care, among others.

Fisher’s inspiration for writing the book: losing in stocks

In the 1920s, Fisher computed a stock market index that was regularly reported and published in reputed papers. On October 15, 1929, the New York Times quoted Fisher's statement at a meeting of the Purchasing Agent Association. The Times believed that Fisher's attitude "fell into almost unqualified optimism".

A few days later on October 24, also known as Black Thursday, the stock market crash of 1929 (Bordo & Rockoff, 2011) proved the Times right and Fisher very wrong. The Great Depression had begun.

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Fisher's wrong prediction has become legendary. But rather than let it keep him down, the debacle influenced Fisher to reflect on his predictions and to write the book "Booms and Depressions". It went on to become the holy grail for research into business cycle fluctuations, debt cycles, and economic downturns.

Book Overview

In the book "Booms and Depressions", Fisher compiles nine main factors that caused the depression and accelerated its adverse effects, with over-indebtedness as the first main factor. The other factors include volume of currency, price level, net worth, profits, production, trade and employment, and optimism and pessimism.

Over-indebtedness is when outstanding debts (whether they are individual, corporate, or national) are sizable relative to other economic factors such as assets, income, gold, and liquidities. In his book, Fisher affirms that all other factors play an auxiliary role compared with two dominant factors: "over-indebtedness to start with and deflation following soon after". Though other factors may be more evident in specific episodes, their role is often subservient to over-indebtedness and deflation, acting as effects or symptoms of debt vulnerability. Debt also amplifies the deleterious effects of overinvestment, overconfidence, and over-speculation.

Fisher also states that the money market and debt market are closely tied. The volume of currency is measured not only in the deposits sense, but also as credit currency created by “the pen and ink of the banker”. This currency originates and terminates in the banking entries, which is balanced out in regular times by an alternate entry, but gets wiped out in recessions as people and firms struggle to repay their debts. Due to this tendency, the adage "one man's debt is another asset," as advocated by (Krugman, 2011) does not always hold up.

Moreover, Fisher provides a general understanding of the relation between real debt and the price level which is crucial to gauge the economy's direction. In simple words, if the price level doubles, the real value of debt halves and if the price level halves, the real value of the debt doubles. Inflation and deflation thus have a contrasting effect on the real debt and its subsequent impact on the real economy.

While one may argue that deflation will increase the value of money, it also increases the value of debt. This makes paying off debt difficult, and decreases spending and investment at the same time.  A similar indication is given by (Minsky, 1992) who argues that “distress selling” affects the economy by reducing asset prices. In the absence of refinancing opportunities and impaired cash flow from operations during a recession, firms are forced to sell assets (sometimes at large discounts) to pay their obligations. Distress selling and assets falling in value recursively feed on each other, exasperating the initial shock of deflation.

Fisher deduced the following chain of consequences in how the nine factors interact. It starts with shock to the system affecting either the interest rates or the productive or earning capacity. The after-effect of the shock forces a company into debt liquidation and distress selling, which results in contraction of deposit currency as bank loans get paid off. This consequently slows down the velocity of circulation.

What follows is a fall in the level of prices, which results in a fall in the net worth of business. This hastens bankruptcies and results in falling profits, reduced output, and declines in trade and employment. All these factors usher in a pessimistic sentiment and loss of confidence, which leads individuals and firms to favor hoarding money. This results in a further reduction in the velocity of circulation.

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The market forces attempt to rebalance the money demand with the supply by shifting the interest rate. In major instances, we notice a fall in the nominal, or money, rates and a rise in the real, or commodity, interest rates (Fisher, 1933).

The book’s reception among economists

Fisher’s observations in the book have been supported by the likes of many well-known economists over the years. These include Ben Bernanke, John Kenneth Galbraith, Charles Kindleberger, Milton Friedman, Hyman Minsky, Paul Samuelson and Christina Romer, all of whom have commented on the work in their books, papers or speeches.

The admirable quality of the book lies not only in its vivid explanation of the Great Depression but in providing a framework for analysis of future crises. This wisdom of this book is invoked time and again as new financial and economic crises emerge. Since its publishing the book has been cited by highly influential papers, reports and other books on investment management and the financial crisis.

In that spirit, we can compare the recent economic downturn to the Great Depression to show that many economic factors identified by Fisher are moving in the same manner as before and after the Great Depression.

The first significant factor is the debt. Reports from the Institute of International Finance show that the global level of debt hit an all-time high record in 2023, with roughly 80% of that debt buildup coming from mature markets such as the US and France. This is echoed by reports from the World Bank, showing that the world has been in a “fourth wave” of increasing debt, warning that it could end in crisis. While the role of deflation is debatable (it prevailed in the starting months of 2020 only to be taken over by inflationary pressures), this appears to be a time where deflation would have devastating consequences and likely lead the world into another debt crisis.

Among the other factors, the interest rate seems to be the defining variable for future recovery. A rise in the interest rate will shift the dynamics of the price levels. Economists are divided on whether the stimulus and accommodative monetary policy that was used to deter the COVID crisis will result in inflationary or deflationary trends in the long term. The presence of inflation and low-interest rates has stabilized the financial environment, but the trend may soon reverse as central banks raise interest rates.

Other factors such as the volume of currency, corporate profits, and velocity of circulation have also moved in the same direction as Fisher predicted, though with less intensity. That’s due to the unprecedented government and central bank support which has prevented debt liquidation and distress selling thus far. The vital question to ask here is, “for how long?”. Despite the apparent recovery, evidence from past recessionary episodes provides a sense that the prosperity may be short-lived. Fisher’s chain of events may have been postponed, but its possibility not annulled.

Book Details

Booms and Depressions: Some First Principles
Publisher: Adelphi Company, New York
ISBN 1453697640, 9781453697641
Buy on Alibris (US)
Buy on Amazon (international)


Fisher, I. (1933). Debt-Deflation Theory of Great Depressions. Econometrica, 337–357.
Krugman, P. (2011). Debt Is (Mostly) Money We Owe to Ourselves. The New York Times.
Minsky, H. P. (1992). The Financial Instability Hypothesis. The Financial Instability Hypothesis, 74, 1–10.

Schumpeter, J. A. (1997). Ten Great Economists. Ten Great Economists.

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