In a must-read book, “Irving Fisher: A Biography”, the author, Robert Loring Allen, writes on Professor Irving Fisher’s book “Booms & Depressions”.

“Irving Fisher completed Booms and Depressions in July 1932. The book came out in the fall, published by Adelphi. Allen and Unwin published a separate English edition the next year. He had presented a preview of the book in January 1932, in a paper before the American Association for the Advancement of Science. The book he dedicated to Wesley C. Mitchell (1874-1948) of Columbia University and the National Bureau of Economic Research, a long-time student of business cycles. Fisher and Mitchell had long been friends, although they did not agree in their approaches to economics. Mitchell was one of those giants in economics who sympathized with the work of everyone, even Schumpeter, but trod his own path to greatness.

As usual, Fisher submitted the manuscript to no less than 45 other economists, authorities on the business cycle. He reported in the preface “With few exceptions these authorities on business cycles have found in the theory much that they regard as both new and true.” He states his position succinctly, the main conclusion of this book is that depressions are, for the most part, preventable and that their prevention requires a definite policy in which the Federal Reserve System must play an important role.

Most of the book concerns his diagnosis of the cycle and its course. It surprised none of his colleagues that Fisher found that the cycle is a monetary phenomenon. "If money, by any chance, should become deranged, is it not at least possible that it would affect all profits, in one way, at one time?"

He presented nine "oscillating factors" which explain the cycle in the first part of the book. They are (1) debt, (2) volume of currency, (3) price level, (4) net worth, (5) profit, (6) production, (7) the psychological factor, (8) currency turnover, and (9) rate of interest. Not surprising in that list of nine are the four elements (2, 3, 6, and 8) which constitute his equation of exchange that dates back to his Purchasing Power of Money of 1911 and the quantity of theory of money which was centuries old. He treated the first three - debt, volume of currency, and the price level - in one chapter and the remaining six in another.

“Over-indebtedness means simply that debts are out-of-line, too big relatively to other economic factors,” and this imbalance spreads throughout the economy. General over indebtedness leads to bankruptcies and liquidations, distress selling, the shrinkage in the volume of bank money followed by a fall in the price level, generating a “vicious spiral downwards.” Fisher attributed the beginning of a depression to monetary changes, inventions, war debts, and many other factors.

In the second part of the book Fisher examined the events leading up to the depression. This embraced the 1923-9 boom during which stable prices paradoxically accompanied monetary expansion, largely because the expansion of trade absorbed the new money. The overindebtedness which led to the depression originated in dangerous borrowing by corporations and high-pressure salesmanship of investment bankers.

The third part of the book treated measures to get out of the depression. Fisher's remedies were monetary, including expansion of the money supply and restoring prices to their previous level in anticipation of increasing production as well. He believed that Federal Reserve Banks could stop falling prices or increase prices and thus move the economy out of the depression. Using open market operations, the Federal Reserve could buy or sell government debt, thus expanding or contracting bank reserves and thus credit, the basis of price changes. He did not favor public works programs or measures which bolster prices by restricting supply.

Fisher gave an abbreviated but more felicitous statement of the substance of the book at the meeting of the Econometric Society shortly after Adelphi published the book. Econometrica, the new publication of the society, of which Fisher was a member of the editorial board, published the article. Although directed at professionals, it also partook of the nature of a popular address. He describes the cyclical process as follows;

Assuming that at some point in time a state of over-indebtedness exists, this will tend to . . . the following chain of consequences in nine links: (1) Debt Liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices, in other words, a swelling of the dollar. . . there must be a (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a "capitalistic," that is, private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to (7) Pessimism and loss of confidence, which in turn lead to (8) Hoarding and slowing down still more the velocity of circulation. The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest. Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way. . . In actual chronology, the order of the nine events is somewhat different from the above “logical” order, and there are reactions and repeated effects. . . But it should be noted that, except for the first and last in the “logical” list, namely debt and interest on debts, all the fluctuations listed come about through a fall in prices. . . The over-indebtedness hitherto presupposed must have had its starters. It may be started by many causes, of which the most common appears to be new opportunities to invest at a big prospective profit, as compared with ordinary profits and interest, such as through new inventions, new industries, development of new resources, opening of new lands or new markets. Easy money is the great cause of over-borrowing. When an investor thinks he can make over 100 percent per annum by borrowing at 6 percent, he will be tempted to borrow.

Despite what the authorities who read his book may have told him, Booms and Depressions met with harsh criticism. One critic questioned his judgment in writing this kind of a book. Ralph Arakie in Economica wrote, A popular treatment of industrial fluctuations seems doomed to failure, if only because it must take for granted almost the whole field of theoretical analysis, certainly that extensive and intricate section called the theory of capital. And a scientific treatment of industrial fluctuations is hardly likely to be popular since, at the present time, while we are able to say something about the origin of a theoretically conceivable boom and its subsequent break, and in the light of this, perhaps some-thing about an actual boom, it is by no means possible in the present state of our investigation to lay down precepts of central banking policy design to hasten recovery.

Raymond T. Bowman in the American Economic Review was even more critical when he wrote,

In the reviewer's opinion, this book is of little use to the lay reader and of even smaller value to the technical investigator of business cycle phenomena. . . Professor Fisher has not deserted his previous contention that the "dance of the dollar" is the root of almost all the evil . . . the point is always made (in discussing the nine factors) that the effectiveness of these factors in creating depressions would be forestalled if the drop in the price level were prevented.

Harold Barger in the Economic Journal wrote, "From the pen of Professor Fisher this book cannot but be something of a disappointment. What little theory it contains is in no way novel.”

Many years later the judgment of Joseph Schumpeter provided a more balanced and more favorable view of Booms and Depressions, casting it, along with Mathematical Investigations, Appreciation and Interest, The Nature of Capital and Income, The Theory of Interest, and The Purchasing Power of Money, as one of the "the pillars and arches of a temple that was never built" by Fisher. In evaluating Booms and Depressions, Schumpeter wrote,

The monetary reformer also stepped in to impair both the scientific and the practical value of Fisher's contribution to business-cycle research. But in themselves they are much more important than most of us seem to realize. They are, once more, models of econometric research and have perhaps influenced the development of its standard procedure. Fisher's econometrics there took a definitely dynamic turn: a paper of 1925 (“Our Unstable Dollar and the So-called Business Cycle”) suggested an implicitly dynamic model, several years before the boom in such models set in. Finally, with admirable intention, he listed all the more important “starters” of the cyclical movements, the modus operandi of which need only be worked out to yield a satisfactory explanatory schema.

But in order to realize this, we must again perform an operation of “scrapping the facade.” The “starters” are not where they belong, viz. in the place of honor at the beginning. They are shoved into Chapter IV. On the surface, we have over-indebtedness and the process of its deflation, "the root of almost all the evils." Or, in other words, everything is being reduced to a mechanically controllable surface phenomenon with the result that Fisher actually deprecated the use of the term “cycle” as applied to any actual historical event. And expansion and contraction of debt, associated as they are with rising and falling price levels, land us again in monetary reform, the subject Fisher was really interested in when he wrote the book. This time the Compensated Dollar, while still recommended, received modest emphasis. Instead of the vigorous advocacy of this particular plan we found in The Purchasing Power of Money, we find in Part III of Booms and Depressions a simple and popularly worded survey of means of monetary control in which hardly any economist will find much matter for disagreement and which includes practically all the policies of “reflation” that they were either adopted or proposed in the subsequent years. . . considering the date of publication, I believe him to be entitled to more credit than he received. But I do wish to emphasize that this was not the only merit of the book and that, though but imperfectly sketched, something much larger and deeper looms behind the facade.

That which lurked behind the facade was none other than Schumpeter himself, in the form of his analysis of the impact of innovations, new markets, new supplies, as well as other fundamental structural changes in the economy which Fisher mentioned but did not follow up in his discussion of starters.

James Tobin in his 1985 essay quoted earlier gives a contemporary view of the importance of Fisher's business-cycle work. In an appreciation like that of Schumpeter at odds with the views of Fisher's colleagues at the time, he wrote,

In the early 1930s, observing the catastrophes of the world around him, which he shared personally, Fisher came to quite a different theory of the business cycle from the simple monetarist version he had espoused earlier. This was the "debt-deflation" theory of depression, (1932) summarized in the first volume of Econometrica the organ of the international society he helped to found (1933). The essential features are that debt-financed Schumpeterian innovations fuel a boom, followed by a recession which can turn into depression by an unstable interaction between excessive real debt burdens and deflation. . . This theory of Fisher's has room for the monetary and credit cycles of which he earlier complained, and for the perversely pro-cyclical real interest rate movements mentioned above. Fisher did not provide a formal model of his latter-day cycle theory, as he probably would have done at a younger age. The point here is that he came to recognize important nonmonetary sources of disturbance. His practical message in the early 1930s was “Reflation!” He was right.

The real trouble with Fisher's venture into business-cycle analysis was his failure to tie what happened before and during the business cycle to his theory of interest and to his analysis of income and capital. In Booms and Depressions his analysis stayed on the surface, examining monetary phenomena, whereas the problem was in the failure of businessmen to invest and create income. His book was not really a theory book, but an examination of some of the factors that change during of the business cycle and some recognition of the real forces, such as innovation, which initiate booms.”