The Persistent Myth of Price Stability: Revisiting Irving Fisher and the 1920s Boom-Bust Forecasts

The idea that central banks should prioritize a stable price level to ensure prosperity has deep roots in early 20th-century economic thought, as explored in analyses from the Mises Institute. Proponents like Irving Fisher and elements of the Harvard Economic Service argued that preventing price declines during downturns was essential, often overlooking how productivity gains naturally lower prices and raise living standards. Fisher's public optimism exemplified the era's 'new era' thinking. On October 15, 1929, he declared stocks had reached 'what looks like a permanently high plateau,' expecting further rises even after initial market tremors. Similar optimism persisted post-crash, with forecasts dismissing severe depressions. These views aligned with mainstream definitions of inflation as rising prices, downplaying asset bubbles fueled by cheap money. Both Fisher and the Harvard service systematically over-predicted economic activity, as later confirmed by statistical reanalysis. Fisher, heavily invested in stocks, suffered massive losses estimated at $10 million (around $241 million in 2026 dollars), forcing Yale to intervene with his housing. The Harvard Economic Service folded amid credibility damage by 1932. A 1986 NBER working paper by Ray Fair, Matthew Shapiro, and Kathryn Dominguez rigorously examined their data and pronouncements, finding the optimism mirrored in the statistics despite reality's divergence. Critics, including Murray Rothbard, countered that stable prices via monetary policy distort markets and hinder broad prosperity gains from innovation. This historical episode underscores ongoing debates over whether targeting price stability masks underlying credit expansions and malinvestments, rather than fostering genuine stability.