Confronting High Prices: Pursuing Profiteering and Systemic Causes, 1919–1920

The economist Irving Fisher’s “equation of exchange” offers a convenient framework for categorizing postwar policy choices in response to inflation. The equation is virtually axiomatic: MV = PT, where M is the money supply, V the velocity of its circulation, P the average price level, and T the volume of trade. For Fisher, a monetarist, M was the independent variable whose fluctuations almost entirely explained price changes. His potential allies, however, often weakened their critiques of current policies by a constricted focus on currency rather than the credit-driven expansion of bank deposits. In any case, monetarist criticisms were downplayed or dismissed by the administration and the Federal Reserve Board. The administration focused instead on profiteering that boosted the prices of individual products and thus the cost of living rather than on inflation as an economy-wide phenomenon. Besides, even commentators who condemned monetary inflation feared that deflation would cause economic distress.