The Making of Index Numbers

Measuring movements in the general level of prices was crucial for Irving Fisher’s monetary economics. His distinction between real and nominal interest rates depended on changes in the general price level. His statement of the quantity theory of money, holding that, other things being equal, a change in the quantity of money leads in the long run to a change in the price level of the same proportion, also depends on the concept and measurement of an index of the average level of prices. His compensated dollar proposal called for stabilization of an index of commodity prices. Fisher drew on his great energy and determination in his effort to decide upon and calculate an ideal index number for prices, along with the corresponding index for quantities. Although Fisher had predecessors, whom he generously acknowledged, Arthur Vogt rightly states that one may call Fisher’s The Purchasing Power of Money the old testament and The Making of Index Numbers the new testament of statistical index theory.