Sunday, September 27, 2009

Jeffrey Hummel on Sumner 1

Jeffrey Hummel commented on Sumner's article on Cato Unbound. Like Selgin, his comment was supportive. That is natural because Hummel is also a monetary disequilibrium theorist and a free banker.

Hummel is best known (to me, anyway) as a historian of of the Civil War and slavery. His Emancipating Slaves, Enslaving Free Men: A History of the Civil War, is a libertarian classic. Recently, however, I have found his posts on the Liberty and Power blog about the Fed's balance sheet very helpful. I would see something in the news, try to decipher the New York Fed or Board of Governors reports, develop some limited clue, and then, there is a great post by Hummel clarifying it all.

Hummel's discussion of orthodox monetarism and conventional Keynesian economics was an excellent summary of the monetary disequilibrium view. Keynesians try to hide the monetary disequilibrium in some back closet, while orthodox monetarists struggled mightily to show that the demand for money remains on a constant growth path, so that it is fluctuations in some measure of the quantity of money that causes the fluctuations in nominal expenditures.

Like Sumner, Hummel criticizes the Fed's policy of paying interest on reserve balances. However, I don't really agree that this policy turns monetary policy into fiscal policy. My view is that the Fed should pay interest on reserves--just lower than the opportunity cost of those funds--say 25 or 50 basis points below 4 week T-bills. Reducing the rents collected by the government from money creation is a good idea. And under current conditions, the result would involve charging banks for keeping their funds in a perfectly liquid and riskless form. I find Sumner's particular schemes for penalty rates on excess reserves a bit irritating, especially when combined with paying bonus interest on required reserves. Probably it is because I oppose the existence of reserve requirements, and can see draconian penalties on excess reserves (Sumner sometimes chooses 4% for some reason,) as requiring just one new regulation after the other to control what is in the final analysis the inevitable result of making all money redeemable in zero-interest currency. If it is profitable to operate money warehouses, having Federal Reserve police try to close them down is futile.

Hummel, like Sumner, points to the danger of interest rate targeting. Pointing to historically low interest rates and claiming that means that there is plenty of money is usually a symptom of what Yeager called, "Money and Credit Confused." However, perhaps because of an emphasis on pure credit monies and cashless payments system, I am more open to a "Wicksellian" approach to understanding monetary disequilibrium. The problem is a divergence between the market interest rate, that central bank policy impacts, and the unobservable natural interest rate, the real interest rate that coordinates saving and investment with real income equal to productive capacity. While controlling the quantity of money allows market interest rates to adjust with market forces of supply and demand, keeping the quantity of money equal to the unobservable demand for money that would exist if real income equaled productive capacity and the interest rate is at the level that coordinates saving and investment is no less challenging.

Hummel challenges Sumner to look towards monetary deregulation to avoid monetary disequilibrium. I don't think Hummel quite grasps the degree to which Sumner's index futures targeting (or as I prefer to call it, index futures convertibility,) puts the banking system in the (invisible) hands of market forces. However, my main comment here is to say, yes, Scott, think about free banking a bit more.


  1. Bill, I'll try to think more about free banking when the crisis is over (which may be relatively soon, I hope.)

    I think the 4% penalty figure you cite may have been used in the context of trying to convince doubters that the policy could definitely reduce ERs. Ditto for positive interest on RRs, which was to convince people worried about bank profits. I think both of those worries are wrong, and that your suggestion for a rate only slightly below the T-bill yield is actually better.

    Sometimes I make extreme points as a debating stance, when people don't see the logic of an argument.

  2. Jeffrey Rogers HummelSeptember 29, 2009 at 5:09 PM

    Bill: Thanks for your kind praise, and congratulations on starting your own blog. I've always found your comments thoughtful and interesting, but too often they haven't gotten the attention they deserve because they've been buried within other people's blogs. Now that you have your own forum, I was particularly glad to see you take on Klingonomics. I've been eagerly waiting for someone to challenge his very peculiar macro theories.