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Jun 13 2021
JEFF HUMMEL, MONETARY POLICY, MONETARY THEORY
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Notes on Taking Hummel's Monetary Theory and Policy Course
14
By David Henderson
Categories: Monetary Policy Money and Inflation
By David Henderson, Jun 13 2021
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I wrote the final exam in Jeff Hummel’s Masters course in Monetary Theory and Policy last month and got the results about 10 or 12 days ago. I got an A+. (Yay!) Now you might say that I should have gotten an A+, given that I have a Ph.D. in economics and given that one of the readings on the syllabus was by me. (By the way, embarrassingly, the only short-answer question out of 46 questions that I got wrong was on an article that Jeff and I had co-authored. Division of labor explains that. Jeff came up with the data, which was what the question was on, and wrote the first draft, and I rewrote.)
But I had to do the work. Don Boudreaux asked me after the midterm, on which I got close to a perfect score, what percent I would have got if I hadn’t taken the course or done any of the readings. I estimated that it would have been between 50 and 60%, which, in a Masters class, is essentially a failing grade. I asked myself that question for the final. The answer is 40 to 50% because the material in the last half of the course was less familiar to me than the material in the first half.
I learned a ton: the resource cost of a gold standard, the weird and implausible Diamond-Dybvig model, the Bailey curve on seigniorage, bond illusion, the fiscal theory of the price level, the Taylor rule (I knew that but I couldn’t have told you the actual numbers–now I can), Hayek’s prediction of the kind of money that would evolve if there were no government intervention (and why I think, with Larry White, that Hayek was wrong), the Currency School, the Free Banking School, the real bills doctrine, Murray Rothbard’s pretty weak case for 100% reserve requirements in banking, the exact definition of fiat money (HINT: it does not mean money that has no intrinsic value), the interesting history (in a reading by Hummel) showing that bank panics, widespread bank failures, and recessions must be distinguished between, the formula for the money multiplier, and how Jeff’s favorite President, Martin van Buren, avoided having the federal government have a bank account, to name a few.
Along with that, he gave an outstanding lecture on the Great Depression. I already knew most of what he talked about here, but most means about 70%. I learned the other 30%, including the fact that the feds put a 2-cent tax on checks at exactly the wrong time because the tax encouraged people to convert checking accounts to currency, reducing the money multiplier and shrinking the money supply.
Also his explanation of capital theory using Tom Hanks’s character in Castaway is really good. Just cuts to the chase and avoids a lot of extraneous stuff.
If Jeff teaches the class again next January by Zoom, and I’m encouraging him to do so, I recommend that you get in touch with him if you have a fairly strong economics background and are willing to stay up until 9:15 p.m. Pacific time, on a  Tuesday evening.
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Andrew_FL
Jun 13 2021 at 7:35pm
I learned about the check tax from George Selgin, he wrote a paper on it.
Hayek’s argument that private fiat issuers would compete on offering price level stability now seems rather optimistic, given the empirical evidence from the cryptocurrency market, but I’m not sure even knowing the outcome I could theoretically explain why he was wrong.
Matthias
Jun 14 2021 at 3:21am
Stable coins are rather popular in the cryptocurrency markets.
Andrew_FL
Jun 14 2021 at 8:47am
“Pegged to the US dollar” is not what Hayek meant by price level stability, either
Gregory Rehmke
Jun 13 2021 at 8:01pm
In 2007 or so I enrolled in SJSU Economics Masters program and took Jeff’s Monetary Theory and had similar experience. I learned a lot that I didn’t know but though I knew. Many hours of intense effort working through textbook and class materials. By chance, yesterday in Zoom chat with Olga Nicoara, I had chance to say hello to Jim Gwartney and also Joe Conners. Joe was in same SJSU monetary class (as was Wayne Pugh and I think Margaret Kilmartin, people I’ve kept in touch with since). There were sixty or more in the class, learning from mainstream monetary textbook and also Jeff’s excellent presentations plus reading Rothbard’s What Has Government Done to Our Money. Highly recommended experience!
Mark Brady
Jun 14 2021 at 12:49am
“[T]he exact definition of fiat money (HINT: it does not mean money that has no intrinsic value).”
But doesn’t Jeff go beyond that to argue that, from the perspective of neoclassical economics, the concept of intrinsic value does not make sense because all value is subjective.
David Henderson
Jun 14 2021 at 10:08am
Yes.
Laron
Jun 14 2021 at 3:14am
If you want to test your knowledge by explaining what you’ve learned, I’d love to see posts on the “weird and implausible” Diamond-Dybvig model, fiscal theory of the price level, and/or why bank panics/failures and recessions must be distinguished.
Matthias
Jun 14 2021 at 3:22am
George Selgin has posts on most (or all?) of these topics.
Laron
Jun 14 2021 at 5:39pm
Thanks, I’ll try to find his posts.
Jeff Hummel
Jun 15 2021 at 8:12pm
Laron,
Here are links to Selgin’s two posts on the D-D model:
https://www.alt-m.org/2020/12/17/modeling-the-legend-or-the-trouble-with-diamond-and-dybvig-part-1/
https://www.alt-m.org/2020/12/18/modeling-the-legend-or-the-trouble-with-diamond-and-dybvig-part-ii/
I did not assign these articles in my Graduate Monetary Theory course. Instead, I relied on Larry White’s critique of the model in ch. 6 of his The Theory of Monetary Institutions. It is not quite as comprehensive but a bit easier to grasp.
On the distinction between (a) banking panics with large numbers of bank suspensions or failures and (b) depressions or recessions, I did an Alt-M post of my own:
https://www.alt-m.org/2015/10/22/the-history-of-u-s-recessions-and-banking-crises/
As far as I know, neither Selgin nor any other advocate of free banking, has written anything on the Fiscal Theory of the Price Level. But I would be happy to share my class notes on the theory with you. The moderators will be happy to email you my email address if you are okay with their emailing you with that info.
Andrew_FL
Jun 16 2021 at 10:45am
I think they may have been thinking about James Dorn’s post on the subject
https://www.alt-m.org/2016/08/23/the-fiscal-theory-of-the-price-level-true-and-false/
Andrea Mays
Jun 14 2021 at 2:39pm
This sounds so interesting and worthwhile.  Thank you for the suggestion.  If I am not teaching in that time slot, I will ask to enroll.
Tiago
Jun 17 2021 at 10:44am
Congrats. The humility to keep learning when you already know a lot and people expect of you to know a lot is a deeply admirable trait.
David Henderson
Jun 17 2021 at 12:54pm
Thanks very much, Tiago. As a bonus, I hope it delays dementia.
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