San Jose State University economics professor Jeff Hummel recently wrote a former student to answer a question about how to follow and understand the details of monetary policy. I found it so insightful that I got his permission to post it. I liked the personal reminiscence and the insights in the last paragraph. Here it is.


You asked: “Where did you find out about all the details of the Fed’s handling of the Treasury account? This is something I’m interested in reading about.” I realize that what follows may be longer than you bargained for, but your question provoked some nostalgic reminiscing that I want to get down in writing.

How I learned details about the Fed and the Treasury began back in 1967-68, when I was an undergraduate taking Principles of Economics from Hans Sennholz at Grove City College. Although I became a history major, the topic of money fascinated me. I wanted to understand how the Fed worked, and in particular, how one could figure out what it was doing to the money supply. Sennholz told me to look at the Fed’s H.4.1 Release, which at that time was published weekly in the Wall Street Journal, every Friday if memory serves. So I eventually began following the Release, but did not understand it well, and so it was little help. Nowadays the Board of Governors website provides extensive information about the H.4.1 Release, but back then it was all a mystery.

Jump ahead to 1975 when I was in graduate school at the University of Texas at Austin. Although working for a Ph.D. in history, I also took a graduate course in world economic history from Walt Rostow and a U.S. business history course from Joe B. Frantz. (As an interesting aside, both courses were taught in the LBJ library, because Rostow, of course, had been one of LBJ’s advisors, while Frantz was an LBJ crony. An added coincidence is that during the brief span after I got out of the Army and before I started graduate school, I worked as a security guard. One of my jobs was in the guard shack at night outside the LBJ Library to watch scaffolding that had been set up around the 10-story library; the original mortar used to attach the limestone facing on the outside walls was defective and all the panels had to be removed and reattached.) In most graduate courses during that period at U.T., you had to read a book a week. So during spring break I read Friedman and Schwartz’s Monetary History of the U.S., using it for one of my weekly reviews in Frantz’s course and writing a longer paper based on it for Rostow’s course, which required only one long paper. I got an A in both courses, and still have both papers with the instructors’ comments.

Reading Friedman and Schwartz (F & S) gave me my first deep insight into the workings of the Fed and its relationship with the Treasury. I had previously read Rothbard’s America’s Great Depression, and while I fully accepted Austrian business cycle theory at the time, it hadn’t taken me long to realize that F & S’s handling of the money stock and the factors affecting it was far more sophisticated and historically rigorous than Rothbard’s. F & S also provided my first introduction to the money multiplier. Indeed, one of my favorite parts of that book was Appendix B, which at the very end goes into the Fed’s balance sheet and its relationship to the Treasury. That allowed me interpret the Fed’s H.4.1 Release, and so F & S is where you should start.

The H.4.1 Release ( by that time had two basic sections. The second half presents the consolidated balance sheet of the Federal Reserve System as well as the balance sheet of each FR bank. The first half consolidates the Fed’s balance sheet with the Treasury’s monetary accounts to give a complete picture of the monetary base. But it does so in a very confusing and convoluted way, derived from how the release was originally put together in the Fed’s early history when the U.S. was still on the gold standard and Fed thinking was dominated by the real-bills doctrine. In contrast, F & S’s approach is clear and straightforward.

So when I began first teaching Money and Banking at Golden Gate University in the fall of 1988, I would cover the Fed and Treasury balance sheets, using F & S’s approach. My understanding of the Fed and Treasury balance sheets and how they relate to the monetary base contributed to the analysis in David Henderson’s and my Cato Briefing paper on Greenspan’s monetary policy (, published in 2008. It also made me aware very quickly (and before many others) of what the Fed was actually doing in response to the financial crisis. I realized that Bernanke during the first phase of his response was sterilizing his bailouts, something that is now widely recognized. I also caught right away (forgive my boasting) that Bernanke’s second phase, during quantitative easing, was not going to result in rising inflation, because the Fed was both borrowing money from the Treasury and, more significantly, paying interest on reserves. Again, this too is now widely accepted.

For those who don’t know, Walt Rostow was a big deal when I started getting into undergrad economics in 1969. Hans Sennholz was the person who turned Jeff onto economics; one of his other students who got hooked on economics after learning from Sennholz at Grove City College was George Mason University’s Peter Boettke. Sennholz earned his Ph.D. in economics under Ludwig von Mises.