Good for James Ahiakpor for recognizing David Hume's contribution to  
cumulative process analysis, which establishes Hume's chronological  
precedence over Thornton in the history of the cumulative process  
model. James is absolutely right on that.

For Hume did indeed argue (1) that the equilibrium interest rate  
(Wicksell's natural rate) is a real rather than a monetary phenomenon,  
(2) that a one-time monetary injection may temporarily lower the  
market rate of interest below that equilibrium level, (3) that the  
same monetary injection will raise prices (and, for a while, real  
activity, too), and (4) that the resulting price increases, via their  
effect on loan demands, will reverse the fall in the market rate and  
restore it to its initial equilibrium level, thereby ending the  
cumulative process.

More precisely, Hume noted that new money typically enters the  
spending stream by way of loan. The resulting expansion of loan supply  
relative to loan demand temporarily lowers the market rate below the  
equilibrium rate with the gap between the two rates encouraging  
borrowing and spending. The ensuing spending stimulus and price  
inflation then raises the nominal value of real activity,  
necessitating extra loans just to finance that real activity. The  
demand for loans therefore rises, thus bidding the market rate back to  
its equilibrium level.

In short, Hume's name joins the long list of pre-Wicksell formulators  
of the cumulative process model, which perhaps should be christened  
Paul Samuelson style as the Hume-Smith-Thornton-Ricardo-Marshall- 
Wicksell-Cassel model -- not counting names undoubtedly overlooked.

We can also agree with James's contention that many factors besides  
monetary manipulation affect the market rate. For example, the market  
rate can fall not only because of the temporary liquidity effect of a  
monetary injection, but also because cyclical downturns depress the  
real interest rate and the expected rate of inflation, the two  
components of market rates identified by Irving Fisher. I don't think  
Wicksell would deny that. Nor does it invalidate his monetary theory.

James asks, "Of what use is a pure credit model when people are  
anxious to deal with the problem of inflation?" The answer is that  
pure credit models allow one to analyze how financial intermediation  
attenuates the quantity-theory relationship between base or high- 
powered money and the price level when modern payments mechanisms  
evolve toward the cashless extreme. Today, many analysts see "the  
cashless economy" on the horizon. Surely pure credit models are useful  
in analyzing how such economies might behave.

Again, James asks apropos Wicksell's feedback policy rule "Why not  
focus on the price level (from an understanding of the quantity  
theory) and leave interest rates alone." The answer, of course, is  
that in the cashless pure credit economy base money ceases to exist  
and cannot anchor the price level. Here another anchor is required.  
One obvious candidate is the gap between natural and market rates of  
interest. But (as Wicksell always insisted) because the natural rate  
is an unobservable variable impossible to target, the best one can do  
is to keep on adjusting the market rate in response to price-level  
movements until those movements cease and price stability prevails.