Henry Calvert Simons

Henry Calvert Simons
Born	(1899-10-09)October 9, 1899 Virden, Illinois,U.S.
Died	June 19, 1946(1946-06-19)(aged 46)
Nationality	American
Education	University of Michigan University of Chicago
Academic career
Field	Economics
School or tradition	Chicago School of Economics
Influences	Frank H. Knight

Henry Calvert Simons(/ˈsaɪmənz/;October 9, 1899 – June 19, 1946) was an Americaneconomistat theUniversity of Chicago.A protégé ofFrank Knight,hisantitrustandmonetaristmodels influenced theChicago school of economics.He was a founding author of theChicago planformonetary reformthat found broad support in the years following the 1930s Depression, which would have abolished thefractional-reserve banking system,which Simons viewed to be inherently unstable. This would have prevented unsecured bank credit from circulating as a "money substitute" in the financial system, and it would be replaced with money created by the government or central bank that would not be subject to bank runs.

Simons is noted for a definition ofeconomic income,developed in common withRobert M. Haig,known as theHaig–Simons equation.

Work

Program of reform

In one of his essays,A Positive Program for Laissez Faire(1934)Simons set out a program of reform to bring private enterprise back to life during theGreat Depression.

Eliminate all forms of monopolistic market power, to include the breakup of large oligopolistic corporations and application of antitrust laws to labor unions. A Federal incorporation law could be used to limit corporation size and where technology required giant firms for reasons of low cost production the Federal government should own and operate them... Promote economic stability by reform of the monetary system and establishment of stable rules for monetary policy... Reform the tax system and promote equity through income tax... Abolish all tariffs... Limit waste by restricting advertising and other wasteful merchandising practices.

Henry Simons argued for changing the financial architecture of theUnited Statesto makemonetary policymore effective and mitigate periodic cycles ofinflationanddeflation.The goal of changing the "monetary rules of the game" in this way was to "prevent... the affliction of extreme industrial fluctuations".

Corporate finance and the business cycle

According to Simons, financial disturbances in the economy are perpetuated by "extreme alternations of hoarding and dis-hoarding" of money.Short-term obligations(loans) issued by banks and corporations effectively create "abundant (fiat) money substitutes during booms". When demand becomes sluggish, a sector of the economy undergoes a shrinkage, or the economy as a whole begins to lapse intodepression,"hopeless efforts atliquidation"of the secondary monies, or"fire sales,"result.

Simons believed that a financial system so structured would be "repeatedly exposed to complete insolvency". In due course, government intervention would inevitably be necessary to forestallinsolvencydue to traders' bad bets andmargin callsby lenders.

A recent example would be the $10 billion bailout by theFederal ReserveofBear Stearns,a multinational global investment bank, in 2008.John Mauldin,a senior member of the financial services industry, writes: "If Bear had not been put into sound hands and provided solvency and liquidity, the credit markets would simply have frozen... The stock market would have crashed by 20% or more... We would have seen tens of trillions of dollars wiped out in equity holdings all over the world." The Bear Stearns debacle was a watershed event in a housing market crisis that precipitated massive devaluations, left the economy reeling, and required massive government action.

This is the chain of events predicted by Henry Simons in the event of a large-scale liquidation of inflated securities such as mortgage loans. InEconomic Policy for a Free SocietySimons writes that all it takes to precipitate a massive liquidation of securities is "a relatively small decline of security values". Simons is emphatic in pointing out that corporations that traded on a "shoestring of equity, and under a mass of current liabilities" are "placing their working capital precariously on call," and hence at risk, in the event of the slightest financial disturbance.

Banking reform

In Simons' ideal economy, nothing would be circulated but "pure assets" and "pure money," rather than "near moneys," "practically moneys," and other precarious forms of short-terminstrumentsthat were responsible for much of the existing volatility. Simons, an opponent of the gold standard, advocated non interest-bearing debt and opposed the issuance of short-term debt for financing public or corporate obligations. He also opposed the payment ofintereston money, demand deposits, and savings. Simons envisioned private banks which played a substantially different role in society than they currently do. Rather than controlling themoney supplythrough the issuance of debt, Simons' banks would be more akin to "investment trusts" than anything else.

In the interest of stability, Simons envisioned banks that would have a choice of two types of holdings: long-termbonds,orconsols,andcash.Simultaneously, they would hold increasedreserves,up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of "bank-financed inflation of securities and real estate" through the leveraged creation of secondary forms of money.

Simons advocated the separation ofdepositand transaction windows and the institutional separation of banks as "lender-investors" and banks as depository agencies. The primary benefit would be to enable lending and investing institutions to focus on the provision of "long term capital in equity form" (233). Banks could be "free to provide such funds out of their own capital". Short-term interest-based commercial loans would be phased out, since one of the "unfortunate effects of modern banking," as Simons viewed it, was that it had "facilitated and encouraged the use of short-term financing in business generally".

Money supply

Simons believed theprice levelneeded to be more flexible to accommodate fluctuations in output and employment.To this end, he advocated a minimum of short-term borrowing, and a maximum of government control over the circulation of money. This would result in an economy with a greater tolerance of disturbances and the prevention of "accumulated maladjustments" all coming to bear at once on the economy. In sum, for Simons, a financial system in which the movement of the price level was in many ways beholden to the creation and liquidation of short-termsecuritiesis problematic and threatens instability.

References

• Friedman, Milton (1967). "The Monetary Theory and Policy of Henry Simons".Journal of Law and Economics.10.The University of Chicago Press: 1–13.doi:10.1086/466628.JSTOR724867.S2CID154308028.
• Kasper, Sherryl.The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of Its Pioneers(2002), ch 3
• Mauldin, John, peter. "Thoughts on the Continuing Crisis." Frontline Weekly Newsletter. 21 March 2008.
• Oakeshott, Michael.The Political Economy of Freedom,in:Cambridge Journal,Volume II, 1949; now in: Michael Oakeshott,Rationalism in Politics and Other Essays(1962), Indianapolis, Liberty Fund, 1991 (New and expanded edition), pp. 384–406.
• Simons, Henry C. "Economic Policy for a Free Society." University of Chicago Press, Chicago, IL. (1948), pp. 165–248
• Stein, Herbert. "Simons, Henry Calvert,"TheNew Palgrave: A Dictionary of Economics(1987), v. 4, pp. 332–35

External links

• The Forgotten Henry Simons – Florida State University College
• "Henry Simons".JSTOR.
• Guide to the Henry C. Simons Papers 1925-1972at theUniversity of Chicago Special Collections Research Center
• Works by or about Henry Calvert SimonsatInternet Archive