Henry Calvert Simons (; October 9, 1899 – June 19, 1946) was an American
economist
An economist is a professional and practitioner in the social sciences, social science discipline of economics.
The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...
at the
University of Chicago
The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the b ...
. A protégé of
Frank Knight
Frank Hyneman Knight (November 7, 1885 – April 15, 1972) was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago School. Nobel laureates Milton Friedman, George ...
, his
antitrust
Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust ...
and
monetarist
Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on natio ...
models influenced the
Chicago school of economics
The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles. Milton Friedman and George Stig ...
. He was a founding author of the
Chicago plan
The Chicago plan was a monetary and banking reform program suggested in the wake of the Great Depression by a group of University of Chicago economists including Henry Simons, Garfield Cox, Aaron Director, Paul Douglas, Albert G. Hart, Fra ...
for
monetary reform
Monetary reform is any movement or theory that proposes a system of supplying money and financing the economy that is different from the current system.
Monetary reformers may advocate any of the following, among other proposals:
* A return t ...
that found broad support in the years following the 1930s Depression, which would have abolished the
fractional-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 of
economic income, developed in common with
Robert M. Haig, known as the
Haig–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 the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
.
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 the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
to make
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for federal funds, very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money s ...
more effective and mitigate periodic cycles of
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
and
deflation
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...
. 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 into
depression, "hopeless efforts at
liquidation
Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistrib ...
" of the secondary monies, or "
fire sale
A fire sale is the sale of goods at extremely discounted prices. The term originated in reference to the sale of goods at a heavy discount due to fire damage. It may or may not be defined as a closeout, the final sale of goods to zero inventor ...
s," 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 forestall
insolvency
In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-shee ...
due to traders' bad bets and
margin calls by lenders.
A recent example would be the $10 billion bailout by the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
of
Bear Stearns
The Bear Stearns Companies, Inc. was a New York-based global investment bank, securities trading and brokerage firm that failed in 2008 as part of the global financial crisis and recession, and was subsequently sold to JPMorgan Chase. The com ...
, 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. In
Economic Policy for a Free Society Simons 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-term
instruments that 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 of
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
on money, demand deposits, and savings. Simons envisioned private banks which played a substantially different role in society than they currently do. Rather than controlling the
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
through 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-term
bonds, or
consols, and
cash
In economics, cash is money in the physical form of currency, such as banknotes and coins.
In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-im ...
. Simultaneously, they would hold increased
reserves, 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 of
deposit and 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 the
price level
The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set ...
needed 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-term
securities is problematic and threatens instability.
Notes
References
*
* 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," ''The
New Palgrave: A Dictionary of Economics'' (1987), v. 4, pp. 332–35
External links
The Forgotten Henry Simons – Florida State University College*
Guide to the Henry C. Simons Papers 1925-1972at th
University of Chicago Special Collections Research Center
{{DEFAULTSORT:Simons, Henry Calvert
1899 births
1946 deaths
People from Virden, Illinois
Economists from Illinois
University of Chicago faculty
Columbia University alumni
20th-century American economists
Chicago School economists