Henry Calvert Simons
Encyclopedia
Henry Calvert Simons was an American economist at the University of Chicago
. His anti-trust
and monetarist models influenced the Chicago school of economics.
Simons is noted for a definition of economic income, developed in common with Robert M. Haig, known as the Haig-Simons equation
; this definition of income has strongly influenced the modern American tax structure.
In one of his better known 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
.
Henry Simons argued for changing the financial architecture of the United States
to make monetary policy
more effective and mitigate periodic cycles of inflation
and deflation. The goal of changing the "monetary rules of the game" in this way was to "prevent… the affliction of extreme industrial fluctuations"—in other words, the business cycle
.
, "hopeless efforts at liquidation
" of the secondary monies, or "fire sale
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
due to traders' bad bets and margin call
s by lenders.
A recent example would be the $10 billion bailout by the Federal Reserve of Bear 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 precisely 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.
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 through the issuance of debt, Simons' banks would be more akin to "investment trusts" than anything else (229).
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
. 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" (236). 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".
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, Simons’ chief problem was with 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. To Simons this threatened financial instability.
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...
. His anti-trust
Competition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
and monetarist models influenced the Chicago school of economics.
Simons is noted for a definition of economic income, developed in common with Robert M. Haig, known as the Haig-Simons equation
Haig-Simons equation
Haig–Simons income or Schanz–Haig–Simons income is a measure of economic income aswhere C = consumption and ΔNW = change in net worth.Here, broadly speaking, consumption refers to the purchase or acquisition of goods and services of any kind...
; this definition of income has strongly influenced the modern American tax structure.
In one of his better known 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
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
.
"Eliminate all forms of monopolistic market power, to include the breakup of large oligopolistic corporations and application of anti-trust 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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
to make monetary policy
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
more effective and mitigate periodic cycles of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
and deflation. The goal of changing the "monetary rules of the game" in this way was to "prevent… the affliction of extreme industrial fluctuations"—in other words, the business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
.
Henry Simons on Corporate Finance and the Business Cycle
According to Simons, financial disturbances in the economy are perpetuated by "extreme alternations of hoarding and dishoarding" 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 depressionDepression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....
, "hopeless efforts at liquidation
Liquidation
In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...
" of the secondary monies, or "fire sale
Fire sale
A fire sale is the sale of goods at extremely discounted prices, typically when the seller faces bankruptcy or other impending distress. The term may originally have been based on the sale of goods at a heavy discount due to fire damage...
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
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
due to traders' bad bets and margin call
Margin Call
Margin Call is a 2011 American independent drama film, written and directed by J.C. Chandor. The film has an ensemble cast that includes Kevin Spacey, Demi Moore, Paul Bettany, Jeremy Irons, Zachary Quinto, Stanley Tucci, Simon Baker, and Penn Badgley...
s by lenders.
A recent example would be the $10 billion bailout by the Federal Reserve of Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
, 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 precisely 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.
Henry Simons and 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, a supporter 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 interestInterest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
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 through the issuance of debt, Simons' banks would be more akin to "investment trusts" than anything else (229).
In the interest of stability, Simons envisioned banks that would have a choice of two types of holdings: long-term bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, or consols
Consols
Consol is a form of British government bond , dating originally from the 18th century. The first consols were originally issued in 1751...
, and cash
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
. Simultaneously, they would hold increased reserves
Bank reserves
Bank reserves are banks' holdings of deposits in accounts with their central bank , plus currency that is physically held in the bank's vault . The central banks of some nations set minimum reserve requirements...
, 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
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
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" (236). 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".
Henry Simons and the Money Supply
Finally, Simons believed the price levelPrice level
A price level is a hypothetical measure of overall prices for some set of goods and services, in a given region during a given interval, 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, Simons’ chief problem was with 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. To Simons this threatened financial instability.