Henry Calvert Simons

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Henry Calvert Simons (October 9, 1899 – June 19, 1946) was an American economist at the University of Chicago. His anti-trust and monetarist models laid the foundation for the Chicago school of economics. Yet his views were often opposite to those held by Milton Friedman, who developed Monetarism and was the leading figure of the Chicago School in the second half of the twentieth century.


Simons' philosophy combined libertarian ideals of freedom with apparently "interventionist" government controls that would maintain a framework within which a free market economy can operate successfully. He argued for changing the financial architecture of the United States to make monetary policy more effective and mitigate periodic cycles of inflation and deflation. Simons also believed in equality, as evidenced by his proposals for income tax reform, many of which have been implemented.


Henry Calvert Simons was born on October 9, 1899 in the small, midwestern town of Virden, Illinois. He grew up comfortably as the member of the middle class, the son of a moderately successful lawyer and an extremely ambitious homemaker. He graduated second in his high school class by the age of 16, but due to a decline in the family’s financial situation, he could not follow his older sister to an eastern college (Ella Simons Siple graduated from Wellesley College).

Instead, in 1916 he enrolled at the University of Michigan with the aim of becoming a lawyer. By his junior year, the study of economic theory captured his interest and Simons graduated as an economics major in 1920—claiming later in his life that Fred M. Taylor was the key influence in his early education—and then began graduate studies, initially taking courses at Michigan.

In 1921 he moved to the University of Iowa as a part-time lecturer where he studied with, and became a follower of, Frank H. Knight. He took graduate courses at the University of Chicago and, although he had not completed his Ph.D. dissertation, he was appointed Assistant Professor at Iowa in 1925. In 1927, he followed Knight to the University of Chicago, where he taught in the department of Economics. He later stated that "Knight was nearly perfect as an influence at the next stage" (Simons 1942, 1).

Simons also came under the influence of Frank A. Fetter, first as professor at the University of Chicago and later as a fellow visitor at the University of Berlin where Simons was planning to complete his dissertation on income taxation. While he did publish his dissertation as Personal Income Taxation (1938), he never completed his doctorate.

In 1939 Simons began to teach in the University of Chicago Law School, and his 1942 appointment as Associate Professor was to teach both Economics and Law. In 1945 he was finally given the rank of full Professor.

Simons married Marjorie Kimball Powell in 1941; they had one daughter, Mary, born in 1944.

By 1945 Simons' health began to fail. Suffering from ulcers and insomnia, he died on June 19, 1946 from an accidental overdose of sleeping pills.


During the early years of his career, Simons did not make the usual progress in gaining the credentials for success as a professional economist. In fact, he never did submit his dissertation to complete his Ph.D. While at Iowa, he published only one article on taxes (Simons 1923).

However, once established at the University of Chicago, in the early 1930s, Simons began a period of intense activity. He published his Syllabus Materials for Economics 201 (Simons 1933a). He wrote book reviews and several memoranda about banking and monetary policy which he sent to academic economists and key policymakers in Washington DC. One responded to the March 1933 banking crisis and called for radical reconstruction of the banking industry using 100 percent reserves (Simons 1933c). Another called for greater centralization of monetary policy using the Federal Reserve (Simons 1933f). In March 1934, Simons went to Washington DC to help Senator Bronson Cutting formulate a bill that would bring the money supply and availability of credit under stronger federal control (Phillips 1994, 81-93). This period of activity culminated in the publication of his famous Positive Program in 1934.

Positive Program

Simons' A Positive Program for Laissez Faire (1934) was published by the University of Chicago Press as a Public Policy Pamphlet. Rather than presenting a carefully reasoned theoretical analysis about income taxation (the topic of his dissertation which was published separately in 1938), Simons chose to write a "frankly propagandist tract" (Simons 1934a, 40).

Simons was led to create the Positive Program to solve the problem of the Great Depression. The essay set out a program of reform to bring private enterprise back to life. It consisted of a twofold investigation: a “general analysis” of the necessary conditions for a system of classical liberalism and a delineation of the policy proposals designed to move toward those conditions:

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 (Simons 1934a).

Classical Liberalism

Simons based his position on classical liberal principles:

A cardinal tenet of libertarians is that no one may be trusted with much power—no leader, no faction, no party, no “class,” no majority, no government, no church, no corporation, no trade association, no labour union, no grange, no professional association, no university, no large organization of any kind (Simons 1948, 23).

However, once he embedded the classical liberal state in an organic society, a larger role for the government became possible. In this aspect, Simons appears more of an "interventionist" who did not believe that the economy could function effectively through free markets alone without any government actions, an understanding that quite surprised members of the Chicago School in later years (De Long 1990).


By the mid-1930s, many of the surviving members of the first generation of progressive social scientists were still fighting against the New Deal (Friedman, 1967). Simons, an avid opponent of New Deal policies, saw the usefulness of a capitalist free-market system and was outspoken in his defense (and recommendation) of laissez-faire as policy. Yet, he also believed the government had an important role in setting the framework for the working of a free market economy. Simons argued that affirmative government controls are appropriate and necessary for the society to flourish.

In an April 1937 speech about “the relation of the state to social and economic activity,” Simons continued to emphasize the position of the Positive Program that the state must intervene:

You may have inferred yesterday, that like some economists at the beginning of the 19th century, I had a very low opinion of the ability of governments to do anything very useful. Frankly, I do sympathize with the old notion that government governs best which governs least. ... But obviously the democratic state must govern in some directions, to only remain democratic, to preserve internal peace, and to provide the framework of rules without which freedom would merely be chaos (Simons 1937).

Simons had observed the trends of the American economy leading up to the 1930s, and identified as causes of the depression—price inflexibility and monetary contraction. He noted that by the 1930s, the major organizations had grown so large that diseconomies of scale had started to occur (1934a, 59). Thus, smaller production units had merged into larger enterprises to achieve economies of scale in merchandising, financing, research and development (Simons 1934a, 59 and 1945, 34-5). As a result, enterprises remained profitable, going concerns, even though they did not employ efficient production techniques (Simons 1934a, 71-2 and 1945, 35). Thus, he recommended that to disperse the concentrated economic and political power of this "enterprise economy," the state had to intervene to break up monopolies, even at the cost of economic efficiency.

An advocate of the Quantity theory of money, Simons proposed a number of restrictions on the financial system. For example, Simons urged that the state eliminate private monopoly to restore competitive industry structure. Further, he argued that the state should institute a legislated rule for monetary policy to ameliorate business cycles. Additionally, the state should eliminate tariffs to promote free international trade.

According to Simons, financial disturbances are perpetuated by "extreme alternations of hoarding and dishoarding" of money, in other words by lack of stability in the supply 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" of the secondary monies, or "fire sales," result (Simons 1948).

In Economic Policy for a Free Society Simons claimed that all it takes to precipitate a massive liquidation of securities is "a relatively small decline of security values" (Simons 1948). 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 (Simons 1948). This is precisely the chain of events predicted by Simons in the event of a large-scale liquidation of inflated securities such as mortgage loans in 2008 “sub-prime crash.”

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 calls by lenders. The $10 billion bailout by the Federal Reserve of Bear Stearns, a multinational global investment bank in 2008 illustrates this exact situation. 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:

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. (Mauldin 2008)

Banking Reform

Simons' observations of the actual financial system persuaded him that he could not assume that the monetary authority could control the supply of money. As a result, to save the organizing principle of classical liberalism, he recommended the more radical reform of 100% reserves and the more discretionary policy of stabilizing the price level, rather than the quantity of money. This involved giving the Federal Reserve the mandate to stabilize prices by expanding the money supply during recessions and contracting it during booms, in what became known as the "Chicago Plan."

Along the same vein, he recommended the government pursue Anti-Trust policy vigorously—against both firms and labor unions. In fact, Simons favored a long list of restrictions on the financial system. 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 interest 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 (Simons 1948).

In the interest of stability, Simons envisioned banks that would have a choice of two types of holdings: long-term bonds 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" (Simons 1948). 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" (Simons 1948).


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:

Personal income may be defined as "the algebraic sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights between the beginning and end of the period in question" (Simons 1938).

Along with his libertarian philosophy of the supreme importance of human freedom, Simons also valued equality. His writings on taxation, Personal Income Taxation (1938) and Federal Tax Reform (1050), clearly revealed this goal. He advocated a progressive tax as the foundation for greater equality, along with many other reforms of the federal tax system many of which have been implemented.

Money Supply

Finally, Simons believed the price level 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.

Critique and Legacy

Simons' legacy has been puzzling and contradictory. He was dominant among the founders of the Chicago school of economics and his work laid the foundation for Monetarism. Yet his approach differed significantly from that of those such as Milton Friedman, who developed Monetarism and was the leading figure of the Chicago School in the second half of the twentieth century.

Simons clearly opposed the type of detailed intervention in the economy initiated by Hoover and Roosevelt; and this is the key word: "detailed intervention." He believed that some restructuring of property rights was necessary. However, even this is not sufficient to label him an "interventionist."

It became clear that the classical liberal Simons and the neo-liberal post-1946 Chicago School diverged regarding their conceptions of the presence and importance of monopoly power. Classical liberals, like Simons, abhorred all accretions of power whether by private firms or by labor unions, because they reduced the ability of individuals to compete in the economy. In fact, historians of economics have wondered if Simons would have supported the theoretical and policy directions the Chicago School took after his death.

More important than this "wondering," however, is Simons’ more provable (and more evident) prediction of what would happen if the government intervened too much—and without particular knowledge of behavioral interactions between the producers (such as banks) and consumers (such as mortgagers). If the economic environment—banking sector together with government checks and balances—behaved according to Henry Simons’ ideas, almost all of the Earth's population would have been at much higher standard of living now; not to mention without fear of their economic future.

Major Works

  • Simons, Henry C. 1923. The Tax Exemption Question. Journal of Business I4 (March): 9-12, 24.
  • Simons, Henry C. 1933a. Syllabus Materials for Economics 201. Chicago, IL: University of Chicago Bookstore. ASIN B0006YPIG6
  • Simons, Henry C. 1933b. Review: T.E. Gregory, The Gold Standard and its Future, Journal of Political Economy (February): 137.
  • Simons, Henry C. 1933c. “Banking and Currency Reform.” (March): Memorandum.
  • Simons, Henry C. 1933d. Notes from talk given June 7, 1933 at the Harmony Cafeteria to the Social Workers Discussion Group on the New Deal. Box 9; File No. 5, The Henry C. Simons Papers, Special Collections, Joseph Regenstein Library, University of Chicago, Chicago.
  • Simons, Henry C. 1933e. “Mercantilism as Liberalism.” A review article on Charles A. Beard (Ed.), America Faces the Future, Journal of Political Economy (August): 548-51.
  • Simons, Henry C. 1933f. “Banking and Business Cycles” and “Long-time Objectives of Monetary Management” (November), Memoranda
  • Simons, Henry C. [1934a] 1949. A Positive Program for Laissez Faire: Some Proposals for a Liberal Economic Policy. Chicago, IL: The University of Chicago Press. ASIN B0007GWLKY
  • Simons, Henry C. 1934b. Letter from Simons to Friedrich A. von Hayek, December 18, 1934. Box 3, File No. 40, The Henry C. Simons Papers, Special Collections, Joseph Regenstein Library, University of Chicago, Chicago.
  • Simons, Henry C. 1937. ”Speech” Box 9, File No. 2. The Henry C. Simons Papers, Special Collections, Joseph Regenstein Library, University of Chicago, Chicago.
  • Simons, Henry C. [1938] 1980. Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy. Chicago, IL: University of Chicago Press. ISBN 978-0226758930
  • Simons, Henry C. 1944. “Economic Stability and Antitrust Policy.” Reprinted in Economic Policy for a Free Society, 1948.
  • Simons, Henry C. 1945. “Introduction: A Political Credo,” Economic Policy for a Free Society, 1948, 1-39.
  • Simons, Henry C. 1948. Economic Policy for a Free Society. Chicago, IL: University of Chicago Press. ISBN 978-0226758916
  • Simons, Henry C. 1950. Federal Tax Reform. Cambridge: Cambridge University Press. ASIN B0000CHQ9J


  • De Long, J. Bradford. 1990. In Defense of Henry Simon's Standing as a Classical Liberal. CatoJournal 9(3) (Winter): 601-618. Retrieved October 10, 2012.
  • Friedman, Milton. 1967. The Monetary Theory and Policy of Henry Simons. Journal of Law and Economics 10 (October 1967): 1–13.
  • Kasper, Sherryl. 2002. The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of Its Pioneers. Cheltenham, UK: Edward Elgar Publishers. ISBN 978-1840646061
  • Kasper, Sherryl. 2011. Why Was Henry Simons Interventionist: The Curious Legacy of a Chicago Economist. Retrieved October 10, 2012.
  • Mauldin, John. 2008. Let's Get Real About Bear. InvestorsInsight.com. Retrieved October 10, 2012.
  • Oakeshott, Michael. [1962] 2010. Rationalism in Politics and Other Essays. Indianapolis, IN: Liberty Fund. ISBN 978-0865970953
  • Phillips, Ronnie. 1994. The Chicago Plan & New Deal Banking Reform. Armonk, NY: M.E. Sharpe. ISBN 978-1563244704
  • Van Horn, Rob, and Philip Mirowski. 2009. "The Rise of the Chicago School of Economics and the Birth of Neoliberalism." In The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective, edited by Philip Mirowski and Dieter Plehwe, 139-180. Cambridge, MA: Harvard University Press. ISBN 978-0674033184

External Links

All links retrieved November 12, 2012.


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