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 influenced the Chicago school of economics.

He made important contributions to public finance and was the founder of the Chicago tradition in monetary economics. Indeed, George Stigler dubbed him the "Crown Prince" of Chicago economics.


Life

Henry 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 (Kasper 2011, 6) 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; Kasper 2011, 8).

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.

Work

During the early years of his career, Simons did not make observable progress in gaining the credentials generally deemed necessary for success as a professional economist. While at Iowa, he published only one article on taxes (Simon 1923).

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.

"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 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.


Positive Program

In the early 1930s, Simons began a period of intense activity. He published his “Syllabus Materials for Economics 201” (Simon, 1933a). He also wrote three memoranda about banking and monetary policy sent to academic economists and key policymakers in Washington D.C. The first responded to the March 1933 banking crisis and called for radical reconstruction of the banking industry using 100% reserves (Simons, 1933c). He wrote two other memoranda in November 1933, which called for greater centralization of monetary policy using the Federal Reserve (1933f). In March 1934, Simons went to Washington D.C. to help Senator Bronson Cutting formulate a bill that would bring the money supply and availability of credit under stronger federal control (Phillips 1995, 81-93). This frenzy of activity culminated in the publication of the Positive Program in 1934, which included the monetary proposals of the Chicago memoranda, but added the more wide-ranging calls for social control (Kasper 2011, 11)

Rather than presenting a carefully reasoned theoretical analysis about income taxation, he chose to write a “PO essay” (Simons 1934a, 40,) consisted of a twofold investigation of: 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 (Simons 1934a, 41; ibid.)


Classical Liberalism

Simons based his position on classical liberty principles. He wrote: “….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. Secondly, his interpretations of the theory of imperfect competition and monetary theory also added to the interventionist bent of the Positive Program. Simons believed that liberty and equality should serve as the standards for guiding the conduct of individuals in society. By liberty he meant the "freedom to associate or disassociate" in a variety of settings, including the economy, the political realm and social discourse (Simons 1945, 3; ibid.) equality, he meant equality of opportunity to participate in economic, political and social activity. Simons described society not as a static collection of rational individuals or a "mere aggregate of reified aspects"; rather he viewed society as "a living, functioning organization or 'organism'" that changed over time (Simons 1945, 2; ibid.)

He characterized economic activity as “…petty warfare . . . within groups..” (Simons 1934a, 44). As long as economic activity took place within a “…stable framework of legal rules . . . [of] competition, limited rights of private property, and free exchange…. the pursuit of self interest resulted in ‘a kind of private warfare; which produced the most output and consequently benefited all members of society…” (Simons 1937, 3; Kasper 2011, 17)

Analysis of Corporate Finance and the Business Cycle and Turn to Interventionism to Help Private Enterprises

Simons was led to create the Positive Program to solve the problem of the Great Depression. His theoretical analysis of this problem was twofold: “The depression is essentially a problem (1) of relative inflexibility in prices which largely determine costs and (2) of contraction in the volume and velocity of effective money” (Simons 1934a, 74; Kasper ibid.)

To study imperfect competition, he developed a cartel model that described industry, rather than individual firm, behaviour. This choice drew on his observations of the evolution of the American economy up until the 1930s. In essence, he characterized the industrial organization of the U.S. economy between the wars as that of an “enterprise economy” due to the prevalence of large-scale organizations, or enterprises, that he associated with the “intricate division of labour” of an advanced industrial society (Simons 1936, 164 and 1934a, 45; ibid. p.20). He attributed this concentration to both economic and institutional factors.

Simons observed 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; ibid, 20).

For example, Simons recommended that the state eliminate private monopoly to restore a competitive industry structure. Further, 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.

Typical example we find in (Simons 1934a,) where he set out a program of reform to bring private enterprise back to life during the Great Depression, saying: "….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….."

In so far “stable rules for monetary policy” Simons claimed that financial disturbances in the economy are perpetuated by "extreme alternations of hoarding and dishoarding" of money. 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).

He 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 (ibid.). He claimed 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 (ibid.). 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 2008 “sub-prime crash.”


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 depression, "hopeless efforts at liquidation" 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 forestall insolvency due to traders' bad bets and margin calls 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. (Mauldin 2008)

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.

Interventionism and Banking Reform

A 1934 exchange of letters with Friedrich von Hayek about the Positive Program reveals that one of Simons’s interventionist policies served in part as a means to build that a consensus of opinion against the increasing power of the early New Dealers as advocates of national planning (Kasper 2011, 27). In one of the letters he says:” ……Most of our so-called ‘liberals’ and ‘New-Dealers” are really asking us to adopt for industry a scheme of things closely comparable in essentials to that which we have been practicing in the case of the railroads. I am willing to prostitute my judgment somewhat, in advocating government ownership, in order to vent my spleen fully as to the merits of a grand system of private monopoly with government regulation of prices and wages….” (Simons 1934b, 2)

Henry Simons represents, to many, the early days of "monetarism;" he might as well be called the progenitor of what is now considered to be the “Chicago School.” Simons saw the usefulness of a capitalist free-market system and was outspoken in his defense (and recommendation) of laissez-faire as policy. An avid opponent of New Deal policies, his pleas for their reversal in both the popular press and the journals of the University of Chicago, were paralleled with a call for the government to instead merely set the framework for the working of a free market economy and to then withdraw (http://www.newschool. edu/nssr/het/ profiles/hcsimons.htm)

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.) And 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….” (Kasper 2011, 26.)

As his observations of the trends of the American economy contained the era up until the 1930s, he identified as causes of the depression—price inflexibility and monetary contraction.

Thus, instead of toying with perfect competition to describe the ideal of a competitive equilibrium, he used a more realistic model of the cartel and recommended that to disperse the concentrated economic and political power of the enterprise economy, the state had to intervene to break up monopolies, even at the cost of economic efficiency (ibid., 28).

Likewise, in his adaptation of the quantity theory, his 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.

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.

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. He claimed 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 Simons 1948.)

Along the same vein, he recommended the government pursue Anti-Trust policy vigorously - against both firms and labour unions - as well as setting out the now famous monetarist adage of strict control and provision of a stable supply of money according to a non-discretionary (albeit counter-cyclical) "rule"—what was known as the "Chicago Plan." Thus, he called during that time for active monetary expansion via deficit spending.

We can rephrase these sometimes contradictory claims by saying that Simons favoured a long list of restrictions on the financial system, he thought that Federal debt management (changing the maturity structure of the federal debt) had significant macroeconomic consequences, and most surprising of all, he thought that bond-financed federal deficits could have ended the depression, and that Federal Reserve open market purchases could not have done so. Simons thought that in the absence of radical reforms the best rule for monetary policy was stabilizing the price level (Rockoff@econ.rutgers.edu) 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. This would, we repeat, avoid the “poisonous sub-mortgage packets” that gave rise to the over-all world economic crisis 2008-2010.

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" (Simons 1944.) Banks could be "free to provide such funds out of their own capital" (ibid.) 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."



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 (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."

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

Even if we cannot say for certain whether his belief that government ownership of, say, utilities, may be better than government regulation, it seems that his belief No. 2, to wit: large corporations do not reflect genuine economies and should be broken up, is not going to become an axiom; especially in nowadays’ economies.

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 right was necessary to avoid such an intervention. But even this isn’t sufficient to label him “interventionist.”

Unfortunately many of the particular recommendations called for increasing the power of the central government---but never a detailed intervention, as the banking sector overregulation yielded the sub-mortgages trick to avoid the over-regulated other banking instruments----a direction later considered to be an anathema by his followers. In the early years, while members of the Chicago School were working to gain influence for their free market principles, the members of his school explained away the awkward interventionist elements by appealing to his lack of knowledge of contemporary facts, his unawareness of the later growth in government, his ignorance of subsequent theoretical developments, and the interventionist climate of the 1930s and 1940s. When they began to win influence after the failure of Keynesian economics to deal with the stagflation in the 1970s, it is not surprising that they gave up trying to rescue the classical liberal reputation of Henry Simons.

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 diminished equality and the concurrent ability of individuals to compete in the economy and to participate meaningfully in the conversations about political change. In fact, one wonders if Simons would have supported the theoretical and policy directions the Chicago School took after his death (Kasper, 30.)

The more important than this “wondering,” however, is the still more provable (and still more evident) Simons’ prediction of what would happen if the government intervenes too much---and without particular knowledge of the producers (e.g. banks) vs. consumers (e.g. mortgagers) behavioral interactions. If only the economic environment---banking sector together with government checks-and-balances----behaved according to Henry Simons’ ideas, almost all of the Earth population would have been at much higher economic standard of living now; not to mention without the fear of the 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

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Chicago school economists

Frank H. Knight · Jacob Viner · Henry Calvert Simons · Theodore Schultz · Ronald Coase · George Stigler · Milton Friedman · Rose Friedman · George P. Shultz · Robert Fogel · Gary Becker · Robert Lucas, Jr. · Sherwin Rosen · Richard Posner · James Heckman · Kevin M. Murphy

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