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The Economic Thought of Henry Calvert Simons

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The Economic Thought of Henry Calvert Simons The Economic Thought of Henry Calvert Simons Drawing on years of research, Gerald Steele delves into the diverse ideas of Henry Simons, a neglected economist whose work in the 1930s on monetary and financial instability is extremely relevant to today’s debates about com- mercial bank credit, the interdependence of fiscal and monetary policy, and financial regulation. Steele describes the emergence of the first Chicago School of economics and its distinctive difference to the School subsequently associated with the Monetarism of Milton Friedman, and shows how Simons provides the basis for what is now referred to as ‘the fiscal theory of the price level’ and how this differs from the monetarist attempt to control prices by controlling the supply of broad money. This book will be of interest to advanced students and researchers of the history of economic thought, economic history, macroeconomics and bank- ing and finance. G.R. Steele is Reader in Economics at Lancaster University. His research interests include the economics and political philosophy of Friedrich Hayek, and he has pursued a general inquiry into the development of ideas relating to problems of a money economy. In 2007, he delivered the F.A. Hayek Memorial Lecture, Austrian Scholars Conference, Mises Institute. In 2010, he was Visiting Professor at the Univer- sity of Economics, Prague, when he delivered the František Čuhel Memorial Lecture, Conference on Political Economy, at the Cevro Institute. Routledge Studies in the History of Economics For a full list of titles in this series, please visit www.routledge.com. 196 Economics, Entrepreneurship and Utopia The Economics of Jeremy Bentham and Robert Owen Estrella Trincado and Manuel Santos-Redondo 197 War in the History of Economic Thought Economists and the Question of War Edited by Yukihiro Ikeda and Annalisa Rosselli 198 Schumpeter’s Price Theory Harry Bloch 199 Economics and Literature A Comparative and Interdisciplinary Approach Edited by Ҫınla Akdere and Christine Baron 200 Economic Analyses in Historical Perspective Edited by José Luís Cardoso, Heinz D. Kurz, Philippe Steiner 201 Lionel Robbins on the Principles of Economic Analysis The 1930s Lectures Authored by Lionel Robbins Edited by Susan Howson 202 The Foundations of Political Economy and Social Reform Economy and Society in Eighteenth Century France Ryuzo Kuroki and Yusuke Ando 203 Asia and the History of the International Economy Essays in Memory of Peter Mathias Edited by A.J.H. Latham and Heita Kawakatsu 204 The Economic Thought of Henry Calvert Simons Crown Prince of the Chicago School G.R. Steele The Economic Thought of Henry Calvert Simons Crown Prince of the Chicago School G.R. Steele First published 2018 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2018 G.R. Steele The right of G.R. Steele to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Steele, G. R., author. Title: The economic thought of Henry Calvert Simons: crown prince of the Chicago School / G.R. Steele. Description: Abingdon, Oxon; New York, NY: Routledge, 2018. | Includes bibliographical references and index. Identifiers: LCCN 2017052867 | Subjects: LCSH: Simons, Henry Calvert, 1899–1946. | Economists—United States—Biography. | Chicago school of economics. | Monetary policy. | Free enterprise. Classification: LCC HB119.S56 S74 2018 | DDC 330.15/53—dc23 LC record available at https://lccn.loc.gov/2017052867 ISBN: 978-0-8153-6465-8 (hbk) ISBN: 978-1-351-06274-9 (ebk) Typeset in Bembo by codeMantra To Catherine and Charlotte Contents Preface xi 1 Introduction 1 1.1 Henry Simons 1 1.2 The Chicago School 4 1.3 Fiscal policy 6 1.4 October 1929 8 1.5 Money matters 10 2 Libertarian Philosophy 14 2.1 Liberalism 14 2.2 Simons and Hayek 14 2.3 Private property 18 2.4 Impediments to competition 19 2.5 Market failure 23 2.6 Consensus 24 2.7 Libertarian utopianism 26 2.8 Libertarian paternalism 28 3 Economics and the Chicago School 32 3.1 Modern economics 32 3.2 Economics and politics 33 3.3 Credit: saving and bank finance 35 3.4 Keynes’s economics (interest rate determination) 36 3.5 Keynes’s economics (the income multiplier) 37 3.6 The Chicago tradition 39 4 The Chicago Plan: the background 43 4.1 The Federal Reserve 43 4.2 A treasury and a central bank 44 viii Contents 4.3 US monetary policy in the 1920s 45 4.4 Complacency 46 4.5 Unemployment and Keynes 47 4.6 The Norman Wait Harris Foundation Conference 50 4.7 The view from Harvard 51 4.8 March 1933: Roosevelt takes office 54 4.9 Appendix: the Harris Manifesto 55 5 The Chicago eight, plus four, plus one 59 5.1 Cox, Garfield (1893–1959) 59 5.2 Director, Aaron (1901–2004) 59 5.3 Douglas, Paul Howard (1892–1976) 60 5.4 Knight, Frank Hyneman (1885–1972) 60 5.5 Mints, Lloyd Winn (1888–1989) 61 5.6 Schultz, Henry (1893–1938) 61 5.7 Simons, Henry Calvert (1899–1946) 62 5.8 Viner, Jacob (1892–1970) 62 5.9 Gideonse, Harry D. (1901–1985) 62 5.10 Millis, Harry Alvin (1873–1948) 63 5.11 Wright, Chester Whitney (1879–1966) 63 5.12 Yntema, Theodore Otte (1900–1985) 63 5.13 Soddy, Frederick (1877–1956) 63 6 The Chicago Plan 66 6.1 US money and banking 66 6.2 Fractional reserve banking 67 6.3 The Plan 68 6.4 A federal monetary authority 72 6.5 The Plan: Lauchlin Currie 73 6.6 The Plan: Irving Fisher 74 6.7 The Plan: Maynard Keynes 75 6.8 The Plan: Jacob Viner 77 6.9 The Plan: Milton Friedman 78 6.10 Summary thoughts 82 7 Monetary rules 85 7.1 Monetary reform (1936) 87 7.2 The Great Depression 88 7.3 Sovereign expenditure 89 7.4 A significant divide 91 7.5 Raise expenditure or cut taxation? 92 Contents ix 7.6 Involuntary unemployment and make-work schemes 93 7.7 The concept of fiscal monetarism 94 7.8 Moneys, practical moneys and near moneys 95 7.9 Concerns about Keynes 97 7.10 A rules-based system 98 7.11 Monetary reform (2015/2016) 100 8 Monetarism and Fiscal Monetarism 107 8.1 Revolution in economics 107 8.2 The quantity theory of money 109 8.3 A Chicago monetary traditon 109 8.4 Fiscal Monetarism 112 8.5 Ricardian equivalence 115 8.6 The Treasury view 116 8.7 Broad money and its credit counterparts 118 9 Business, bankers and bubbles 124 9.1 Mainstream economics 124 9.2 Minsky moments 126 9.3 The Great Moderation 130 9.4 Monetary policy activism: interest rates 132 9.5 Austrian business cycle theory 135 9.6 Assets and investments 137 9.7 Shadow banking 138 10 Taxation 145 10.1 Motivation 145 10.2 Evolution, not revolution 146 10.3 Equal sacrifice? 147 10.4 Tracts for the times 149 10.5 The base and the rates 150 10.6 Reform 154 10.7 Variable income 157 10.8 Final thoughts 158 11 Islamic banking and finance 162 11.1 Central bank independence 162 11.2 Banking structures 162 11.3 Yields: a Keynesian perspective 164 11.4 Yields: an Islamic perspective 165 11.5 Islamic banking: base money 166 x Contents 11.6 The social perspective 167 11.7 Culture, entrepreneurship and economic advance 169 11.8 A trade-off: innovation or stability? 170 12 Final comments 172 12.1 Markets and mayhem 173 12.2 Regulation and trust 176 12.3 Keynesian options 177 12.4 Monetary reform 178 12.5 Economics moves on 180 12.6 The epoch of aggregate demand management 183 12.7 Friedman’s Chicago revival 184 12.8 Boom and bust 186 12.9 Economic policy: models and practice 187 Index 191 Preface If this were a journal article, the abstract would contain the following. Henry Calvert Simons is worthy of interest, for many reasons. He argues that consensus is a necessary preliminary for successful policy initiatives. He held firm to libertarian principles even at the depth of the Great Depression, when others were seeking more radical options. He understands how the application of Keynes’s ‘solutions’ threatens the liberal ethos. He recognises the inescapable interdependence of fiscal and monetary policy. His pres- entation of fiscal policy is a precursor of the ‘fiscal theory of the price level’ (aka ‘Fiscal Monetarism’). He gave support to the application of monetary rules in preference to discretionary interventions. He argues that the ‘near moneys’ that are the creation of commercial fractional reserve banking are likely to exacerbate business crises. He backs 100 percent reserve banking (which has affinities with Islamic finance), but anticipates the emergence of new credit extending bodies (aka ‘shadow banking’). His influence upon the US tax structure draws from a detailed consideration of a workable basis for income taxation.
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