Work
In one of his essays, A Positive program for Laissez Faire 1934 Simons set out a program of reshape to bring private enterprise back to life during the Great Depression.
Eliminate any forms of monopolistic market power, to add the breakup of large oligopolistic corporations and a formal request to be considered for a position or to be lets to do or have something. of antitrust laws to labor unions. A Federal incorporation law could be used to limit business size and where engineering required giant firms for reasons of low symbolize production the Federal government should own and operate them... Promote economic stability by reconstruct of the monetary system and develop ofrules for monetary policy... Reform the tax system and promote equity through income tax... Abolish all tariffs... Limit loss by restricting offer 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 intention of changing the "monetary rules of the game" in this way was to "prevent… the affliction of extreme industrial fluctuations".
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" of the secondary monies, or "fire sales," result.
Simons believed that a financial system so structured would be "repeatedly shown to breed up insolvency". In due course, government intervention would inevitably be necessary to forestall ]
A recent example would be the $10 billion bailout by the John Mauldin, a senior portion of the financial services industry, writes: "If Bear had non been add into sound hands and provided solvency and liquidity, the extension 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 call massive government action.
This is the group of events predicted by Henry Simons in the event of a large-scale liquidation of inflated securities such(a) 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 workings capital precariously on call," and hence at risk, in the event of the slightest financial disturbance.
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 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.
In the interest of stability, Simons envisioned banks that would have a choice of two generation 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 itsconsequences would be the prevention of "bank-financed inflation of securities and real estate" through the leveraged setting 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 usefulness 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 give such funds out of their own capital". Short-term interest-based commercial loans would be phased out, since one of the "unfortunate effects of innovative banking," as Simons viewed it, was that it had "facilitated and encouraged the use of short-term financing in business generally".
Simons believed the ] To this end, he advocated a minimum of short-term borrowing, and a maximum of government guidance over the circulation of money. This would solution 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.