Control of Finance as a Prerequisite for Successful Monetary Policy: A Reinterpretation of Henry Simons’ “Rules versus Authorities in Monetary Policy”

Thorvald Moe

Accounting, Economics, and Law: A Convivium, 2013, vol. 3, issue 3, 261-276

Abstract: Henry Simons’ 1936 article “Rules versus Authorities in Monetary Policy” is a classical reference in the literature on central bank independence and rule-based monetary policy. A closer reading of the article reveals a more nuanced policy prescription, with significant emphasis on the need to control short-term borrowing. Bank credit is seen as highly unstable, and price level control is, in Simons’ view, not possible without limiting banks’ ability to create money by extending loans. These elements of Simons’ theory of money form the basis for Hyman P. Minsky’s financial instability hypothesis. This should not come as a surprise, as Simons was Minsky’s teacher at the University of Chicago in the late 1930s. I review the similarities between their theories of financial instability and the relevance of their work for the current discussion of macro-prudential tools and the conduct of monetary policy. According to Minsky and Simons, control of finance is a prerequisite for successful monetary policy and economic stabilization.

Keywords: monetary policy; financial stability; narrow banking; financial regulation; Henry Simons; Hyman Minsky; Milton Friedman (search for similar items in EconPapers)
JEL-codes: B22 E42 E52 G28 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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Working Paper: Control of Finance as a Prerequisite for Successful Monetary Policy: A Reinterpretation of Henry Simons's Rules versus Authorities in Monetary Policy (2012)
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DOI: 10.1515/ael-2013-0023

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