ABSTRACT
Simons’s ‘Rules versus Authorities’ is contemporaneous with Keynes’s General Theory and Hayek’s Austrian business cycle theory. In arguing that money is a prime driver ‘of extreme industrial fluctuations’ and by his desire for capitalism to become a more workable system, Simons advocates three reforms: (i) flexible prices; (ii) a fixed quantity of ‘circulating media’; and (iii) strictly limited short-term financing. With ‘quantitative easing’, the real value of money is largely unaffected; i.e., the composition of sovereign debt has inflationary relevance only by the willingness to hold that given volume of debt. In the management of monetary and fiscal policy, the key player is the fiscal authority. The limited role for a monetary authority is to advise a legislature on whether any course of action is in line ‘with accepted norms of fiscal action’. Simons’s reform agenda still takes the attention of modern practitioners. With his introduction to a report for Iceland, Lord Turner of Ecchinswell notes the instability inherent in allowing banks to create endogenous money. With his recent book, Lord King of Lothbury is motivated to find ‘a way of retaining the attractive feature of the Chicago Plan – that it ends bank runs’.
