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

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  • Moe Thorvald Grung

    (Norges Bank, Oslo, Norway; Levy Economics Institute of Bard College, Blithewood, New York, United States)

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.

Suggested Citation

  • Moe Thorvald Grung, 2013. "Control of Finance as a Prerequisite for Successful Monetary Policy: A Reinterpretation of Henry Simons’ “Rules versus Authorities in Monetary Policy”," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 3(3), pages 261-276, April.
    • Handle: RePEc:bpj:aelcon:v:3:y:2013:i:3:p:18:n:3
    DOI: 10.1515/ael-2013-0023
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    References listed on IDEAS

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    1. Biondi Yuri, 2013. "Hyman Minsky’s Financial Instability Hypothesis and the Accounting Structure of Economy," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 3(3), pages 141-166, June.

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    More about this item

    Keywords

    monetary policy; financial stability; narrow banking; financial regulation; Henry Simons; Hyman Minsky; Milton Friedman;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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