277. J. M. Keynes to Harrod , 25 January 1933 [a]

[Replies to a letter not found; continues at 278 ]

46, Gordon Square, Bloomsbury #

25 January 1933

Dear Roy,

I have found the earlier part of the enclosed excellent. [1] Your simplified condition [2] does, I think, bring out the point very well, and I have no criticism.

When you get, however, to the part on international capital movements, I am not so happy. I have marked my criticisms in the margin. [3] Serious ones begin about page 21a, and continue to page 29. In my notes I am not really criticising the substance of your argument, and I think it is useful for you to emphasise the side of the case which is generally seriously understated. My difficulties really boil down to three,

1. All the first part of the argument seems to me unnecessarily complicated and likely to confuse the reader. I wish you would look up again my Treatise on Money on this point. Perhaps I am prejudiced in my way of looking at it, but your treatment seems to me to leave the reader's mind seriously confused between what in my book I call foreign investment and what I call foreign lending. You will remember that the favourable balance is foreign investment in my terminology, whilst the amount of domestic currency put at the disposal of foreigners to be removed by them constitutes foreign lending. When you talk about the export of capital, I never know for certain which of these two things you mean. [4]

2. This point comes to a head on page 22 where you leave out the item of lost gold. I am not quite sure how far this is a formal point of criticism and how far a substantial point. But the argument has rather the appearance of proving that there will be no movement of gold by assuming at the beginning that there is none. My pencilled comments will make clear to you what I am driving at. [5]

3. I think you may produce a wrong impression in the reader's mind by the absence of any quantitative conclusions in your story. You are suggesting that there is a strict limit to the amount of the drain of gold, you argue that the possibilities of gold drains are commonly greatly exaggerated, and you give the general impression that this is not the sort of thing about which a rational person bothers very much. [6] If, however, the potential outflow of gold is enormously greater than the gold resources of the ordinary country, your conclusion by no means follows; and you give no indication whatever as to the order of magnitude of the quantities involved. I can put the point in this way. At almost any time in our history the loss of £50,000,000 in gold would have greatly embarrassed the Bank of England and required the most drastic action by them, since our free gold has seldom reached that figure. Yet £50,000,000 is only about 5 per cent of the current deposits of the country, leaving out deposit accounts and current cash. You have given reasons for believing that an adverse balance of a few hundreds of millions is most unlikely, and as a recurring phenomenon practically impossible. But that does not mean that there may not be an acute practical problem.

Yours ever,

J M Keynes.

Roy Harrod Esq., Christ Church [b] , Oxford.

  1. 1. Chapter VI of Harrod's International Economics ( 1933:10 ).

    2. Section 1 of chapter VI, on "Equilibrium in Simplified Conditions", introduced to meet Keynes's criticism formulated in letter 273 , [jump to page] .

    3. Harrod, International Economics, section 4 of chapter VI. Keynes's annotations and Harrod's draft are not extant.

    4. Keynes, Treatise on Money (1930), in Collected Writings, vol. V, pp. 118-19.

    5. Probably refers to the income and allocation balance sheets on p. 123.

    6. Refers perhaps to Harrod, International Economics ( 1933:10 ), p. 116. The requested quantitative illustration was not inserted.

    1. a. TLS with autograph corrections, two pages on two leaves, in HP II-27. Reproduced by kind permission of the Provost and Scholars, King's College, Cambridge.

      b. Ts: «Christ Church College».

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