278. J. M. Keynes to Harrod , 31 January 1933 [a]

[Replies to a letter not found; follows on from 277 ]

46, Gordon Square, Bloomsbury #

31 January 1933

Dear Roy,

1. As regards nomenclature, I am now in lectures using Income in the old-fashioned sense, as you use it, and I shall do so in my next book. So please do not try and accommodate yourself to me on that point. I am, however, for what seemed to me overwhelming reasons, continuing to use Savings in my own revised sense. For Savings in the old sense, meaning the excess of income over expenditure, I now use the phrase Surplus Income, or Surplus for short. Unconsumed Income would do equally well. [1]

2. I am still a little bothered as to how you can get your equations without bringing in an item for gold lost or gained. Either your equation must run Foreign Balance = Foreign Investment, which can carry no argument any further, since these are only different names for the same thing; or the equation must run

Foreign Balance + Loss of Gold = Foreign Lending.

This last is the equation which is relevant when you are considering a loss of gold through people allowing their domestic balances to run down [2] .

3. I think you want to be clear whether you conceive a loss of gold as reducing domestic balances not at all, by an equal amount, or by a greater amount.

4. I think it is important, if you agree, to make it clear that your argument as to an unbalanced position involving a reduction of money balances, [3] does not much affect the practical problem, and there ought to be some discussion of this practical problem. The vital headings of the practical problem seems to me to be:--(i) That in so far as foreigners hold balances here, there is a liability for the whole of them to be removed, (ii) that our own balances, including deposit accounts, are often largely in excess of the minimum we need to carry on business, for [b] example, balances have increased by more than £200,000,000 in the last year, probably the whole of which is available, without the slightest inconvenience, for foreign lending, if foreign lending is attractive, and there is no restriction upon it. (iii) It is usually difficult to enforce a curtailment of balances to restrict foreign lending, without at the same time restricting all kinds of harmless and praise-worthy domestic activities. Do you agree that one could take your theoretical argument at its full face value, and there would still be nothing to prevent a loss of gold up to at least £500,000,000 by this country unless the banking authorities took the traditional steps to prevent it, and these traditional steps would do all kinds of harm in unintended directions? In short, does your argument really diminish the practical acuteness of the balance of trade problem, and if you agree about this, ought not it to be made plain to your readers?

5. You will see that I agree with you that there would be great force in your method of approach if capital transactions were <slow> and nothing but the foreign balance was in question. The problem is essentially created by the possibility of foreign lending exceeding the foreign balance, so that the fact that the problem does not arise when foreign lending is by hypothesis zero, has no relevance to the question of what happens precisely when and because foreign lending comes in.

Very sorry to be so persistent, but I am not clear from your letter how far you accept or dispute the above, and how far you are really facing it in that chapter.

Yours ever,

J M Keynes

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

  1. 1. In International Economics ( 1933:10 ), p. 122n., Harrod distinguished his own use of "unconsumed income" from Keynes's definition of "savings" in the Treatise on Money (1930).

    2. Harrod eventually decided not to account for the loss of gold in his balance sheet (International Economics, p. 123).

    3. Harrod, International Economics ( 1933:10 ), p. 131. Harrod did not discuss the practical implications of his argument along the lines suggested by Keynes.

    1. a. TLS with autograph corrections, three pages on three leaves, in HP II-28. Reproduced by kind permission of the Provost and Scholars, King's College, Cambridge.

      b. Ts: «For».

      c. Ts: «Christ Church College».


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