330. E. Cannan to Harrod , 20 November 1933 [a]

[The exchange continues at 333 ]

11 Chadlington rd [Oxford]

20 November 1933

Dear Harrod

I suppose [b] even the most rigid anti-inflationist would admit that there are circumstances under which an inconvertible currency ought to be increased, and if that is so, why must we be asked to say that all increase of inconvertible [c] currency must always be the result of something commonly regarded as discreditable, viz. a "budget deficit"? [1]

No one says the token coinage cannot be increased without a budget deficit; the difference between the nominal value and the cost appears in the national accounts as profit or seigniorage. Why is not the profit on manufacturing standard paper money treated as profit in the same way? I fancy it often has been, but I am not sure of any of my cases. Where it is not so treated, but is made into a "budget deficit", the reason clearly is simply that tradition suggests that the paper should be issued by a bank, and therefore the Government does not print it at the Treasury, but gets its creature, the state bank, to print it, and then "borrows" it from the bank. Borrowing is the ordinary method of making up the difference between expenses and receipts and so a Government which has borrowed notes from its bank is regarded as having a "deficit" of that amount in an ordinary way, though it would not be if the borrowing were earmarked for telephone extension or the Guernsey Market House.

But [d] this "borrowing" is a pure fiction, since in modern times all states have arranged in one way or another that they pay no interest on the so-called loan. The state receives the full value of the issue less expenses, and there is not the least ground for regarding the receipt as a deficit, except that in so far as it [e] is non-recurrent it may well be treated as the death-duties might also be as capital rather than income. At any rate there is nothing discreditable about it.

The old Foxwellian idea that standard paper money is only "small change", [f] like the token coinage, and will be paid into the banks and remain there, if more is issued just as shillings would, [2] of course overlooks the fact that the extra paper would raise prices, and the extra shillings wouldn't. If a thousand millions of new fiduciary issue were posted to holders of national debt to pay either their interest or their capital, does anyone seriously suppose that they would pay them into their banks and leave them there? In point of fact nobody seems to doubt that Roosevelt [g] can raise prices fast enough by a sufficient issue of greenbacks .

Yours ever,

Edwin Cannan

  1. 1. It is not clear what stimulated this exchange. The opening paragraph criticizes a position Harrod expressed in "Currency and Central Banking", where he wrote that "Inflationary borrowing increases the circulating medium whether the government takes to itself the right of note issue or not. The essential cause contributing to an increase of money is a deficit not covered by loans subscribed to by the public and financed out of their genuine savings" (Harrod 1933:13 , p. 135). Cannan, however, only acquired the book in which this article was included after writing this letter (see letter 333 , [jump to page] ), and seems to have read Harrod's article only at that point (letter 333 , [jump to page] ). This letter may thus reply to a not extant earlier one by Harrod, which could have been stimulated by a belated reading of Cannan's review of L. Alston's The Functions of Money (Economic Journal XLIII, June 1933, pp. 273-78), or may comment on an unidentified writing by Harrod.

    2. Probably refers to H. S. Foxwell, "British War Finance" (1915), in Papers on Current Finance, London: Macmillan 1919, pp. 20-21.

    1. a. TLS, with autograph corrections, one page. In HP IV-186-188/1; envelope addressed to Christ Church. CC (without autograph corrections) in CP 1033/200.

      b. Ts: «suppos».

      c. Ts: «incomvertible».

      d. Ts: «BUT».

      e. Ts: «iit».

      f. Ts: «.».

      g. Ts: «Rooseveldt».


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