335. E. Cannan to Harrod , 13 December 1933 [a]

[Replies to 334 ]

11 Chadlington rd, [Oxford]

13 December 1933

Dear Harrod

I'm sorry I've given you so much trouble. You will feel you have been casting your pearls before swine, and I shall say you make me unable to see the wood for the trees.

The essence of my quarrel with the present predominant school of monetary theorists is simply that I hold that when you're on a gold or other metal standard, the value of your currency is settled by or equal to the value of gold and when you've gone off gold it is settled by or equal to the value of whatever does in fact take the place of gold as the standard.

I'm sure the predominant school does not hold this, though I have never been able to make out what it supposes to be the standard when it is not a metal.

Of course at present the standard in this country is still gold, though at the ratio of 83 French gold francs to the £ instead of 122. When I used the word "inconvertible" [b] twice in the first par[agraph]. of my letter of Nov[ember]. 20, [1] I was rather careless, as our currency can be described as inconvertible although it is on the (or a) gold standard. Now I think in doing this, I intentionally set rather a trap for you, because the note issue is at present restricted by the effort of the Bank and the Treasury to maintain this ratio, though in fact they restrict too much for their own comfort, so that the £ is always threatening to go up in gold value instead of down. The Bank has lots of notes to spare without asking the Treasury for permission to exceed the fiduciary statutory limit again, but it does not use them, not because there would be at least difficulty in doing so, but because to "reduce the reserve" would what they would call "destabilise the pound".

Where there is no hitch of this kind, you admit that there is no difficulty at all, as you say Roosevelt [c] "can raise prices by meeting a sufficient amount of gov[ernmen]t expenditure by paper rather than taxation". [2] Then, however, you seem to wish to minimise [e] this by saying he would not raise prices if he paid off certificates on indebtedness held by the F[ederal]. R[eserve]. Banks. This is too technical for me, as I don't profess to understand the F[ederal]. R[eserve] system (now happily discredited). But if it follows that, after abandoning the Paris peg, the British gov[ernmen]t could not raise prices by paying off all immediately redeemable debt by posting Bank notes to all holders, I think the proposition is absolutely groundless. Of course most of the holders would pay the notes into their banks, but they don't want to keep money in the banks indefinitely; they would try to buy interest bearing securities, and when these rose enormously in price as they must, the price of houses and buildings must rise because people unable to buy gilt-edged [f] stocks at reasonable prices will be driven to invest in such things, and then these things being more valuable will cause new ones to be constructed and that will raise the price of materials and labour.

In your last page and a half your relations with your bank seem to me [g] rather odd. When my bank gives me Bank of England notes it debits my account--reduces my credit balance by that amount--and if it could issue notes of its own and give me some of them, no doubt it would still do so. But your bank seems to credit your account with the notes which you take out. You should be a happy man! On the other hand [h] , however, you are at a disadvantage compared with me because you "can only receive notes from the bank" if you either (1) deposit gold or (2) receive a loan. [i] Now I manage to receive a suitable supply of notes from my bank every few weeks, though I've never paid in gold in my life, and have seldom had a loan from the bank. I can surely take out as many notes as I put in, at the very least, and also, I should think, you might allow me a few which have been got and paid in by the various companies which pay me dividends. (Some of these companies get nearly all their receipts in notes and coin). I suspect you were getting tired when you got to these last pages, and failed consequently to say what you meant. [j] I have not failed to think of the possibility that when you said "when it credits my account with so much", you meant when it writes your balance up by giving you a loan which will be added to your balance. If so, your statement only amounts to saying "there is not much difference of principle" between getting a loan in notes (which you very likely pay in at once), and getting a loan by way of permission to draw out notes (which you very likely avail yourself of at once.) But this interpretation doesn't seem to fit the next sentence, which says "my acc[oun]t can only be credited with so much (or I can only receive notes from the [k] bank) either if (1) I deposit gold or (2) receive a loan". You couldn't be saying, "I can only get a loan if either (1) I deposit gold or (2) I get a loan." [l]

But I cannot fathom what you really meant to say. If it was only that non-note-issuing banking in gold standard conditions and note-issuing in those conditions both economise gold and so reduce [m] the value of gold and currencies in the gold standard area, I agree 1 , and we needn't fight about which does it most. But it really looks as if you wanted us to believe that a bank or perhaps a banking system (Withers' single bank: [4] Withers very properly got a 3rd in Greats) with power to manufacture paper pounds in the shape of legal tender and generally acceptable notes ad lib. has no more power of depreciating the currency and the unit of account than if it was only authorised (as we all are) to accept loans commonly called deposits to any amount.

I am glad you think it is the total of "checkable" as the Americans say, deposits that corresponds with the total of currency outstanding, as that is what I've assumed your school to think, when attacking the "Bank deposit theory of prices" in Modern Currency. [5] (There [n] are only 56 copies of that left so perhaps I may be having a 2nd ed. or impression and be glad of any criticisms). Perhaps you saw the further attack in my review of Alston in last June's [o] Econ. Journal. [6]

You didn't take up my challenge about token coins--to say whether paper tokens were different from metal tokens. [7] Nobody mixes metal tokens up with borrowing and lending by means of intermediaries called bankers.

Yours ever

Edwin Cannan

P. S. Members of the predominant school less intelligent than you will say that paying off debt with new notes is only "open market purchases" which has failed repeatedly. But it isn't. Under it the banks get an accession of notes which are as good as gold was in gold standard times!

  1. 1. Letter 330 , [jump to page] .

    2. Letter 334 , [jump to page] .

    3. E. Cannan, Money: Its Connexion with Rising and Falling Prices, London: King & Son, 1929 (6th edition).

    4. Refers to H. Withers's "Parable of a Little Local Bank", in The Meaning of Money, London: Murray, chapter V (1920 edition, pp. 68-71).

    5. E. Cannan, Modern Currency and the Regulation of its Value, London: King, 1931. The Bank-deposit theory of prices is criticized in chapter IV § 6.

    6. E. Cannan, "The Function of Money. By Leonard Alston", Economic Journal XLIII, June 1936, pp. 273-78.

    7. Letters 330 , [jump to page] , and 333 , [jump to page] .

    1. a. TLS with autograph corrections, two pages two leaves plus an insertion on a separate fragment of sheet attached to page 2, in HP IV-186-188/3; envelope addressed to Christ Church, but forwarded to Campden Hill Square. Carbon copy with autograph corrections in CP 1033/211-213.

      b. Ts: «inconvdrtible».

      c. Ts: «Rooseveldt».

      d. Ts: punctuation missing; the next sentence, however, begins by capital letter.

      e. Ts: «minmise».

      f. Ts: «giltedged».

      g. Ts: «mer».

      h. Ts: «hnad».

      i. Ts: «loan".».

      j. The remainder of the paragraph was added at a later stage on a separate page, with the indication: "Addendum to middle of p. 2".

      k. Ts: «gthe».

      l. Ts: Inverted comma missing.

      m. Ts: «redduce».

      n. Ts: «there».

      o. Ts: «June».

1. See Money pp. 46 & 80-81 [3] [Cannan's note in the margin].

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