339. Harrod to J. E. Meade , 4 January [1934] [a]

[Replies to a letter not found, follows on from 325 ]

Christ Church, Oxford #

4 January [1934] [1]

Dear James,

I was reading your letter of Nov 18 (a long time ago!) over again. I confess I am not altogether happy about neutral money. [2] I have a sneaking suspicion that--in spite [b] of Pigou's attack upon it [3] --the concept may have some important significance in the sense of being a monetary system which allows real forces to operate in the way that they would if not disturbed by monetary factors. And in this case it is not merely a matter of definition.

The difficulty is in interpreting what people do mean in real terms when they make a monetary decision. We should agree that when a man decides to save he intends to add to capital without breaking on the capital of others or causing automatic splashing by others. There seems to me to be some sense therefore in saying that the monetary system is neutral if in these circumstances it disallows automatic splashing. [4]

But suppose a Trade Board raises wages in a sweated industry. What does it really intend? To raise relative wages in that industry and leave the average of real wages in the country intact (which implies a small reduction in other real wages)? Or to raise the average of real wages in the country? And if we do not know what it intends (it probably doesnt know itself) how can we define what sort of monetary system will carry out its intentions.

But suppose wages are raised in a trade in which productivity has increased by such an amount as to leave the price of the commodity the same, the intention of the bargain is that real wages should be raised by the same amount as money wages. There is nothing in principle to prevent the monetary system allowing that. But on your system, prices would be made to fall (with constant incomes and higher productivity) and real wages would be raised more than was intended. This would be a violation of the principle of neutrality. [5]

I dont think your finite day really helps you. [6] Suppose that productivity rises on day 0 and that people intend to take out the increment in the form of capital goods on day 1 . It is important that the right goods should be made on day 0 . Suppose that the banks make new loans equal to the increment on day 0 to be paid to men engaged on capital construction (these being displaced from other industries owing to higher productivity), while the old amount of money is paid to the men retained in employment, a higher wage being paid to a smaller number of men, is not the condition of neutrality fulfilled? Incomes will be up on day 0 in proportion to the rise of productivity and expenditure (including investment) will be up on day 1 . Expenditure on consumable goods will be the same as before and the output of those on day 0 will also be the same as before.

It is because I have a lasting feeling that there may be something in the idea of neutrality that I am suspicious of your position. I believe that there may be a number of different definitions of neutrality, which vary with the interpretations given to individual decisions. I also believe that in certain circumstances (vid. sup.) constant incomes may be inconsistent with neutrality.



  1. 1. Misdated 4 January 1933. The correspondence between the wording of this letter with the comments stimulated by Pigou's criticism to neutral money (see notes 3 and 5 to this letter) suggest that they must have been written at about the same time. The subject of this letter resumes one of the topics of Harrod's letter to Meade of 13 November 1933 (letter 325 , [jump to page] ), to which Meade's letter of November 18 (not found), referred to by Harrod, must have been a reply.

    2. Meade, in The Rate of Interest in a Progressive State (1933), p. 11, defines a neutral money system as one which interprets the decisions of individuals, of companies or of the government as if they were taken in a non-monetary economy. As a corollary, on the assumption of a constant population a neutral monetary system "maintains Final Incomes constant."

    3. Pigou, The Theory of Unemployment (1933), p. 188n. At the time of writing this letter, Harrod was reviewing Pigou's book ("Professor Pigou's Theory of Unemployment", 1934:1 ); the review article was submitted to Keynes for publication in the Economic Journal a few days later (see letter 343 ).

    4. In Robertson's terminology, automatic splashing occurs whenever a decrease in the stream of money directed on to the market (caused, for instance, by new hoardings) induces certain persons to consume goods which they would otherwise not consume: Banking Policy and the Price Level (1926), pp. 47-49.

    5. Harrod examined the same example (using almost the same words) in his discussion of Pigou's proposal of a standard monetary system alternative to neutral money: Harrod, "Professor Pigou's Theory of Unemployment" ( 1934:1 ), pp. 28-29.

    6. In his book, Meade did not use period analysis, and there is no reference to "finite days"--which were used instead by Robertson in "Saving and Hoarding" (1933), p. 399. This suggests that in the missing letter of 18 November Meade had recast his analysis in these terms.

    1. a. ALS, four pages on two leaves, in MP 2/4(5-6). Photocopy in HP (NC).

      b. Ms: «inspite».

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