351. Harrod to G. Haberler , 24 March 1934 [a]

[Answered by 355 ]

Christ Church, Oxford [b]

24 March 1934

Dear Haberler

I was very gratified by your review of my book in Economica [1] which I feel was better than it deserved. There is one point in it which I should like to take up, not in order to justify myself on what I may have said in the past, but in order to clear my mind as to your opinions.

I refer to the para. on p. 102 beginning--"I cannot find this reasoning convincing ..."

I am discussing an international money system. The plain, simple, straightforward solution, is to have a stable price level, based on commodities with international quotations.

Largely out of deference to the arguments which you and D. H. Robertson have been advancing, [2] I point out that a stable price level may involve illicit inflation. To avoid that, prices must be allowed to fall. But as different countries progress at different rates, this means a moving par of exchange between the more and the less progressive countries. The movement will be in one direction usually and only small per annum but may be big cumulatively. [3]

You are not convinced by this. You think "that an economic system which has lost its elasticity to such an extent that it is unable to correct a price and income maladjustment of 2 per cent will, in any case, be faced with a dangerous situation". [4]

Good. If that is so I go back, and I think that you ought to go back too, to the simple and straightforward solution of a stable wholesale price level which would allow stable exchanges. And to avoid illicit inflation you ought to urge countries like the U.S.A. to make their wage system more elastic in an upward direction.

Oh, you will object, but it may be impossible to secure such elasticity, and we shall have repeated all the <terrible> [c] consequences of illicit inflation.

I would go with you in urging that the price level might be allowed to fall everywhere at the rate at which efficiency is increasing in the least progressive country.

Oh, you will object, but that was roughly what happened in 1925-9 and you still got shocking illicit inflation in the more progressive countries.

Good. Then I go back to the plan in my book, which you criticize, of making prices fall more quickly in the more progressive countries, and letting exchange rates vary. You see my plan which you criticize is really advanced out of respect for your views. Had I not had that respect I should have proposed a stable price level (or not falling more than efficiency is increasing in the least progressive country). I call that, for short, a stable price level.

There is, of course, one other possibility. To make prices fall more quickly and to get the less progressive countries to make their wages more elastic downwards. Is it really reasonable to prefer that to a stable price level? A stable price level allows stable exchanges but involves some countries adjusting wages upwards. Your system allows stable exchanges but involves some countries adjusting wages downwards. If you think that the former system will not work for lack of adjustability, a fortiori is that true of the latter. The essential logic of your position is that it is more likely to be able to get a system to work well which involves periodic downward wage revisions than one which involves periodic upward wage revisions, i.e. that it is easier to get wages reduced than to get them raised. Quod est absurdum.

Yours very sincerely

R. F. Harrod.

  1. 1. G. Haberler, "International Economics", Economica, February 1934, pp. 98-103.

    2. See for instance G. Haberler, "Money and the Business Cycle", in Q. Wright, Gold and Monetary Stabilization, Chicago: The University of Chicago Press, 1932, pp. 43-74; D. H. Robertson, Banking Policy and the Price Level (1926), chapter 2.

    3. Harrod, International Economics ( 1933:10 ), p. 166-77.

    4. Haberler, "International Economics", p. 102.

    1. a. ALS, four pages on two leaves, in GH Box 67.

      b. The Campden Hill letterhead was crossed out.

      c. Ms: perhaps «horrible».


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