367. G. Haberler to Harrod , [September 1934] [a]
[Follows on from 366 , answered by 368 ]
The League of Nations, Geneva #
I have studied your article very carefully.  The first part I like very much and I substantially agree with what you say. There are only minor points where I would distribute emphasis in a slightly different way or where I have a slightly different estimate of the adjustability and flexibility of our present financial system.
The second part I simply cannot understand. This is to be taken literally and is not a polite way to say that I believe that your deduction is wrong. Frankly, I think there is something wrong, but I do not understand it well enough to be sure. As you called it a simple-minded argument, I had other people read it--Miss Joseph  and Nurkse  who are both much clever, but they could not enlighten me.
Let me point out specifically where I feel uncertain about the meaning of your theory: Page 297. "q may be zero, in the case in which all members of the b[usiness] s[ection] are overdrawn." What does that mean? Same page last paragraph: "In the unit period ... than they receive from it as factors."  So they hoard, but why? Or does that mean that they spend (1-q)x less than they ought in order to keep prices stable? Unit period means obviously the period before money has been injected, but after (or in which) volume of production has risen. Or do you assume that they hoard, because their real income has risen? p. 298. "Income receivers disburse [b] in the purchase of securities s-(1-q)x in the unit period" [c] . Why do you assume that, if they hoard, they spend less in securities but so much as they did before on consumers' goods?
If thus one section decides to hoard qx units and the other (1-q)x, then one must increase the quantity of money by x in order to offset the tendency to hoard. But how does it follow that this is also the amount which is necessary to keep prices stable? Further: Hayek's [d] argument is (see German edition of Prices and Production) that, if you inject money you alter the ratio of the money streams spent on [e] consumers' goods and producers' goods respectively. But in the subsequent periods this newly injected money tends to be distributed among consumers' goods and producers' goods in the old proportion which has been disturbed by the injection.  This may be true or not (I have, as I wrote you the other day my doubts whether it is true  ), but I find no argument in your paper which could disprove this proposition.--Your definition, to take up still another point, of saving does not make it clear whether value means value in terms of money or in terms of goods, "real" value, as it were. 
I wouldn't [f] dare to write to you, if I had not the <control> of two so clever economists as Miss J[oseph]. and Mr. N[urkse]. I can only repeat, that we do not understand your point and should really be very grateful to get some elucidations, if you care to make any.
With best regards
Haberler's copy of Harrod's article (in GH, box 66) is annotated as follows:
On p. 289 bottom, next to the sentence beginning "The existence of fixed money ...", he underlined the word "premature" and wrote: "Aren't they brought up by others?". A few lines below he underlined the word "death" and noted: "of men but not of sources. Change in management see p. 290".
P. 290, first full paragraph: Haberler underlined the words "sensibly damaged", and commented: "old fashioned Ausgleich"; the following sentence is also underlined. In the margin of the following paragraph the word "Frictionen" is written, followed by some words in shorthand. Shorthand annotations also appear on p. 291. Further remarks are reported in note 4 to this letter.
Finally, Harrod corrected in his own hand a passage in the middle paragraph of p. 295: the word "making" is crossed out and substituted by "affecting", and the words "productive on balance" are substituted by "favourably than other factors of production".
2. Probably M. F. W. Joseph, temporary member of Section with the International Labour Office (1933-36), later member of the Financial Section and Economic Intelligence Service (1936-38).
3. Ragnar Nurkse was member of the Financial Section and Economic Intelligence Service at the League of Nations in Geneva from May 1934 to July 1939.
4. The complete quotation runs as follows: "In the unit period income receivers pay to the business community (1-q)x less units of money by the purchase of goods and securities than they receive from it as factors." x is the amount of money to be freshly injected into the economic system in the following unit period, q is the proportion of it required by the business community, and (1-q) the proportion required by income receivers.
Haberler underlined the words "they receive from it as factors" on his copy of Harrod's article (see note 1 to this letter), and annotated in the margin: "They hoard? Why".
5. F. A. Hayek, Preise und Produktion, Wien: Springer Verlag, 1931, pp. 56-57. See Prices and Production (1931), p. 53.
6. Letter 355 , [jump to page] ; see also letter 366 , [jump to page] .
7. "The natural rate of interest is that which causes real capital to be increased at a rate equal to that at which the aggregate savings of the community increase. The savings of the community in any period may be defined as the difference between the value of its total income and the value of the consumable goods purchased therewith": Harrod, "The Expansion of Credit" ( 1934:8 ), p. 297. In his offprint, Haberler underlined the whole paragraph. Robertson, in the notes written in the margin of his own copy of Harrod's article, also commented that real and monetary notions of saving were mixed up: see note 6 to letter 370 , [jump to page] .
- a. ALS, two pages on one leaf, in HP IV-395-422.
b. Ms: «disburs».
c. Ms: the quotation mark was not closed.
d. Ms: «Hayeks».
e. Ms: «for».
f. Ms: «would».
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