382. R. F. Kahn to Harrod , 22 October 1934 [a]

[Replies to 375 and 376 , answered by 383 ]

King's College, Cambridge #

22 October 1934

My dear Roy,

Thank you exceedingly for your very painstaking letter. Your information is most useful. Maynard has decided to invite Smith to become a member of his Club. Of Pollard I have heard nothing more.

Very many thanks for the offprint. [1] I had of course read your article with great interest, but am very glad to possess a separate copy of it. You will not be surprised if I tell you that I have far more sympathy with Part II than with Part I.

As regards the wickedness of the Hayekites, I too am inclined to feel rather strongly, though unlike you I suspect that on the whole the best we can do is to leave them to stew in their own juice. They have got themselves into an absolutely hopeless mess. Their own youngsters are fast deserting them, and Hayek himself, in his terror of being caught out, is deliberately trying nowadays to avoid the main issue. He has now had plenty of time to put things straight, and all he does is to write absurd articles on ridiculous questions.

But I agree with you that it is worth while to point out their more fantastic blunders. Their mystic attitude towards money provides an occasion for such a rebuke, and I am entirely with you in making it clear that the borrowing and lending activities of banks in no way differ in their effects on society, from the borrowing and lending of private individuals and institutions. In all these matters I take my standpoint on the fundamental truism that savings are always and in every situation equal to investment. (Why by the way did you refer in your letter to the "somewhat complicated rival system of J.M.K"? [2] could anything be simpler and more beautiful than this truism and all that goes with it? [3] ) Your proposition that savings are always equal to loanable funds is merely another aspect of this same truism. It is surely clear that your truism like mine must be universally true. The proof which you give in your letter to the "Economist" is of general validity and cannot be restricted to the case of stable prices. [4]

You might I suppose say that it is a question of definition of saving; though I suspect that you will have to frame a very queer definition to concord with what you are saying in your letter. [5] But whether it is a question of definition or not, the trouble is that what you seem to be saying in your letter is that no matter how fast costs are falling it is in some sense desirable that the banks should keep prices stable.

To my mind it is the most complete nonsense to suppose that the ideal behaviour of banks can be framed in terms of any proposition involving the level of prices. How prices behave depends on how wages behave, and that in turn depends on how Trade Unions behave. If at a time of increasing efficiency it is desired to keep prices stable it is necessary to give such stimulus to the demand for labour that wages go on rising at exactly the rate at which efficiency is increasing. Whether that is desirable or not depends entirely on how responsive money wages are. If Trade Unions respond readily to prosperity by demanding and securing higher wages, then the policy might be desirable, or it might actually be desirable to have rising prices. But if it would be necessary to have a dangerously intense demand for labour in order to drive wages up fast enough, then the policy would be undesirable, and it would be desirable to allow prices to fall, though probably not so fast as efficiency is increasing.

In short, I do not think in terms of money and prices. In the view of Keynes and his followers the Theory of Money has ceased to exist. Of course, that is an exaggeration (it is the quantity of money which determines the rate of interest), but the exaggeration is a pardonable one. [6]


R. F. Kahn

Roy Harrod, Esq., Christ Church [b] , Oxford.

  1. 1. Harrod, "The Expansion of Credit in an Advancing Community" ( 1934:8 ). Kahn's copy is in RFK 14/47.

    2. Letter 375 , [jump to page] .

    3. Kahn failed to understand that at this point Harrod was referring to the special definition of saving given in Keynes's Treatise on Money (1930), for--in spite of Keynes's warning (see letter 278 , [jump to page] )--he was unaware of Keynes's change in terminology. This, however, soon became evident in the sequel of the exchange: see letter 383 , [jump to page] .

    4. Harrod, "Banking Policy and Stable Prices" ( 1934:9 ), press item 8 , [jump to page] .

    5. The fact that Harrod's statement implied a new definition of savings was also recognized by Haberler (letter 384 , [jump to page] ), and admitted by Harrod (letters 383 , [jump to page] , and 388 , [jump to page] ).

    6. Although Harrod had seen fragments of the new Keynesian system, he failed to appreciate the extent of the change that was going on. This seems to be the first time that Harrod had to face the full implication of Keynes's shift of emphasis.

    1. a. TLS with autograph corrections, four pages (numbered from the second) on four leaves, in HP IV-586-668b. Cc without corrections in RFK 13/57/83-86.

      b. Ts «Christchurch».

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