388. Harrod to G. Haberler , 29 October 1934 [a]

[Replies to 384 , continues at 390 , answered by 393 ]

Christ Church, Oxford

29 October 1934

My dear Haberler

The definition of saving implied in my first letter to the Economist [1] is, as you say, an unusual one. [2] So is Keynes' definition. [3] The point is that unless you give an unusual definition to savings, the proposition that savings = investment is true in all circumstances. In traditional economic thought this is assumed. Keynes discovered that by giving a somewhat different definition to savings, "savings should be equal to investment" may be made a constructive criterion. Whether his line of approach is fruitful I will not now discuss. I will only re-affirm that if the normal definition of savings is taken, saving = investment in all circumstances.

Suppose the banks create new credit = £100. Some people must simultaneously begin to hold £100 of additional money, i.e. they must devote part of their income to this purpose, they must make a gap between their income and lending + spending of £100. If they cut down lending by the whole £100, this simply means that the banks lend the £100 which private people would otherwise have done and there is no increase of investment. If they cut down spending by £100 this means an increase of saving of £100 to balance the new bank credit of £100. They may do a little of each. Whatever they do, their increase of saving + their decrease of investment must be equal (without time lag) to the increase of loans by the banks; thus the creation of new credit produces no disparity between saving and investment. 1

I regard this proposition as being as certain and necessary as a correct formulation of the Quantity Theory or of the balance of international payments. And I am confident that if you give the matter further reflexion you will agree with me.

In order to construct a theory of the Trade Cycle based on the disparity between saving and investment, either saving or investment must be given an unusual sense. Otherwise the theory is necessarily fallacious. [4]

This is a point of such cardinal importance, that I will not deal with other more controversial and debatable points in your letter now, because I earnestly hope that you will give this very special consideration.

Yours sincerely

R. F. Harrod

  1. 1. Harrod. "Banking Policy and Stable Prices" ( 1934:9 , press item 8 ).

    2. See also letters 383 , [jump to page] and 389 , [jump to page] .

    3. Keynes, Treatise on Money (1930), in Collected Writings, vol. V, pp. 111-14.

    4. See, for a similar argument, letter 389 , [jump to page] .

    1. a. ALS, two pages on one leaf, in GH Box 66. TLCc, two pages on two leaves, in LoN 10B.12653.12653. The letter was typed by FB., and indicates in handwriting: "Copie; original gardé par M. Haberler".


1. If they sell capital to acquire the money, this implies no change in saving, but a negative or dis-investment which will be balanced by the bank loan [Harrod's footnote].


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