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  is, as you say, an unusual one.  So is Keynes' definition.  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. 
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.
R. F. Harrod
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] .
- 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".
top of page
Return to index of this section
Go to previous page
Go to next page