395. G. Haberler to Harrod , 6 November 1934 [a]
[Replies to 390 , continues at 396 , answered by 397 ]
League of Nations, Geneva #
6 November 1934
Many thanks for your letter of November 1st. The first point you raise I must consider more carefully; I do not feel quite sure about it.  As to the second,  I believe that I can answer it at once:
What matters is the "flow of money" or, more precisely, the demand for goods in terms of money per unit of time. This latter will rise ceteris paribus (a) if M rises, (b) if V rises. If additional loans are created by the banks in favour of somebody, M [b] rises. It also does so if the Government pays its way by inflation. In both cases the flow of money increases and, as you say, the people are taxed illicitly. Exactly the same happens if V [c] goes up. How is it possible to finance investment by means of an increase in V? Obviously somebody must dishoard; money which was lying idle, comes into the market. To say that money circulates more rapidly on the average is only another way of saying that it is on the average not kept so long in the pockets of individuals; [d] that the average time between two successive payments has become shorter.
Now, if a person dishoards, it increases the demand for money (in the respective period). The case is therefore exactly analogous to the increased purchasing power of a Government, which pays its way by inflation. The people are illicitly taxed, as you put it, this time not in favour of the Government, but in favour of those persons who dishoarded. There is nothing mysterious in this and I need not cite Keynes' "paradoxes" (which are, in reality, quite artificially created with the help of an involved terminology) of the widow's cruse,  etc., to solve the problem.
I should like once more to suggest that you talk the matter over with Marschak. He has written an excellent paper (in German) on velocity of circulation, its relation to the size of individual cash balances, etc.,  and I consider him as one of the highest authorities in this field.
Very sincerely yours,
R. Harrod Esq., Christ Church, Oxford
2. Letter 390 , [jump to page] , which resumes the criticism originally raised in letter 378 , [jump to page] and discussed by Haberler in letter 384 , [jump to page] .
3. Keynes, A Treatise on Money (1930), in Collected Writings, vol. V, p. 125.
4. J. Marschak, "Volksvermögen und Kassenbedarf", Archiv für Sozialwissenschaft und Sozialpolitik, BD 68 H. 4, January 1933, pp. 385-419. See also note 8 to letter 384 .
- a. TLS with autograph correction, one page, in HP IV-395-422. Further copy in GH Box 66.
b. Ts: «M.».
c. Ts: «V.».
d. Ts: «,».
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