404. E. F. M. Durbin to Harrod , 16 November 1934 [a]
33 York Terrace, N. W. 1.
16 November 1934
I have now read your original Economica article, your rejoinder to Robertson and the Economist letters as carefully I can.  Everything you say has been most interesting but I still remain puzzled as to what exactly you believe yourself to have proved or disproved.
1. The first part of your Economica article is most stimulating. I think your conclusions need amendment but I have not worked out my criticisms fully and I will leave it until I have.
2. In the second part of the article you develop the view--and more plainly in the subsequent rejoinder and letters--that account must be taken of any tendency to accumulate balances by the public before monetary policy can secure equilibrium.  No one but a dotty--which does not include Hayek on this point--would deny this and you may remember that James Meade shows--Appendix to Chapter II of his book-- [b] that it is precisely this consideration which invalidates Hayek's argument in favour of a constant MV. 
But you go on to generalise this argument by pointing out that if prices are stabilised the public will accumulate balances at a rate equal to the rate of growth of physical output and that consequently the banks can issue new credits to this extent without disturbing an equality between Saving and Investment as defined by you.  Or as I put it in my book by equating Saving and Investment meaning the money supply and demand for new physical capital.  What you say is plainly fine but I cannot see that it amounts to more than saying if you have stabilised prices you can stabilise prices!
The whole real problem is how this is to be done. If the price level of final output is to be stabilised without disturbances in the relative price levels--which occasions [c] a different type of disequilibrium--the value of expenditure must rise at every point in the system simultaneously at the same rate and at a rate equal to the rate of increase of physical output. If you can secure that this should happen then of course it is possible to stabilise prices. But has anyone ever denied this--with the possible exception [d] of Hayek. Certainly not people like me. The whole problem of policy is not what could be happening if this were done but how it could be done.
I am sure the real solution of the problem of policy lies as I am arguing in my book in the assumptions you are making about the degree of flexibility of the prices of the primary factors and the forms of credit expansion at your disposal.  But exactly what you are assuming about those matters--other than a rigidity of wages and debenture interest--it is not easy to see. As soon as the revision of my book is complete I shall be most interested to have your criticisms of the parts relevant to your own views. I am proposing to add a section of the Appendix on you! 
Evan F M Durbin.
2. Harrod, "The Expansion of Credit" ( 1934:8 ), p. 298; "Rejoinder" ( 1934:11 ), p. 477; "Banking Policy" ( 1934:9 ), press item 8 , [jump to page] .
3. J. Meade, The Rate of Interest in a Progressive State (1933), note on "Neutral Money in Dr. Hayek's `Prices and Production'", pp. 19-23.
4. Harrod, "The Expansion of Credit in an Advancing Community" ( 1934:8 ), p. 298.
5. E. F. M. Durbin, The Problem of Credit Policy (1935), pp. 90-91.
6. Durbin, The Problem of Credit Policy, chapter IV, in particular p. 113 and, with reference to Harrod, p. 139.
7. Durbin added instead a section on Harrod before the conclusion of chapter IV, pp. 138-43.
- a. ALS, three pages on two leaves, in HP IV-293-295/1.
b. Ms: «shows ... shows».
c. Ms: «occasion».
d. Ms: «except».
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