414. Harrod to K. F. Bode , [31 December 1934] [a]

[Replies to a letter not found, answered by 415 ]

[31 December 1934] [1]

May I go through your MS. point by point. [2]

P. 1. line 4. The words "and even demands". This I never said. [3] Moreover in my first Economist letter I specifically disclaimed such a contention. 1   2

P. 1. end of 1st para. This neglects the careful statements which I have already made. When in doubt I think it is only fair to have regard to what I have said in Economica, where exigencies of space do not preclude one from full explanation. There in my Rejoinder I explain that this result follows if you accept a special definition of savings designed to make the propositions possible. [5] But I say that the other definition makes I = S always true. Also in my 2nd letter to the Economist I say that the proposition in question requires a "curious" definition of saving. I gave reasons why I threw out the curious definition. I say that the definition which makes S = I is "more natural". And in deference to Dr. Haberler I withdrew the "curious" definition. [6] In view of these careful qualifications, it seems unfair to represent that, "if there is no additional credit, ", as my view simpliciter. 3 The "curious" definition was neither given nor implied in my first Economica article. 4

There are two points here:--

1. You are stating my main position in terms of a definition of saving, which in deference to Robertson and Haberler I have already agreed to drop (cf. 2nd letter to Economist "I accept his criticism" and "I joyfully accept his position" referring to Haberler, and Economica Rejoinder "I am willing to acquiesce" (referring to Robertson). [7]

I dropped the definition not because it is itself a faulty one--on the contrary I think it very neat--but because Robertson and Haberler don't like it. Definitions are things to be agreed about not fought over. I am perfectly willing to be accommodating.

2. My main refutation of the view that steady advance is not inconsistent with the infusion of credit owing to any savings/investment difficulty in the first Economica article Pt II does not depend on the "curious" definition. 5 It would clearly be a very weak one if it depended on a particular use of words. 6   [8]

Surely I make this clear in my Rejoinder. Robertson complains that I make Savings = Investment a tautology. [9] I say--oh, no not necessarily. I am prepared to advance another definition by which it is not. But I am willing to acquiesce in either alternative. This must surely be understood as saying--anyhow that is what I meant to say--that I regarded my argument in the original article as valid independently of which alternative you adopt. 7   [10]

My objection to your article in its present form is that it will suggest to the reader that you have studied my position very carefully, whereas it suggests to me, who know what I wrote, that you have not.

P. 2. Velocity. [11] I said quite explicitly both in the first Economica article and elsewhere that I assume V is constant. (In parenthesis I said V may not be constant and indicated what would happen in that case). [12] What then is the point of arguing for the next 5 pages that I ought not to assume a change in V (or K), when I never have assumed such a change? It can only result in confusing the mind of the reader.

You say I make implicit assumptions that contradict the assumption that V is constant. What are these? You do not point one out. The charge [b] is not substantiated. If you can find any such assumption, then I shall admit that you have a valid criticism.

Lower you say that one might think I referred to a rise in K because I use certain language. But if you admit that that would be a misinterpretation of my words, why continue to argue for several pages as though it were a true interpretation? 8 Actually I think my wording is perfectly clear. If I wanted to refer to a rise in K, I should have said not "increase the value of monetary holding" but "raise the proportion of income (or expenditure) held in monetary form". K is a fraction. The increase I refer to is not an increase in the value of the fraction, but an equal [13] increase in the numerator and denominator, supposing the denominator to represent the number of units of income or whatever it may be.

P. 3. "Kaldor interprets Harrod along these lines." [14] This is certainly incorrect. If you look at Kaldor's letter carefully you will see that he nowhere suggests an increase of K. On the contrary he explicitly says, referring to my argument, "since individuals intend to keep a constant proportion of their real income in the form of money". [15] When you tabulate Kaldor's points you recognise this (point 2). [16]

Let me take you point by point. You say if I meant (which I didn't) a rise in K, this would commonly be called "hoarding". My doctrine would then be (top p. 3) that hoarding is a regular accompaniment of a [c] progressive economy (which of course it isn't). Kaldor interprets him along these lines (which he doesn't). If Kaldor thinks I mean to imply hoarding (which according to your page 2 is equivalent to the increase of K [d] --interpretation of me) why does he say (your point 2) "the desire to maintain K constant". 9

Where you itemise Kaldor's contribution your point 2 is right and points 1 and 3 incorrect. [18]

1. Kaldor says nothing about people expecting an increase of money income. He refers solely to expectations with regard to prices. 10

3. This point does not occur in Kaldor at all. It is of course true that if people think prices are to be stable and they do fall, hoarding 11 is likely to occur (increase of K).

p. 3. last para. You say that if I am to be taken at my word in agreeing with Kaldor, I have committed myself to the view that in a progressive economy there will be some feature leading to an increase in K. [19] But I have repeatedly disclaimed assuming an increase in K [e] and Kaldor says that I assume constant K. Could misrepresentation be greater?

But there are more misrepresentations in this paragraph. By asking question 1) you imply that I hold that in a progressive economy people normally anticipate a rise of income. 12 [20] I never said or suggested anything of the sort. I only made the point that if the banks are maintaining prices stable, then the most probable assumption is that they expect prices to be stable. It may happen--this I never denied--that in spite of the banks keeping prices stable, people expect them to fall. This would entail that if they desire to keep K constant (as I assume) K will in fact fall. My assumption was the simplest one that people have a correct notion of what the banks are doing. But if they have an incorrect notion and at the same time try to keep K constant, K must alter. But it is important to notice that the particular misapprehension of people not expecting prices to fall will lead not to a rise but to a fall in K. (Kaldor and I spoke in terms of what is happening to prices [f] : that is what affects the individual's behaviour; he is not concerned except indirectly with whether certain bricklayers are or are not about to be given additional incomes by bank loans).

P. 4 towards top. There is a reference to next month. [21] This is strictly incorrect. Kaldor used the term price-expectation. Expectation may be taken to refer to the future of prices. 13 But it need not be so interpreted. What is relevant to the issue is what is happening simultaneously. The question is whether people have a correct or incorrect notion at any point of time as to what is happening to prices at that point, i.e. whether they are falling or stable. This is a fine point and I could hardly be expected to have made it (here I use the word expect in a sense which clearly need not apply to the future: "Harrod wrote a letter to the Economist last Saturday". "Oh, did he? I expect [g] he was talking about banking policy".) in reply to five correspondents. [22] But the point becomes important when you begin to talk about "next month" and the whole argument becomes absurd when to this is added not something about the behaviour of prices, but an increase of "my income".

P. 5. [23] I don't know what the "reed" refers to, but let that be. But I do protest against the view that I have abandoned some position. What? I am prepared (for the moment) not to continue to use a definition of saving which Haberler doesn't like. To abandon a definition is not to abandon a position. Nor have I abandoned it in any definitive sense. If I find it a convenient tool for developing a theorem I shall unhesitatingly use it.

p. 5. next para. [24] Incorrectness [i] repeated that Kaldor's interpretation involves a fall in V.

p. 6. If we apply to his theory [j] the "usual" definition of savings his argument becomes meaningless! [25] Well, of course. You can't apply a definition of saving to a proposition which implies another definition without rendering in meaningless or incorrect.

p. 10. The "disproof of the antithesis" [26] given in my first Economica article did not entail the "unusual" definition of saving advanced in the second article as a concession to those who want to find some meaning in the expression . On the contrary the arguments of that article were valid on the basis of the usual definition.

p. 11. I disagree with the words "terminological wangling" in (a) and "much more in harmony with" in (b), [27] but I will not bother you with arguments on this head, as this would not be germane to the special points you have to make about myself.

  1. 1. The transcription (see source note a ) is not dated. The date is inferred from Bode's reply: letter 415 , [jump to page] .

    2. Refers to a preliminary draft of Bode and Haberler, "Monetary Equilibrium and the Price Level" (1935), being a comment on Harrod's "The Expansion of Credit in an Advancing Community" ( 1934:8 ). Harrod's comments reached Haberler only when he had already sent the Ms to the editor of Economica; some changes, however, were introduced in the proofs: see letter 421 , [jump to page] .

    3. The passage was eventually eliminated from the published version: see letter 421 , [jump to page] .

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

    5. In his "Rejoinder to Mr. Robertson", Harrod pointed out that "Mr. Keynes' famous theorem regarding the equilibrium between saving and investment [...] uses saving in a different and abnormal sense" ( 1934:11 , p. 476).

    6. Harrod, "Banking Policy and Stable Prices" ( 1934:10 ), press item 9 , [jump to page] .

    7. Harrod, "Banking Policy and Stable Prices" ( 1934:10 ), press item 9 , [jump to page] , and "Rejoinder to Mr. Robertson" ( 1934:11 ), p. 477, respectively.

    8. Bode and Haberler rejoined to Harrod's point in their footnote 1 to p. 78 of Economica 1935:

    • In his letter to the Economist, Mr. Harrod explicitly introduces his `curious' definition of saving, but in private correspondence he maintains that the argument of Part II of his first Economica article would hold equally well for the ordinary as for his own peculiar definition of saving. This is hard to believe for two reasons: in the first place as already mentioned, the ordinary concept of saving implies an act of hoarding; and in the second place Mr. Harrod believes that with this concept S must always, ex definitione, be equal to I, in which case there seems to be no point in introducing a special argument to establish this equality for the particular circumstances in question.

    9. Robertson's remarks on Harrod's Economica article began by commenting that

    • [...] Mr Harrod seems to me [...] to have succumbed to the charm of the Grand Monetary Tautology, which, long found useful by bankers as a cloak for their misdeeds, is now being rediscovered with alarming frequency by theoretical economists. The bank's balance sheet always balances: alias Saving always equal Investment: alias all money which is anywhere must be somewhere. Mr. Harrod makes use of this principle to argue that, if real income is increasing, equilibrium is consistent with a policy of expanding bank money at the same rate, so as to maintain stability of the price level ("Mr. Harrod and the Expansion of Credit", 1934, p. 473).

    On Robertson's position, see also note 11 to letter 384 . On the view of banks as "cloak rooms" see Robertson, Banking Policy and the Price Level (1926), pp. 53-54.

    10. Harrod, "Rejoinder to Mr. Robertson" ( 1934:11 ), pp. 477-78.

    11. Bode and Haberler, "Monetary Equilibrium and the Price Level", p. 76. The passage was altered to meet Harrod's comment: see letter 421 , [jump to page] .

    12. Harrod, "The Expansion of Credit in an Advancing Community" ( 1934:8 ), pp. 296 and 298 (these passages were eventually cited by Bode and Haberler, "Monetary Equilibrium", p. 78).

    13. Harrod really ought to have said "proportionate".

    14. Bode and Haberler, "Monetary Equilibrium and the Price Level", p. 76.

    15. Kaldor, "Banking Policy and Stable Prices" (1934); this was a reply to Harrod's contribution with the same title ( 1934:9 , press item 8 ). Harrod's interpretation of Bode and Haberler's interpretation of Kaldor's interpretation of Harrod gave rise to a parallel exchange of views in person and by correspondence between Kaldor, Bode and Haberler: see letter 421 , [jump to page] .

    16. Bode and Haberler, "Monetary Equilibrium and the Price Level", p. 76:

    • According to Mr. Kaldor--or rather according to his implicit reasoning--what Mr. Harrod really meant was this: (1) In a progressive economy--i.e. where real income is increasing--people expect an increase in their money incomes; (2) Since they desire to maintain their k--i.e. the ratio of average cash balances to income--constant, they therefore increase their average monetary holdings; and (3) If the banks then disappoint them by failing to provide the implicitly anticipated increase in the supply of credit, then, looked at ex post, these people will have hoarded, although ex ante they had no such intentions.

    17. On the correspondence between Haberler and Lindahl on ex ante and ex post saving and investment and the interpretation of the debate with Harrod see note 6 to letter 393 .

    18. For Bode's and Haberler's rejoinder to Harrod's comment, see letter 421 and "Monetary Equilibrium and the Price Level", footnote 4 on p. 77.

    19. Bode and Haberler, "Monetary Equilibrium and the Price Level", p. 76, last paragraph.

    20. Bode and Haberler, "Monetary Equilibrium and the Price Level", pp. 76-77:

    • If we could take [Harrod] strictly at his word, then the only questions remaining open for discussion would be: (1) In a progressive economy, do people really anticipate a rise in their monetary incomes corresponding to the increase in real incomes? and (2) Does such an expectation actually lead to an increase in k?

    21. Bode and Haberler, "Monetary Equilibrium and the Price Level", p. 77: "Why should I keep back this month part of my income which I should otherwise have spent in the usual manner, simply because I expect a rise in my income next month?"

    22. Harrod's "Banking Policy and Stable Prices" ( 1934:10 , press item 9 ) is a rejoinder to Haberler's, Kaldor's, Barger's, Stafford's, and Blake's comments upon his previous letter.

    23. Bode and Haberler, "Monetary Equilibrium and the Price Level", p. 77.

    24. Bode and Haberler, "Monetary Equilibrium and the Price Level", pp. 77-78.

    25. Bode and Haberler, "Monetary Equilibrium and the Price Level", p. 78:

    • in our opinion, the whole argument of Mr. Harrod throughout all the publications mentioned above, rests alternatively on his tacit or expressed departure from the `usual' concept of savings. If we apply to this theory the `usual' concept of saving as equal to the difference between money income and money expenditures on actual consumption--then the "side tracking of savings" would imply an act of hoarding; this Mr. Harrod explicitly excludes.

    26. Bode and Haberler, Economica (1935), p. 80: "It still remains therefore for Mr. Harrod both to prove his own thesis" "that, with his own concept of saving and under the various other material conditions which he assumes, S can only be equal to I if P [the price level] is kept constant", and also to disprove his `antithesis'", that is, the mistake of the "neutral-money school".

    27. These expressions were dropped from the published version of Bode's and Haberler's article.

    1. a. TL with manuscript corrections, six numbered pages on six leaves, undated (but see note 1 ), probably transcribed by a clerk at the League of Nations in Geneva, where Bode worked in association with Haberler. Cc, annotated by Haberler, in GH Box 66; further Cc in HP IV-395-422.

      b. Ts: «change»

      c. Ts: «of progressive».

      d. Ts: «K.».

      e. Ts: «K.».

      f. Underlined by unknown hand, but probably during the process of revising the transcription.

      g. Underlined by unknown hand, probably during the process of revising the transcription (the underlining appears in both Harrod's and Haberler's copies).

      h. Four or five illegible words, some of which in shorthand.

      i. Ts: «incorrectitude».

      j. Ts: «theory,».


1. "I am not prepared to argue that the equating of loanable funds to savings is ... necessarily the proper object of banking policy." (Econ. letter) [4] [Harrod's note].

2. Haberler marked this passage in the margin of his copy with two vertical lines, and noted: "Even if the equalisation of S and I is accepted--as monetary rule?"

3. Haberler commented in the margin: "money will be sidetracked".

4. Haberler marked this sentence in the margin of his copy with four vertical lines and two question marks.

5. Haberler marked this sentence with three vertical lines in the margin of his copy.

6. Haberler commented in the margin: "every statement depends on the use of words. It is not true under all definitions of the words used".

7. Haberler marked the conclusion of this sentence with three vertical lines in the margin.

8. Haberler marked this sentence with a vertical line in the margin, and commented: "Economica II is independent of curious definition".

9. Haberler noted in the margin: "Harrod does not know Myrdal and Lindahl on <which> Kaldor's reasoning depends. There it is pointed out again and again that what people desire or intend might not come true. Ex ante and ex post". [17]

10. Haberler marked this paragraph with a vertical line in the margin, and commented: "no! see letter!", and "That is implied".

11. But if banks do not expand credit, hoarding in the sense of increase of money holdings will nor of course occur. [Harrod's footnote]

12. Haberler marked this passage with two vertical lines in the margin, and noted: "is implied by anticip. prices!"

13. Haberler marked this sentence with two vertical lines in the margin, and commented: "Kaldor interpretiert es aber so!! Myrdal ex ante <+> [h] !"


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