475. Harrod to J. M. Keynes , 27 September 1935 [a]

[Replies to 474 [1] ]

51, Campden Hill Square, W. 8. #

27 September 1935

Dear Maynard

I quite agree with your point about Vol. 2 on money. That is the little cloud in the sky which is destined (with the aid of your magic) to engulf the whole country.

I dont think you find it in the old economics. Your passage from Ricardo [2] is the direct contradiction [b] . I should guess that old Cannan (who never got beyond 1848) would strenuously deny it. Marshall, if I remember right, was saying in 1888 that an increase of money would raise the money but lower the real rate of interest. [3]

How does it fit in? It is a monetary friction (and \ presumably of short period importance only!). When you consider the system in real terms it simply isnt there. And this is where you come in with overwhelming force. The monetary phenomenon cant be so dismissed. For the labour disutility function which is on any theory of fundamental importance to the theory of unemployment, is essentially expressible in monetary terms. To get back to real terms, you would have to assume that the real labour disutility schedule altered whenever there was a change in the price level. Such an analysis is clearly analogous to the Ptolemaic epicycles and must be dismissed.

That is, I think that if you <choose> your ground well, as you have done in Bk I, you have a superb case. And I deplore all the more attacks from ill chosen ground, as those of Ch. 16 [4] appear to me to be.



Galley 79 (iii) 2nd para. [5] I have noted:--"Isnt there a latent contradiction here?" I should have thought that if cash can only be borrowed at a high rate, that would strengthen the motive for holding cash. Instead of investing a surplus, you refrain from doing so in order not to have to borrow on overdraft later. With given liquidity requirements, then, the higher the overdraft rate the higher the rate earnable by lending must be to overcome liquidity preference. Later you say if bank charges are avoided, this strengthens the motive for holding cash. But surely a high overdraft rate has the same effect as bank charges.

It is quite true that you wouldnt borrow money in order to hold it as cash, if the rate for borrowing is high. But people dont borrow in order to hold cash, they borrow in order to avoid holding cash at some immediately antecedent or subsequent time. 1

Galley 88. last words of last para. but one before II. [6] I was rather uneasy about these. I have noted against the words "diminish the sum":--"But unless it increases this sum by DS, it must bid up the price of bonds, unless we revert to the argument of the Treatise, which hasnt figured previously in these pages, that there will simultaneously be D(entrepreneurial dissaving) = DS." 2

First para of II [7] I have noted "obscure".

On II generally (Galleys 88-90) [8] I have noted:--"This section important and interesting in its positive doctrine. Doubtful of validity & relevance of critical strain." 3

Galley 112. footnote 1. [9] I have noted:--"Might we have a proviso for imperfect competition?" 4

And at the end of first complete paragraph "Thus the limiting case ." [10] I have noted:--"Why is this the limiting case? What about decreasing costs?" 5

Galley 114 1st paragraph, 1st sentence [11] seems to me a little unkind and sweeping. "Only" is so very strong. I have written as suggestion:--"It is in this connexion that I find the principal significance of the conception ...". 6

Galley 115. 3rd line. [12] In previous passages you have used language to which the following would be an equivalent here:--"though at a real wage equal to or less than the existing one". 7

Galley 115. (2) line 4. [13] I have noted:--"I am not quite clear how you use marginal prime cost here; I hope you have used it to include user-cost, for that is the usage I like." But if so, your original definition of prime cost required the amendment I suggested in loco. 8

Galley 120. 5th para. line 2. [14] Against [c] the words general principle I have noted:--"viz. the general principle referred to in last sentence. That this is so is not quite clear from the language. The reader might take it to refer to the general principle of the multiplier itself, in which case the meaning would be reversed." 9

Galley 121. Just before IV "(say 5 per cent)". [15] I have noted:--"So low? cf. Kuznets & Clark, sup." [16]

Galley 125. 2nd whole para. [17] I have noted:--"Does this mean scrapping entirely the view that increased gold production tends to diminish the value of gold?" 10

Galley 130. 1st whole para. line 11. [18] After [d] "so" insert "low". 11

Galley 133--Appendix on Pigou. [19] I dont apply my general remarks on your critical parts to this, which I think is splendid!

R. F. H.

  1. 1. Although the correspondence on the proofs of The General Theory ends here, Harrod and Keynes probably discussed the matter further: Keynes's appointment diary, in fact, records that a meeting took place on 28 September (JMK PP/41).

    2. Keynes, General Theory (1936), p. 190.

    3. Harrod probably refers to Marshall's witness before the Royal Commission on the Values of Gold and Silver in 1887-88, or to the more relevant one before the Committee on Indian Currency in 1899, where Marshall discusses the relation of quantity of money and interest rate in the trade cycle: see the minutes in the Official Papers by Alfred Marshall, London: Macmillan, 1926, pp. 45-51 and 267-326.

    4. General Theory, appendix to chapter 14 (Harrod refers to the old table of contents, in Collected Writings (1971-89), vol. XIII, pp. 525-26).

    5. Collected Writings, vol. XIV, p. 487; General Theory (1936), p. 196.

    6. Collected Writings, vol. XIV, p. 491; General Theory (1936), p. 213.

    7. Ibid.

    8. Collected Writings, vol. XIV, pp. 491-94; General Theory (1936), pp. 213-17.

    9. Collected Writings, vol. XIV, p. 509; General Theory (1936), p. 283 n. 1. Harrod's request was not accepted.

    10. General Theory (1936), pp. 283-84; Collected Writings, vol. XIV, p. 509 (save for a misprint).

    11. Collected Writings, vol. XIV, p. 509; Harrod's suggested wording was incorporated in the second paragraph of p. 287 of the General Theory.

    12. Collected Writings, vol. XIV, p. 510. Harrod's suggestion was incorporated in the first paragraph of III of p. 289 of the General Theory (1936).

    13. Collected Writings, vol. XIV, p. 510 bottom.

    14. Collected Writings, vol. XIV, p. 456; General Theory (1936), p. 120 last paragraph.

    15. Collected Writings, vol. XIV, p. 457; General Theory (1936), p. 122.

    16. General Theory (1936), pp. 102-104.

    17. Collected Writings, vol. XIV, p. 458; General Theory (1936), p. 130 2nd paragraph. Notwithstanding his own note in the margin of Harrod's remark, Keynes did not delete this passage, but moved it from chapter 21 on "The Employment Function" to chapter 10 on "The Marginal Propensity to Consume."

    18. Collected Writings, vol. XIV, p. 507; Harrod's suggestion was incorporated on p. 265 of the General Theory (middle).

    19. Collected Writings, vol. XIV, pp. 507-8; General Theory (1936), pp. 272-79.

    1. a. ALS, two pages on one leaf, enclosing an ANI, three numbered pages on three leaves, in JMK GTE/1/392-96. Printed in Keynes, Collected Writings, vol. XIII, pp. 562-63.

      b. Ms: «contradictory».

      c. Ms: «against».

      d. Ms: «after».

1. The last two paragraphs are ticked by Keynes.

2. "But it will" [Keynes's note in the margin].

3. Ticked in the margin by Keynes.

4. Ticked in the margin by Keynes.

5. Ticked in the margin by Keynes.

6. Ticked in the margin by Keynes.

7. Ticked in the margin by Keynes.

8. "deleted" [Keynes's note in the margin].

9. Ticked in the margin by Keynes.

10. "Deleted" [Keynes's note in the margin].

11. Ticked in the margin by Keynes.

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