482. J. M. Keynes to Harrod , 9 October 1935 [a]

[Replies to 481 , answered by 486 ]

9 October 1935

Dear Roy,

I think your argument stops too soon. It may be an inconvenient use of words to say that banks create lending. But they cause lending to come into existence, which would not be there otherwise, by modifying the terms of lending. That is to say, when the conditions exist which tend towards an increase in the quantity of money, the banks bring about the requisite increase of lending by modifying the terms on which lending happens. In other words, by decreasing the liquidity premium (or increasing it, as the case may be) they appropriately augment the demand for money. The amount of lending is a function of the terms of lending and is obviously not absolute.

Yours ever,

J. M. K.

R. F. Harrod Esq., Christ Church, Oxford.

  1. a. TLCcI, one page, in JMK GTE/1/410. The original was not found among Harrod's papers. Reproduced by kind permission of the Provost and Scholars, King's College, Cambridge.

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