487. D. H. Robertson to Harrod , 12 October 1935 [a]

[Replies to 480 and 483 , answered by 494 ]

Trinity College, Cambridge

12 October 1935 [b]

"Cannan defeated" indeed. It seems to me that [c] the old gentleman has posthumously bemused you all!

You say the bank can't create additional lending ( these pseudo-names ending in -ing, by the way, are terrible verbal traps.) At least you say that's what you say: but what you really say is that it can't create additional lending from itself to the public without simultaneously creating additional lending from the public to itself: this latter lending being, as you hint in letter (2) [1] , of a peculiar kind in that (in the case of notes or current accounts) it doesn't bear interest, or (in the case of deposit accounts) bears a rate of interest which is somewhat (by no means wholly) detached from the general run of market rates.

Now I say this is accountancy, not economics: it tells me nothing which as an economist I want to know. Do please have the kindness to look up BP&PL, 1932 ed[itio]n., pp. 51-52 and long footnote: [2] I don't seem to find anything I want to alter in that.

What I want to know is (i) what effect the above process has on the distribution of real income between (e.g.) creditors & debtors, property-owners & workers, beneficiaries-of-Gov[ernmen]t.-expenditures and others; (ii) whether the stimulus given to production by the process will be durable, or carry in itself the seeds of its own reversal (whether because of distributional changes wrought under (i) or for other reasons). If your (this is a collective adjective) apparatus helps you to throw light on these problems, I must try not to mind you using it. But surely the apparatus can't be in itself a great achievement of thought, even if I am misguided in thinking it actually muddling and retrograde?

For instance , if you like your complicated way of explaining why the rate of interest falls, you must use it: but does it give any result which is not yielded by my (i.e. Wicksell's) simple way of regarding the rate of interest as the market price of loanable funds, the supply of which is increased by the "additional lending" put on the market by the bank? [3] For once more let me insist you haven't shown that the bank doesn't create "additional lending", but only at the most that when it creates one dollop of "additional lending" which comes on the market it inevitably creates another dollop of "additional lending" which doesn't.

I think I returned your letter containing the first version of your "crucial question": [4] but so far as I remember it and my answer, I haven't and am not likely to have anything to add. I'm not sure that the second version (letter 2) gives enough data for an unequivocal answer. But assuming that "wages" is shorthand (a very dangerous shorthand) for all non-entrepreneurs incomes, including the service of old debts, and that all such payments are contrarily financed by entrepreneurs with the aid of bank-loans, then it seems to me quite possible--I would not care to say more--that in the event of the miracle the demand for lending will be raised pari passu with the supply, and hence that no "disequilibrium" will result. I should expect some quite sensible people to describe this as S remaining equal to I in circumstances in which, in the absence of a miracle, S would have fallen short of I. Personally I should prefer to say that, as a result of the miracle, the real situation is the same as in the case (discussed in BP&PL p. 54 [5] ) when prices are allowed to fall: viz. there has been no new hoarding (change in K) and no formation of new real capital (measured in "ergs" [6] ).

By a "non-profit economy" I meant, not a socialised state, but one in which all "producers" are working on their own account, [7] --I had better perhaps have called it an " all-profit" economy. So far as its members are subject to the "money illusion", it is true that their effort and output will be liable to vary in response to variations in general prices. (? [d] They are less likely to be subject to such illusion than persons customarily remunerated on fixed money contracts). But they will not be subject to the same rational inducements to vary output as is the entrepreneur hiring factors whose rewards are sticky in terms of money.

My point was that even in such a community it is possible for (e.g.) the State to transfer real income from the producer-public to its nominees by emission of paper money. Hence I do not wish to make my definition of inflation dependent on the existence of a specialised class of entrepreneurs paying out sticky "costs" to hired factors, and retaining the difference between "prices" and "costs" for themselves.



  1. 1. Harrod to Robertson, 9 October 1935 (letter 483 ). This was marked by Robertson as letter number 2 (see note a to letter 483 ).

    2. Pagination of these passages corresponds to 1926 edition. The passage is cited in Harrod's reply, letter 494 , [jump to page] .

    3. See for instance Robertson, "Industrial Fluctuation and the Natural Rate of Interest", Economic Journal XLIV, December 1934, p. 651.

    4. Letter 477 , [jump to page] .

    5. Pagination corresponds almost exactly in first and 1932 editions.

    6. On the `erg' as a common unit for composite entities see Robertson, "Economic Incentive", Economica 3, October 1921, p. 234.

    7. See Robertson, "Saving and Hoarding" (1933), p. 411.

    1. a. ALI, two pages on one sheet, in HP IV-990-1069d-29. A preliminary (with some corrections) and incomplete draft of this letter is in DHR 3/2 4 . The content is identical, but Robertson omitted the opening sentence ("Oh dear! it all seems to me words, words, going round in endless circles!"), the draft underwent some rewording, and seems to end at «(measured in ergs)».

      b. Address and date are read on the draft in Robertson's papers.

      c. Ms: «that that».

      d. Robertson's question mark, probably added as an afterthought.

Welcome page

top of page

Return to index of this section

Go to previous page

Go to next page