497. D. H. Robertson to Harrod , 16 November 1935 [a]

[Replies to 496 , answered by 498 ]

Trinity [College, Cambridge]

16 November 1935

My dear Roy,

(1) Tautologies. You have been trained in the Principles of Thought, and I have not, & I stand corrected (ever so gently) for my flippancy. But honestly, I am only tempted to be flippant about them when I feel that someone is accusing me of, or trying to trap me into, denying one of them: & I did feel that in your last letter you were fathering on me a confusion between "additional lending" and that chimera "excess of lending over borrowing" of which I wasn't guilty!

(2) No, I'm afraid your revised analogy leaves me unconvinced. (i) To begin with, your revised copper-man sells forward & buys spot: while your banker sells spot & buys forward,--on any temporal method of analysis an important difference. But let that pass. (ii) The revised copper-man's need to cover is pointed to as a factor preventing the price of copper from falling: whereas it is precisely the banker's alleged need to "cover" (by inducing people to hold his I.O.U.'s) which is pointed to as causing the price of loanable funds to fall, not as preventing it from falling. So the analogy, if there is one, is arse upwards!

I'm afraid it seems to me indisputable that the bank can, in any unit of time, put on the market additional loanable funds created ad hoc. If it thinks that as a result some people will, instead of holding its I.O.Us, repay their old debts to it, and if it wants to counteract this, it must press further loanable funds on the market per unit of time, then lowering the price still further. We agree, I think, that if it is sufficiently resolute and sufficiently catholic about its assets, the last word about the volume of money lies with it ("the banks--subject to reservations about gold--determine the quantity of i.o.u.'s outstanding"). We also agree that if it falters or flags in the face of a kick-back by the public, it surrenders this power of determination to the public ("the net effect of the lending is not an addition to bank loans"--nor to bank deposits). All this comes quite easily out of a supply-and-demand-of-loanable-funds analysis. Your analogy, for the reason given under (ii) above, seems to me to wrap it in a veil of paradox.

(3) The concluding portions of your letter are full of justice, wisdom and humanity, and I will do my best to let them sink in. For this reason I retain the letter in a safe place, in order to read it again after an interval: and therefore copy out below the paragraph on which I am commenting in (ii) above.



"The true analogy is, however, with a dealer who sells copper which he has not got. If his sale is to take effect, he must be in a position to lay firm someone else. And if he has to do that his action, though he may gain some commission on the `turn', is not conducive to lowering the price of copper. To make the analogy exact we must suppose that he sells and, to cover himself, buys spot. If when the bank lends no one is induced to hold additional i.o.u.s the net effect of the lending is not an addition to bank loans. The money lent is repaid to this or another bank by someone else. This is what I meant by saying that the banks are irretrievably middlemen. They can only lend what is lent to them. In the case of a commodity the supply may be increased by producers producing something extra, or by the dealers unloading stocks. ... But why should people, ceteris paribus, want to hold more i.o.u.s? They will only do so if the rate of yield of other assets falls. But since the banks (subject to reservations about gold) determine the quantity of i.o.u.'s outstanding, the rate of interest must cet. par. fall." [1]

  1. 1. Letter 496 , [jump to page] .
    1. a. ALI, two pages on one leaf, in HP IV-990-1069d/32.

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