553. J. E. Meade to Harrod , 1 May 1936 [a]
[Answered by 555 ]
Hertford College, Oxford
1 May 1936
I have read the enclosed Chapters and enjoyed them very much.  I am afraid that I have not had time to study them as carefully as the earlier part, so that I may have missed many points which I should otherwise have liked to discuss.
(1.) Foreign Balance.  I think I agree entirely with the main argument. But I feel that more emphasis should be placed on the effect of the rate of interest on the proportion of saved income [b] which is lent at home and the proportion which is lent abroad. For example the last sentence of the middle paragraph of page 212 does not appear to me convincing.  The balance of payments decrees an inflow of specie; but it is not "the country" which determines how much shall be lent abroad to obtain interest earning assets. It is the individuals who will decide whether to lend at home or to lend abroad, according as--inter alia--the rate of interest is higher at home or abroad. I cannot see that an inflow of specie into a country will in itself make foreign lending more probable.
You argue,--and I agree,--that if all the dynamic determinants are appropriate a steady rate of growth may be maintained in a country at a given rate of interest and with fixed exchange rates and that this does not involve the absence of a movement of gold or of short term balances. (page 212 1 st paragraph). And you add that this steady rate of advance may be stopped because of action devised to stop the flow of specie. Might it not be worth adding something about the rate of interest here? If the dynamic determinants are favourable there may be a rate of interest which will preserve steady advance; but this rate of interest--if there are fixed exchange rates--need not be the rate which prevents a flow of specie. There will be another rate of interest which will do this, and this other rate may involve a recession. This, I believe, is implied in your analysis. But would it not be worth while making a specific reference to the effects of changes in the rate of interest on the proportion of savings lent abroad, and so drawing a distinction between the rate of interest appropriate to maintain a steady advance and that appropriate to prevent specie movements? 
(2.) A small point on p. 243 in first paragraph. I do not like the phrase "That is the penalty which other countries justly <undergo> for not taking equally active measures themselves." If the action of the reflating country is simply preventing prices and incomes from falling as they are falling in other countries, the exchange depreciation does not enable the first country to expand its market at the expense of other countries; but it simply prevents an expansion in the market of other countries, which would have taken place if the first country had reflated without exchange depreciation. This action does not in itself inflict any punishment or penalty on the others. Would it not be possible at this point to draw a sharp distinction between exchange depreciation which is unaccompanied by a rise in prices at home and therefore increases the active items in the B[alance]. of Payments at the expense of others, and exchange depreciation in which it [c] is necessary only to prevent a raise in the active items of other countries? 
(3.) I am not quite happy about the argument on pages 299 and 300.  Suppose a tax on profit or incomes throughout industry, the proceeds of which are used to subsidize employment. Suppose that this does not increase net investment (in money terms) nor money expenditure on consumption, because the multiplier is constant. Will it not increase employment? For the reduction in prime costs due to the subsidy--counterbalanced by an equal increase in overheads due to the tax--would cause people to produce more to sell at a lower price for the same level of money expenditure on commodities. I don't see that the subsidy argument rests primarily on subsiding capital goods industries relatively to others.
Excuse such a very scanty investigation of these chapters, but I have not time now to read more thoroughly.
2. Harrod, The Trade Cycle ( 1936:8 ), pp. 145-58.
3. Harrod, The Trade Cycle ( 1936:8 ), pp. 154-55. The passage does not seem to have been altered, as the subject of the last sentence is still "the country".
4. Harrod, The Trade Cycle ( 1936:8 ), p. 154, last full paragraph. Neither the implication was made explicit, nor the specific reference of the influence of the rate of interest on the proportion of saving lent abroad was introduced.
5. Reference to the "penalty" has been eliminated, and the distinction proposed by Meade is incorporated in pp. 188-89 of The Trade Cycle (Harrod 1936:8 ).
6. Harrod, The Trade Cycle ( 1936:8 ), pp. 230-31. Harrod's argument that it would be wise to confine subsidies financed by taxation to capital goods industries was maintained (p. 230).
- a. ALS, three pages on three leaves, in HP IV-745-767/11.
b. Ms: «income,».
c. Ms: «which is».
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