E. 13. Continuity of Values and the Long-term International Problem [a] , [1]


I propose in the first place to take up a challenge of Mr. Hobson's to develop my reasons for supposing that the forces making for trade oscillations are becoming more intense. [2] My contention, if true, has a two-fold significance for international monetary policy which I wish to make perfectly clear.

1. On the one hand Mr. Henderson explained with great force, in replying to Professor Robbins, that we can only hope to work the gold standard on pre-War lines if there is abundant confidence in the ability of each important country to maintain it; and he explained furthermore that the confidence in that ability has been seriously and perhaps permanently shaken by their failure to do so in recent years. [3] If these premises are accepted, it follows irresistibly [b] that it is impractical to aim at establishing a gold standard on pre-War lines in the near future.

Now it might be objected that our failure to maintain the gold standard was due to special circumstances arising out of the War, and that the loss of confidence in the ability of countries to maintain the gold standard is a provisional and not an absolute loss. If, it might be argued, we could demonstrate to all that the post-War commitments had been finally liquidated, confidence in the ability of countries to maintain the gold standard would automatically return, and with the return of confidence in their ability, their ability to do so would also return.

Per contra, my view is that the contribution of post-War obligations to recent troubles has been greatly exaggerated. [4] It must be granted that they contributed something to our difficulties. I hold that there were other casual factors of a more fundamental and lasting nature also at work.

The tendency to attribute all our difficulties to the special obligations arising out of the war has been a natural one. It was the method by which things could be explained and a recipe found most easily--"reparations and war debts must be abolished". This way of regarding the matter was a refuge of escape from the hard work of thinking things out afresh, of tackling a new problem, of accustoming oneself to new modes of thought, of performing the essentially painful task of adjusting one's mind to a new environment. The view that, if only the wretched war payments could be put out of the way, all would go forward as before the war was a pleasant anodyne with which to lull oneself. But perhaps it was too pleasant to be true.

Considerations of the origin of the present slump should immediately suggest some scepticism with regard to that placid view. On the one hand there was the cessation of American foreign lending in the years 1928-29 and on the other there was the great industrial recession in America beginning in midsummer, 1929. [5] Neither of these facts seem to be directly connected with war obligations. America appears to have been the starting-point of our troubles. Yet America was furthest removed from the pressure of post-war difficulties; moreover America was the scene in which the forces released by our greater powers over nature were given fullest play. The troubles of America were not the troubles of a war-ridden people, but of a people entering the promised land. They were troubles incident on an advance to a higher stage of wealth and prosperity. In my judgment the problems of America are likely to arise in other countries too, when these countries reach a higher stage of economic development. They may be thought of as the typical problems which occur when a people emerges from the natural and primeval state of poverty!

Now if it is true that obstacles to the smooth working of the gold standard are at least as much due to the specifically modern economic background as to transitory post-war causes, then Mr. Henderson's point that lack of confidence is likely to render a return to the pre-war gold standard system impracticable stands. [6] It can no longer be rebutted by saying that recent departures from the gold standard were due to special causes arising out of war commitments. That is the first way in which the reply which I shall give to Mr. Hobson's challenge has significance for monetary policy.

2. The second point of significance is this. If it is really true that the forces making for instability in the modern world are greater, we need not, indeed we must not, as Mr. Hobson suggests, despair. [7] But we must set ourselves to tackle the new problem in the light of the new situation.

Now I do not wish to suggest that there is a monetary panacea for this problem. It is probable that it will have to be tackled along a number of lines. But at least we can say that it is essential that experimentation in monetary policy should not be excluded in advance. Yet if monetary experimentation is not excluded Mr. Henderson's point is reinforced. If as things are people have not that utter confidence in the power of countries to maintain the gold standard which is necessary, a fortiori they will not have that confidence if any form of monetary experimentation is adopted or even canvassed. I venture to think that in the face of continued or renewed economic distress it is bound to be canvassed.

My only fear is that, if we are now entering on the upward phase of the trade cycle, people will be lulled for the time being into a false sense of security, like that in America in the boom years, and forget that the essential problems are still unsolved and, because unsolved, spell greater troubles in future, when the cycle once more enters the downward phase.

The forces which I believe to be making for greater oscillation in trade conditions have their origin not in the monetary system itself, though they may be reinforced by the operation of that system, but in the economic background. In stating my views very briefly in this matter, I shall not attempt an explanation of the Trade Cycle. To do so would be unsuitable and impossible in a memorandum of this sort. I shall not even venture a view as to any of its possible causes. I shall confine myself to mentioning certain features of the situation, the presence of which facilitates and gives larger play to the process of oscillation. They are not new; indeed they are inherent in our economic system. But they are continually becoming more important. [8] They are all connected with and becoming more intensified along with the increase in the wealth of the world. In fact they are aspects of this increase of wealth. If I am right in attributing these de-stabilising influences to the growth of wealth, the American origin of recent troubles acquires further significance.

1. The growth of wealth per head in the world has the necessary consequence that a diminished proportion of the world's productive resources are required for the industries, which may be called in this argument "the primary industries", that are concerned with the production of foodstuffs and raw materials. The peculiarity of these industries is that when confronted with a recession in demand, they do not at once reduce output, but may even tend to increase it. I believe that this is due to the fact of their being predominantly in the hands of small producers. When these are faced with a shrinkage in their sole source of livelihood, they do not close down, but on the contrary carry on, and work as hard or harder than they did before, to make good the loss of receipts on a unit of turnover by increasing turnover.

Big capitalist producers react in the opposite way. In the face of a recession in demand, they restrict output. This is because by doing so they can turn away hands who have to fend for themselves. Their own livelihood depends on the difference between receipts and what they pay to wage-receivers. They are likely to be able to maximise this difference, in a recession, by reducing their staff of employees. [9] On the other hand the small producer whose income depends largely on his own efforts has not this way out of his difficulties.

Recently we have been apt to blame primary producers for not reducing output. This attitude of condemnation is intelligible. But it is well to remember that the primary producer's typical reaction is more likely to sustain stability in world output than that of the capitalist manufacturer. It is the reduction of output and the consequent unemployment rather than the accompanying monetary and financial derangement that constitute the greatest evil of a depression. We should not so much mind a fall of prices, if it did not bring in its wake unemployment and wastage of productive resources generally.

This brings me to the essential significance of the declining importance of agriculture and the small producer for trade cycle theory. An influence, which so far as the volume of output is concerned, is a stabilising one is getting less important in the world as a whole. The proportion of the world's resources engaged in the industries, which react to a recession in an opposite and de-stabilising way, is a growing one.

It may be possible and desirable--on this I will not pronounce--to organise primary producers into cartels capable of restricting output in a recession like manufacturers. [10] This might prevent the primary goods price level moving as far away from the general price level, as it has in the present recession. But it would do nothing to check the greater lengths to which reduction of output seems apt to go in the downward phase of the cycle. It would merely make the large amplitude of output fluctuations general to all industries.

The root fact is that we are getting farther and farther away from a world of small producers whose efforts to gain a livelihood formerly checked large recessions in production. [11]

2. With the growth of average income per head, what may be called necessary expenditure becomes a smaller, and optional expenditure a larger, proportion of income. As this happens, there is a greater scope for variation in demand arising from other causes than variation in income. There is greater scope for individuals to draw in and economise, because they feel alarmed or depressed, than there would be if all their income were devoted to absolute necessities. This is further accentuated if the ownership of capital is widely diffused. Capitalists, even small capitalists, may become stimulated by large capital gains and let their expenditure outrun their income--while in the face of capital losses they may retrench and push their expenditure down below their income. There is larger scope for hoarding and dishoarding.

3. With the growth of average income per head, the amount of capital and saving per head tends to rise. I don't want to press upon the group any particular doctrine concerning the relation between the rate of additions to real capital and the rate of saving. But I think that there would be general agreement that serious discrepancies between these rates are disturbing to stability. Now if capital accumulation becomes, as it does become with growing wealth, quantitatively more important compared with income as a whole, the disturbing effect of any discrepancy of this sort is correspondingly enhanced. I am not saying that there is a greater tendency to discrepancy now than before, but only that the discrepancy if it occurs has more important repercussions on continuity. An equal percentage discrepancy involves a larger proportion of total income.

4. With the growth of average income per head, the amount of income devoted to transitory and variable forms of satisfaction becomes larger. The optional part of expenditure is more liable to change its direction under the influence of fashion. But with the improvement in conditions generally people become less and not more willing to undergo the unpleasant experience of a change of occupation. This is likely to cause a jam leading to a [c] recession in the volume of output as whole. [12]

These considerations are all very general as in the nature of the case they must be. They are all connected with the growing wealth of the world. These difficulties constitute the price we have to pay for greater prosperity. They do not explain why there is any cycle in trade, but they indicate why, if variation occurs, it is likely to go to greater lengths. The features enumerated are not new, but the trade cycle itself is not new. We were accustomed to it in the nineteenth century. If, however, its amplitude gets steadily larger, its repercussions in the political sphere may become so serious, that we shall be compelled to seek positive remedies for it in the interest of civilisation itself.

Large oscillations in trade are likely to have important effects on the international balance of payments of each country. Debtor and creditor countries will be differently affected. There is also a subsidiary point, arising out of the first of the four considerations enumerated above. The fact that primary producers and others react to a recession in opposite ways means that the larger the recession is, the greater the movement we are to expect of the price level of the primary group of products away from the price level of other products. This causes a further disturbance in the balance of international payments.

For both these reasons an increase in the amplitude of the trade cycle is likely to cause bigger changes in the items on the international balance of payments of each country. This must cause difficulties in maintaining the gold standard. Such difficulties cannot be kept secret. As they arise they must sow doubt as to the ability of the countries adversely affected to maintain the standard. This doubt enhances the difficulties. Thus if the amplitude of the trade cycle increases, even if it merely does not diminish, well informed opinion as well as idle gossip will have genuine grounds for scepticism about the ability of particular countries to maintain the gold standard, even if war payments are abolished. I hope that this brief excursion into trade cycle possibilities may be judged to reinforce the arguments adduced by Mr. Henderson.


Having taken up Mr. Hobson's challenge to the best of my ability in a small space, I propose to consider possible policies with regard to the exchange value of the national currency from a long range point of view. The closer one gets to grips with the problem the more difficult and complex it appears. Yet if we are convinced that the alternative of a pre-war gold standard is impracticable, we can face these difficulties with the courage born of necessity.

I propose to set out in the following pages a list of possible policies, having in mind logical completeness. I hope that I shall not be supposed to be advocating any particular one of them. The possibilities are set out so that the group may pass its own judgement on each.

1. On one point, I think, there will be general agreement. [d] If it is decided to eschew the immediate return to a gold parity, the Exchange Equalisation Fund should continue to be operated with the object of evening out temporary fluctuations. It is possible that we have not yet reaped the full advantages which might be derived from its operation. At present our future monetary policy is so uncertain, that exercise of the Control may give rise to all sort of conjectures. These may lead to embarrassing consequences. Consequently it may at times be necessary to allow fluctuations to occur as a mere demonstration that we have not decided to return to gold de facto! When it becomes possible to settle our future policy on clear lines and to define it publicly, the Control might be allowed to operate in a more determined way than at present and thus to secure a great measure of short period stability.

2. It seems impossible to make further headway without some postulate about what is happening in the outer world. The ideal would be that all countries should become convinced with all the seriousness at their command in the principle of continuity of values and should be determined to do all in their power jointly to give effect to it. [13] This ideal may be dismissed as Utopian in the near future. But it is possible that one or other countries may become converted. There are then two sets of problems.

1) What is to be our exchange policy vis-à-vis [e] the unconverted?

2) What agreement should we be prepared to make with regard to our [f] mutual exchange rate with any country which we judged to be sufficiently like-minded with ourselves to make legal co-operation towards a common aim possible? It seems better to take the first time of problem first as being more immediate.

3. Opinion on this topic may be divided into two schools of thought. There are those who hold that we should follow whatever monetary policy is most suited to our internal needs and let the foreign exchange rates take what course they may, subject to short period regulation by the Control. On the other hand there are those who believe in some sort of Standard.

There is no doubt much to be said for the former way of thinking. If it were adopted nothing more would remain to be said under this head. The appropriate internal policy, bank rate policy, open market operations, Public Works, budgetary deficiencies and sinking funds have already been discussed at the earlier series of meetings. [14] The exchange rates would be allowed to find their natural level consequential upon the internal policy. The Control would neutralise small but not big movements of liquid funds. It is foolish to attempt to prescribe on paper in advance the precise limit, e.g. £50 million, £100 million, etc., to the volume of its neutralising operations in any short periods.

4. It is when we seek to adopt a policy of having a Standard other than the old gold standard that complexities thicken. The essence of a Standard is that local legal tender money should be convertible at will at a notified rate into some external medium such as gold, a foreign currency etc. We have to consider, first, what the most suitable medium is and, secondly, on what principle the rate should be fixed initially and varied periodically. To take the second point at once, it might be decided to vary [g] the notified rate of exchange from time to time so as to secure continuity of purchasing power over international tradable commodities of ascertainable international prices. This continuity might consist of absolute constancy of purchasing power or of a gently increasing purchasing power in accordance with some pre-determined principle. Or the variation might be devised to take into account all the different items in the international balance of payments in such a way as to ease the transition from one equilibrium to another with the minimum inconvenience to our internal economic life. It will be well to bear this in mind in considering the most suitable medium.

5. Mr. Henderson has suggested gold. [15] This is in line with Professor Irving Fisher's scheme for stabilising the value of the dollar by varying its gold content. [16] Here again we have to consider alternative assumptions about what is happening abroad. I refer to the scheme traditionally associated with his name, not to the advice he may now be giving to President Roosevelt. [17]

If no other countries were on the gold standard, this device might not achieve its object. If home prices were tending to fall, would marking up the Bank's buying and selling price of gold suffice to arrest the decline? Would gold in those circumstances be strong enough to do the work imposed on it? Would it not be like attempting to stabilise the general price level by a Government scheme for valorising on a rising scale any one particular commodity, say, jute? Gold it is true would be sucked into the country. Would it mean much more than that?

Indeed the scheme might have harmful effects. If other countries, though off the gold standard, attached importance to maintaining their gold reserves intact, as they might easily do, they might be led [h] , in order to protect their gold reserves, into measures for improving their balance of trade, involving internal deflation or further restriction of international trade or both.

6. If a small group of countries were still on the gold standard, stabilisation in terms of gold with periodic variation of content would be equivalent to stabilisation in terms of their currencies, with periodic revision of the exchange rates.

In a time of falling gold prices, this would involve a periodic downward revision of the exchange value of our currency in terms of theirs. This might easily have the results of driving them off the gold standard. We should then be faced with the difficult position discussed in the foregoing section.

Alternatively the gold countries might resent our use of their currencies as a lever to raise our own prices, and combine to counteract our attempt to devalue our own currency in terms of theirs. This would lead to a currency war the result of which would be indeterminate. The policy seems fraught with practical difficulties.

7. If the rest of the world were on the gold standard, the policy would probably be practical and effective. But this assumes that the rest of the world has succeeded for more than a short period in overcoming the difficulties in re-creating an international gold standard, scepticism about its power to do which lies at the base of these arguments.

Having considered all possible assumptions about what is happening abroad, we seem to reach the conclusion that gold is not a medium through which the attempt to establish a monetary standard, subject to periodic variation, is likely to be successful. [18]

8. Another possible medium is a foreign currency. At this stage of the argument it is assumed that the foreign country whose currency is chosen is not converted to like-mindedness with ourselves in the matter of monetary reform. It follows that the rate of exchange with the foreign currency in question would be subject to periodic revisions, which might possibly have to be large.

Difficulties analogous to those discussed in section 6 might arise. The foreign country might resent our attempts to devalue our currency in terms of its own currency and undertake reverse operations through an Exchange Equalisation Fund of its own. A currency war would follow the results of which would be indeterminate. Our own Fund might be involved in piling up reserves of the foreign currency in question to a dangerously high level.

This expedient should not be ruled out of court as necessarily impractical. It might work. But it cannot be confidently affirmed that it would.

9. We are reaching the end of our logically exhaustive list of possibilities. The following proposals have the disadvantages of strangeness. They are probably unacceptable on these grounds, buy they are worth inspection. We might undertake to convert our currency not into a particular foreign currency, e.g. a dollar, but into a group or collection containing the principal foreign currencies, e.g. a dollar and a French franc and a mark and a belga and a yen, etc., at a specified rate, (not against each but against the whole bundle together), subject as before to periodic revision as the general price level altered. Such a proposal sounds complex, but it might work smoothly. Since the foreign currencies would be varying relatively to each other, it would give the arbitragers some tricky problems to work out. [19]

It would not have the advantage of our currency being stabilised in terms of particular foreign currencies. But that advantage cannot be achieved in any case, since if the world does not succeed in returning to a common standard, our currency can only be stable in terms of one at the expense of being unstable in terms of the others.

It would have the advantage, not present in other schemes already discussed, of being potent in the fulfilment of its purpose. Devaluation of our currency in terms of gold or a particular foreign currency might not prevent the sterling price level falling. But devaluation in terms of the whole lot, as on the occasion of our departure from the gold standard, would surely do so, especially if accompanied by the appropriate internal policy of expansion.

10. There remains one final possibility--to use neither gold nor foreign currencies as the standard medium, but commodities themselves. [20] This certainly would have the demerit of novelty, but there is much to be said in its favour. I believe that public opinion, outside narrow financial circles, would welcome a frank departure from old-fashioned ways. The policy would be simple and intelligible. It has the support of monetary theory. It need not prejudice the issue of whether it is desirable to keep the general price level constant, as by it continuity of values could be secured in any sense defined.

The central bank or treasury would be in the unwonted position of holding stocks--not in its vaults, let us hope!--of various commodities. But is that more inherently unnatural than its time-honoured practice of holding vast stocks of one commodity--gold?

11. If all these expedients are rejected for one reason or another, there is no available alternative remaining and we are reduced to a standstill in our search for a Standard. We are driven back upon the position referred to in section 3 of letting the long run exchange value of sterling look after itself and relying on internal policy alone to secure such continuity of values as it can.

12. I am convinced that it is desirable that internal policy and variation in the exchange value of currency--if that is requisite owing to the failure of other countries to adopt parallel internal policies--should go hand in hand. I think that in 1931 we lost some advantages of our exchange depreciation and the rest of the world certainly suffered by it unduly through the reverse policy of contraction being pursued here internally. I think that the U.S. in March, 1933, supposedly then on the eve of an expansionary policy, were right from that point of view in going off the gold standard and readjusting the value of the dollar in terms of world commodities at once. [21]

It does not follow that the adoption of a definite (variable) external standard is necessarily desirable. For the variations in the external value of a currency off gold which would occur naturally might produce the desired result.

But I do not think that it is essential that if a definite (variable) external standard is adopted, the appropriate internal policy of expansion or contraction should be vigorously pursued.

13. We must next consider the other problem set out in section 2 of this part. Into what sort of an agreement with regard to a mutual exchange rate should we enter with a country chartered as like-minded with ourselves in the pursuit of continuity of values? Should we agree to a fixed parity of exchange? It should be noted in passing that the discovery of such a like-minded country would not render the problems discussed in the foregoing paragraphs altogether irrelevant. For the two countries would still have to come to an understanding how they wished to make their currencies behave vis-à-vis [i] the rest of the world. But those problems would become much less important. If only we could find another important area of the economic world willing to pursue a common internal policy with ourselves, there would be much more to be said for letting the exchange rates with non-participating countries look after themselves.

14. I do not think that a permanently fixed par of exchange even between two like-minded countries is ultimately desirable. It might be worth agreeing to as a pis aller [j] in order to secure co-operation.

If it were decided that the ideal of monetary policy is a constant general price level of internationally tradable commodities, then a fixed par of exchange between the two countries is a logical corollary.

15. There are, however, arguments well known to the group against absolute constancy in the price level so defined. It has been held that the maintenance of stable prices in the face of falling costs may constitute a kind of relative or illicit inflation and give rise to an unstable position analogous to that resulting from an ordinary inflation. Furthermore, the equilibrium relation of the price level of internationally tradable commodities to the price level of goods in general may vary. In particular, if the view that a diminishing proportion of factors of production will be needed for the primary industries is true, factors of production will have to be dragged out of those industries and the process is likely to involve declining relative prices in them. We may also be faced with a further tendency of primary prices to recede relatively owing to the increasing application of mechanisation to their processes. Now primary good prices must enter in a predominant way into an index of internationally tradable goods prices. Consequently the equilibrium ratio of the international index to the general index and a fortiori to the purely domestic index will be a falling one. This means that if the international index is kept constant, general prices and domestic prices must rise if they are to keep in equilibrium, and we might thus have inflationary conditions.

The relevance of this to the question of a par of exchange is that the factors mentioned may affect different countries in different ways. The general [k] fall in costs of production may be different in the two countries, both because the rates at which efficiency is increasing may be different and because the pressure brought to bear by factors of production to secure corresponding increases in their money rates of reward may be different. Consequently the trend of prices required to keep prices in line with changing average costs would be different in the two countries.

For instance in the case of England and the U.S. it is possible that the trend of prices required to keep industry on an even keel here might be such as to produce latent inflation in the U.S. This latent inflation would cause repercussions dangerous to stability in both countries and to the parity of exchange agreed upon between them. To meet these circumstances it would be essential that the terms of agreement should provide for revision in the par. Such revisions would, it is true, be small. The difference between the rate of change in the general level of costs is unlikely to be greater than of the order of 1% to 2% per annum. Such changes in the par of exchange should not have a disturbing effect on international dealings. But the cumulative effect on internal conditions of the failure to make this adjustment might be disastrous.

Similar considerations apply to the changing relation between primary prices and general prices. Here again, the change may affect different countries in different ways, both because primary products may constitute a different proportion of the total production of the countries and because a different proportion of their income may be expended upon them.

Furthermore, variations in the real rate of inter-change of goods between the countries may occur, both because of changes in demand and comparative costs of production and also because of changes in invisible items. The foreign lending of one country may be rising while the other is falling.

For all these reasons it may be impossible to secure continuity of values in each country while maintaining a fixed par in the rate of exchange between their currencies.

A fixed par may be indeed a first approximation towards a satisfactory argument between two like-minded countries. But it is important that they should have in mind that they do not thereby reach the ultimate ideal, but that further problems still lie concealed, which in turn will call for consideration after the first stage has been reached. They should not therefore regard a par, fixed in the first instance, as permanently binding. [22] , [23]

26 October 1933

  1. 1. This memorandum was prepared by Harrod for the fourteenth meeting of the group on International Monetary Problems of the Royal Institute of International Affairs, held on 23 November 1933.

    The group's second series of meetings began in March 1933, as a continuation of the work that led to the publication of the group's first report on Monetary Policy and the Depression (Oxford: Oxford University Press, and London: Humphrey Milford, 1933; Harrod reviewed the volume as 1933:12 ): its aim was to illustrate "which of the possible lines of policy set forth [in Monetary Policy and the Depression] are advocated either by the Group as a whole or by particular members of the Group, the reasons for this advocacy, and the effects and implications of the steps proposed" ("Note on the Discussions to be held by the Group on International Monetary Problems", in CH 9/6f; see also "Suggested Programme of Discussions", in CH 9/6e). The original group was composed by Charles Addis (Chairman), R. G. Glenday, Jules Menken, Charles I. C. Bosanquet, O. R. Hobson, D. H. Robertson, N. F. Hall, H. D. Henderson, Jack W. Hills, F. W. Pethick-Lawrence, Stephen King-Hall (secretary, Study Groups Department), and A. T. K. Grant (group secretary). L. C. Robbins and Harrod were invited to join at the end of June (CH 9/6h), and were welcomed at the ninth meeting of 5 July 1933 (CH 9/6x).

    The meetings consisted of discussions on memoranda prepared by the members of the group. Grant submitted a preliminary paper on "The Mechanism of Monetary Policy Directed to Raising the Price Level" (18 July 1932, CH 9/6d), there followed untitled notes by Pethick-Lawrence and Glenday (CH 9/6j and 9/6k). The first discussion was introduced by Grant's "The Preservation of Economic Stability" (April 1933, CH 9/6l), there followed a "Note for 2nd Discussion" by Robertson (CH 9/6n); Hobson contributed "Some Notes on the Powers and Limitations of Monetary Action" (CH 9/6o), Hall wrote "International Cooperation in Monetary Policy and the Structure of Leading Money Markets" (CH 9/6o-p). The notes for the fourth discussion were prepared by Hills, Menken supplied a "Note on Public Works and Trade Depression" (14 June 1933, CH 9/6u), while Henderson and Robbins discussed "The International Monetary Problem" (CH 9/6aa and 9/6cc, respectively; Robbins added a "Reply to Critics", 9/6dd). There followed Harrod's note, and finally a paper by Bosanquet on "The Problem of International Lending" (CH 9/6hh-ii. The minutes of the discussions are preserved in the same boxes at CH). A first draft of the conclusions, prepared by Grant, was before the seventeenth meeting (31 May 1934, CH 9/6jj). The draft was revised by the secretariat during summer 1934, and the final arrangement was discussed in autumn; the report was finally published as The Future of Monetary Policy. A Report on International Monetary Problems by a Group of the Royal Institute of Economic Affairs (1935).

    Harrod's paper, together with a supplementary note which was not found, was discussed at the fourteenth meeting of the group on 23 November 1933 under the chairmanship of Charles Addis, with the participation of Glenday, Hall, Harrod, Henderson, Hobson, Jules Menken, Pethick-Lawrence, Robbins, and Grant. The minutes are filed in CH 9/6gg.

    The expression "continuity of value" was adopted by the group to designate the desirable objective of monetary policy. At the first meeting in which he was present, Harrod commented:

    • I myself do favour the adoption of the specific objective of stable prices, or possibly slowly falling prices--I am not quite sure what the word `simpliste' means--I am rather in favour of this plan. When we have had further experience it may not prove to be an ideal plan, but I think simplicity is its great merit at this present stage. Here is something which one can get a wide measure of support for and which is readily intelligible. It would be a great improvement on the kind of monetary conditions we have had in the past. If we got as far as that it would then become apparent that numerous refinements were necessary. I take its simplicity as definitely in it[s] favour at this stage of the monetary affairs of the world. (Minutes of the 9th meeting, CH 9/6x, p. 4)

    [The polemical remark on the word "simpliste" refers to Robbins's statement, uttered immediately before Harrod's, that he was himself "extremely opposed to any suggestion that an object so simpliste as the stabilisation of commodity prices should be the specific objective of monetary policy" (ibid.).]

    As a definition of "continuity of value", Harrod later suggested "that the general level of prices on the one hand should not rise and on the other should not fall more than the general level of costs is falling" (Harrod's replies to RIIA, "List of Questions" to group members, in 9/6vv).

    2. In opening the discussion of the paper on "The International Monetary Problem" read by Robbins before the group on 14 October 1933 (CH 9/6cc), Harrod suggested "that the forces that generated the trade cycle have become much more intense and are likely to continue. We are faced with the possibility that if things are allowed to go on, the amplitude of the oscillation will be greater and the strains set up greater". O. R. Hobson was puzzled by this statement, and invited Harrod to develop his point further (International Monetary Problems Group, minutes of the eleventh meeting, in CH 9/6bb, pp. 2 and 6-7).

    3. Henderson's reply to Robbins is in the minutes of the eleventh meeting, pp. 8-14, CH 9/6bb.

    4. This argument was put forward for instance by Hobson, when he motivated his request that Harrod further discussed his point that the amplitude of the trade cycle is increasing (see note 2 to this essay). In the discussion which followed the presentation of Harrod's paper, Hobson disagreed with Harrod's interpretation (see note 5 to this essay), and Robbins agreed with Hobson that "we simply cannot ignore the immense structural dislocations brought about by the war and the disturbing effects which they had upon the stream of international investment. As a result of the war and post-war inflation you had a capital shortage in Germany and Central Europe which is simply bound to enhance the violence of any downward fluctuation. In Germany and Central Europe from 1924 onwards you had a natural rate of interest which was out of all relation to anything which has been existing in those parts for fifty years" (International Monetary Problems Group, minutes of the fourteenth meeting, in CH 9/6gg, pp. 2 and 6).

    Harrod later developed this argument in his paper for the the Antwerp meeting of economists in July 1935 ("A Comment on the Questions for Discussion", 1935:5 , pp. 40-41), and in the lecture on "The Choice of a Currency Policy" delivered Copenhagen in January 1936 (essay 16 , [jump to page] - [jump to page] ).

    5. Hobson disagreed on this point: he maintained that as a consequence of the war Europe was suddenly impoverished and America enriched, which led to disturbances in the balance of borrowing and lending eventually leading to the collapse of the credit system (International Monetary Problems Group, minutes of the fourteenth meeting, in CH 9/6gg, pp. 2-3).

    6. See note 3 to this essay.

    7. Hobson argued that if Harrod's point that the amplitude of the trade cycle is bound to increase were correct, attempts to establish any sort of international stabilization would be hopeless (see note 2 to this essay).

    8. Harrod's argument that trade fluctuations tend to become more intense was disputed in the ensuing discussion by Glenday and Robbins. Glenday questioned the existence of the trade cycle as a phenomenon, while Robbins found the evidence unconvincing: he found Mitchell's discussion of the amplitude of pre-war fluctuations inconclusive, while seeing some evidence that fluctuations were becoming milder. Robbins added that other considerations should be added to Harrod's theoretical analysis. In particular, he urged "that we must not neglect the growth of knowledge--of knowledge how to handle these matters, which has accompanied the growth of capitalistic industry in the last hundred years. I am not so pessimistic with regard to the possibility of devising methods of banking technique which will enable us to guard against the tendencies to increasing violence which Mr. Harrod discerns (minutes of the fourteenth meeting, in CH 9/6gg, pp. 7-9). Henderson agreed with Harrod's conclusions, but found Harrod's argument unconvincing (see notes 11 and 12 to this essay) and suggested that the most important factors making for instability were the blurring of the distinction between capital and income, which led to a situation in which "the volume of money that people spend on consumption bears a far less definite relation to their incomes in the aggregate than it used to do", and "the decline in the rate of growth in the number of people constituting the market for a commodity", due to "the decline in the growth of population" and to "the movement against international free trade" (minutes, pp. 12-17). Pethick-Lawrence attributed the cause of larger fluctuations to a change in the size and capacity of production, as before the war plants operating up to capacity could barely satisfy the needs, while after the war two or three single units could produce all that could be consumed (ibid., p. 24).

    9. Robbins, in spite of not being in disagreement with this point, was "inclined to think that the tendency of capitalist producers to restrict rather than continue to produce and to cut losses is in part to be attributed to the various kinds of support which they receive in the modern world" (minutes of the fourteenth meeting, in CH 9/6gg, p. 8). Hobson regarded quick cuts in production as the way of shortening the depression, and asked for further comments (ibid., pp. 3-4); Harrod replied:

    • My argument simply is that the typical reaction of the capitalist producer to recession is restriction of output and that tends to make the recession larger. That is why the trade cycle became more developed after the industrial revolution when capitalist production became more important, and why it is still tending to get larger as capitalist production comes to form a larger and larger part of the world economy. (Ibid., p. 4)

    10. Asked for further explanations, Harrod commented:

    • So far as agricultural restriction is concerned, it might have one benefit in preventing the very big gap between agricultural prices and manufacturing prices, but it would not have the effect of limiting the amplitude of output. It might remedy the one evil, that is, the gap, but not the other, the all-round restriction of output in face of a declining demand. (Minutes of the fourteenth meeting, in CH 9/6gg, p. 4)

    11. In the ensuing discussion, Hobson was unable to follow Harrod's argument, while Robbins did not disagree (International Monetary Problems Group, minutes of the fourteenth meeting, in CH 9/6gg, pp. 3a and 7-8). Henderson criticized Harrod's argument:

    • I think his point about agriculture is a weak one, because, after all, agricultural production is a very fluctuating thing. It is liable to fluctuate, for example, for reasons of weather, as manufacturing production is not. In days when agriculture bulked more largely than it does in the world's economy, changes in weather conditions were apt to have rather serious repercussions on the general economic system. The mere fact of a reduction of the relative importance of agriculture in the world's economic activity seems to me on balance a factor making for stability rather than otherwise. (Ibid., pp. 11-12)

    Harrod later restated his argument on the destabilizing effect of the loss of importance of non-capitalist production in the modern world in his book on The Trade Cycle ( 1936:8 , pp. 33-35). Henderson, on reading a preliminary draft of Harrod's book, tempered his criticism, admitting that agriculture exerts a destabilizing effect but denying that it is an important factor: see letter 524 of 21 February 1936, [jump to page] . (Harrod's reply to Henderson's criticism is reported in note 22 to this essay.)

    12. In his comment to Harrod's paper, Henderson disputed "that the tendency to increased income per head as such is necessarily an unstabilizing factor; it might work as a stabilizing one". He did not, however, further elaborate (International Monetary Problems Group, Minutes of the fourteenth meeting, in CH 9/6gg, p. 12).

    13. In his comment, Pethick-Lawrence maintained that internal policy should be the main means of preserving equilibrium. Harrod replied:

    • I should like to interject that that is my own very strong view. This is only a question of whether it is a good thing to have a pre-determined external policy to keep in line with the internal policy or not. About that I am agnostic, but I strongly hold the view that the internal measures are the correct measures for maintaining stability. (Minutes of the fourteenth meeting, in CH 9/6gg, pp. 24-25)

    14. These topics were discussed in the previous memoranda (see a list in note 1 to this essay). Harrod was presumable given a copy of the papers and minutes of the discussions.

    15. H. D. Henderson, "The International Monetary Problem", TD, mimeo to the Royal Institute of International Affairs' Group on International Monetary Problems, in CH 9/6aa (reprinted in Henderson, The Inter-War Years and Other Papers (Oxford: Clarendon Press, 1955, pp. 110-25).

    16. I. Fisher, The Purchasing Power of Money (1925 edition, chap. XIII, § 5); and Stabilizing the Dollar (New York: Macmillan, 1920).

    17. Harrod commented on Fisher's scheme in the collective letter 329 to Roosevelt, [jump to page] .

    18. Robbins expressed his satisfaction with Harrod's conclusion, which he believed, "paradoxically enough", to be "a strong confirmation of the views which I put before the group at an earlier date" (minutes of the fourteenth meeting, in CH 9/6gg, p. 10; reference is to Robbins's memorandum on "The International Monetary Problem", read on 14 October 1933, in CH 9/6cc).

    19. Robbins commented:

    • My feeling about that is simply this, that the arrangement [Harrod] proposes is admirable provided the other currencies are on the gold standard. If not, they will not only constitute `tricky problems for the arbitrageurs to work out', but it is highly probable that those in charge of the currency would fail to hit the mark in one way or another and get into worse difficulties than they would if they tried to keep in touch with one currency only. (Minutes of the fourteenth meeting, in CH 9/6gg, p. 10)

    (In a later note, Robbins specified that "the term admirable was ... misleading", and that he "should have said simply that the thing is conceivably practicable, if the other currencies are linked by gold": ibid., p. 11). Later in the discussion, Harrod admitted that he "was assuming that the other countries succeeded in solving the problem of maintaining the world gold standard" (ibid., p. 16).

    20. Robbins criticized as follows the view that "the exchange should be stabilized in terms of a number of commodities":

    • Coupled with that is the suggestion that the Central Banks of the world should become dealers in commodities. Again I ask what would have been the experience of the Central Banks if they had been attempting to carry out such an experiment in recent years? Would they not have been led into the most catastrophic difficulties? I should have thought that to the existing dislocation of commodity markets and exchanges there would have been added a danger and difficulty which so far have not, fortunately, existed at all. (Minutes of the fourteenth meeting, in CH 9/6gg, p. 11)

    Henderson pointed out that there would be a practical difficulty lying in the cost of storing commodities. Harrod replied that "you can constantly alter the actual physical content of your store". Henderson was not convinced, and maintained that this proposal was "perfectly fanciful":

    • If you want to speculate in commodities you have to pay charges of 5 per cent. per annum corresponding to the cost of storage. The cost of storing gold is negligible, gold being of such small bulk in relation to its value, and not deteriorating in quality. [...] The Central Bank could not escape the cost of storing commodities by buying them in the forward market. They would have to pay the cost in the discount between the forward price and the spot price. (Ibid., pp. 17-18)

    21. On the American monetary policy in spring 1933 see note 4 to press item 16 , and for additional details L. V. Chandler, American Monetary Policy 1928-1941 (New York: Harper & Row, 1971), pp. 274-77.

    22. Harrod replied as follows to the comments to his paper:

    • There is a very short time available in which to reply, and I can only select certain points that have been made. With regard to the amplitude of the trade cycle I have Mr. Henderson with me on the whole, and also Professor Robbins, though the latter thinks that there are also considerations making in the opposite direction, particularly those connected with the growth of knowledge. [see note 8 to this essay]

      With regard to Mr. Henderson's remarks about agriculture [note 11 to this essay], I do lay special stress on my agricultural point. He said that against that the diminishing importance of agriculture meant the diminishing importance of such things as weather fluctuation, but I had rather in mind the exhaustive researches of Professor Mitchell into this subject which had established it fairly well that for fifty years before the war the trade cycle had no connection with the weather. That factor making for instability, which has been, of course, often referred to in the past, has been rather discounted.

    [Reference is probably to W. C. Mitchell, Business Cycles (Berkley: University of California Press, 1913), p. 239, where it is shown that the correlation between volume of agricultural production and business fluctuations is far from perfect.]

    • With Mr. Henderson's main point, which is substantially the same as the second point in my memorandum, I entirely agree, and I can also agree with his further point about the rate of secular increase [note 8 to this essay]. That brings me back to Professor Robbins, who says that it is possible that this tendency to greater oscillation may be countered by growth of knowledge, not excluding the possibility of devising new methods of banking technique [note 8 to this essay]. I agree with that, but if I may refer back not only to to-day's discussion but to the discussion we had a fortnight ago, I think we were in agreement that the ideal would be to have an international money regulation so as to preserve continuity of value. Professor Robbins said he was prepared to subscribe to that provided one had continuity in the Robertsonian and not in the Fisher sense.

    [The relevant minutes of the thirteenth meeting do not survive. Robbins, however, criticized Henderson's scheme, which in Harrod's view was in line with Fisher's proposal (see [jump to page] , and note 16 to this essay for reference to the latter), in his note for the second autumn discussion "The International Monetary Problem"]

    • But the difference between those two senses is apt to be exaggerated. The Robertsonian sense is that prices should be allowed to fall in proportion to per capita productivity. I have heard an eminent authority of the London School of Economics suggest some such figure as 5 or 10 per cent. per annum. Figures of that sort are, of course, quite wild. The idea of a 10 per cent. increase in productivity per capita would be quite out of the question.

    [At this point, Robbins interjected: "He did not get that from me".]

    • Even 5 per cent. would be quite out of the question. Probably it is something of the order of 1 or 2 per cent. Therefore I do not feel at all disposed to quarrel as between the Robertsonian and the Fisher definition, but I do urge that the rules of the game as explained by Professor Robbins at earlier meetings would not necessarily suffice to maintain that sort of continuity of value.

    [On the "rules of the game" see L. C. Robbins, "The Ottawa Resolutions on Finance and the Future of Monetary Policy", Lloyd Bank Review, NS 3, 32, October 1932, pp. 436-37, and The Great Depression, London: Macmillan, 1934, pp. 24 and 168-72. The subject was discussed before the group in Robbins's "Reply to Critics", CH 9/6dd, in particular pp. 1-2]

    • To assume that is to leave the forces making for trade oscillation out of account. If we are going to achieve what Professor Robbins desiderates we shall have to proceed to take conjoint action to overcome what I regard as the growing tendency to oscillation. He might succeed--though he would have difficulty--in getting sufficient agreement among the central banks to pursue the gold standard game according to his rules, but I very much doubt weather he will get sufficient agreement among them both to pursue the gold standard game and also take such joint action as may be necessary to counteract the growing tendency to oscillation. He claimed that it might be possible to devise banking technique to overcome that. I think it is not likely that we shall be able to persuade all the central banks of the world to do those two things. I feel as a matter of judgement and common sense that it is so unlikely that we are going to persuade the banks to reform their methods in those two respects that I think the right thing for the moment is to concentrate on doing it ourselves. I do not want to insulate national economies, I only go so far as to enable us to apply to the best of our ability these methods of improving banking technique for counteracting the greater tendency to oscillation. The more people we can persuade to come in with us the better, but I should be very much opposed to going the other way about and saying, "Come in with us on to the gold standard, according to the old rules of the game first, and later on we will see if we cannot persuade you to adopt with us methods for counteracting the oscillations of the trade cycle". We should get ourselves into the same difficulty in which we were involved before.

      With regard to the exchange possibilities, I will only reiterate that I do not want to rely on these things as an instrument for maintaining stability. Probably the truth is that the best thing we can do is to adopt the first type of expedient--letting the exchange look after itself, subject to short period control. But I have set forth the other possibilities for consideration, and hoped that I had made a logically exhaustive list. In view of the lateness of the hour I will leave other points aside.

    23. Harrod later added the following considerations in reply to a questionnaire circulated among the members of the group on 29 March 1934, asking "If the countries on a common currency policy all restore gold convertibility what other steps should they take either singly or collectively to promote continuity of value? And to what extent would such steps constitute a modification of gold standard usage either pre-war or post-war?":

    • Singly and collectively all the steps mentioned in Q[uestion] 4 a-d ["Do the tools of management include: a) discount rate, b) open market operations, c) public loans for public works, and d) sinking fund policy?"]. Responsibility of the balance of payments should be newly defined. If world gold prices are or are becoming too high, the responsibility for righting the balance of payments should, as now, be on the countries with adverse balances. But if world prices are or are becoming too low, responsibility for righting the balance should be on the countries with favourable balances only. This they would do by lowering tariff barriers and using the tools of management (4 a-d. sup.) in an expansionary direction.

      As a sanction for this arrangement it might be agreed that, in the low price period, countries with favorable balances should send any accruing balance, interest free, to the countries with unfavorable balances.

      Interest free loans apart, the practices proposed here are not new in themselves. But the purpose, time and mode of their application and the agreement to apply them in accordance to a principle would be new. (Harrod's replies to RIIA, "List of Questions" to group members, in 9/6vv)

    Further below, Harrod stressed that

    • Of the principles mentioned in the foregoing answers, the one, which, in my opinion, most needs stressing, is that, if world prices or gold prices or prices in the common currency policy bloc were or were becoming too low, the sole responsibility for reducing an adverse balance that occurred should be on the favorable balance countries, and that some sanctions should be imposed by agreement for securing that this happened. (Ibid.)

    To question 7, "If the countries on a common currency policy do not restore gold convertibility what action should they take either singly or collectively to promote stability of exchange. What part if any in this should be assigned to gold?", Harrod replied:

    • A par of exchange should be fixed. Each country should agree to buy the currency of the other at a fixed rate. The par should be subject to revision. If A tended to a permanent adverse balance, i.e. if B's holding of A's currency not offset by A's holding of B's tended to pile up, A should be allowed to depreciate her currency (by an amount of not more than 2% in any one year) in terms of B's. The consequential loss to B's Exchange Equalization Fund should be made good by A.

      The rate of exchange between the group and outside countries should be allowed to find their natural level subject to short period evening out by the Exchange Equalization Funds of the group acting conjointly.

      Gold might be used by the Exchange Equalization Funds of the group for the purpose mentioned in the second of the above paragraphs. (Ibid.)

      1. a. TD, 18 pages, in CH 9/6ff. Under the title the Ts indicates: "by R. F. Harrod".

        b. Ts: «irresistably».

        c. Ts: «leading a to a».

        d. Ts: «agreement,».

        e. Ts: «vis a vis».

        f. Ts: «out».

        g. Ts: «very».

        h. Ts: «lead».

        i. Ts: «vis-a-vis».

        j. Ts: «pis-aller».

        k. Ts: «bgeneral».

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