Monetary Equilibrium and the Price Level in a Progressive Economy: A Comment

Karl Bode and Gottfried Haberler’s article, first published in Economica in February 1935 and reprinted in 1993, challenges Harrod’s claim that credit expansion can stabilize prices while preserving equality between saving and investment in a progressive economy. Their central objection is that appreciation of existing money balances cannot be treated as saving and compared with investment without corresponding adjustments to both concepts. They restrict progress to productivity gains through technical invention, excluding increases in factor supplies and greater roundaboutness of production. These exclusions isolate Harrod’s argument rather than purporting to cover every form of economic growth.

The first issue is the difference between deliberate accumulation of money and the increased purchasing power of unchanged balances when prices fall. Genuine hoarding can absorb saving and justify monetary expansion. Yet Harrod’s assumption of constant velocity appears to exclude precisely that change in monetary behavior. Bode and Haberler foreground this assumption before testing his reasoning:

Now, for the sake of argument, let us neglect for the moment the fact that Mr Harrod is assuming a constant velocity of circulation (constant k or v in the Cambridge equation).

Their defense of neutral-money theory is consequently conditional, not a blanket rejection of monetary expansion. An increase in the supply of money can be appropriate when people actually increase their cash holdings; the disputed question is whether progressive production necessarily entails such behavior.

Kaldor’s interpretation seeks to supply a behavioral mechanism: anticipated increases in money income induce people to accumulate cash, producing unintended hoarding if credit does not expand. Bode and Haberler dispute the necessity of this response:

As regards the second, we may state that it seems neither certain nor even probable that k will rise as a result of an anticipated rise in money incomes.

Distinguishing circulating cash from reserves, they suggest that transaction balances may grow when additional income arrives, without requiring advance accumulation. Expectations could also work in the opposite direction:

If I expect an increase in my income in the future, it would appear reasonable to assume that I should actually spend more freely from resources which I have available at present.

This counterexample undermines an asserted necessity rather than establishing a universal spending response. The notes acknowledge that disappointed expectations can cause disturbances or deflation. They also qualify the polemic through correspondence with Harrod, while maintaining that his understanding of Kaldor does not resolve the disagreement.

The argument then turns from cash-holding behavior to definitions of saving. Under the ordinary conception of saving as money income minus consumption expenditure, a diversion into cash would imply the hoarding excluded by Harrod’s assumptions. Keynes’s Treatise terminology offers no independent solution: excess saving would correspond to losses, whose occurrence still requires explanation. The authors’ methodological concern is that a definitional relationship cannot itself serve as a causal account.

Harrod’s decisive departure, in their reading, is to include the appreciation of money holdings within income and saving. Such accounting income differs from the money income used in monetary equations. It also raises the question of why appreciation of money should count while appreciation of other assets does not. Above all, investment must be defined consistently with saving. Revaluation of existing wealth cannot simply be compared with expenditure on newly produced capital goods to demonstrate an investment shortfall. Harrod therefore has not established the necessity of stable prices for equilibrium or refuted neutral-money arguments formulated with different definitions.

The concluding discussion addresses Harrod’s concern that ordinary saving equals investment by definition, apparently making every interest rate an equilibrium rate. Bode and Haberler appeal to Robertson’s temporal distinction: saving relates current consumption to income earned in the preceding period, whereas a contemporaneous surplus subtracts consumption from income within the same period. This preserves the connection between saving and deliberate decisions instead of reducing it to an accounting residual.

The article’s contribution is to disentangle monetary behavior, asset appreciation, and investment expenditure. Its proposed distinctions between individual and collective magnitudes, nominal and real values, and points and periods of time make conceptual consistency a prerequisite for monetary-policy conclusions, rather than a substitute for causal explanation.