Michael D. Bordo and Finn E. Kydland†
The gold standard has long been viewed as a form of constraint over monetary policy actions-as a form of monetary rule. The Currency School in England in the early nineteenth century made the case for the Bank of England's fiduciary note issue to vary automatically with the level of the Bank's gold reserve ('the currency principle'). Following such a rule was viewed as preferable (for providing price-level stability) to allowing the note issue to be altered at the discretion of the well-meaning and possibly well-informed directors of the Bank (the position taken by the opposing Banking School). 1
In this paper we survey the history of the gold standard (or to be more accurate the specie standard) treated as a rule, but our meaning of the concept of a rule differs radically from what used to be the traditional one. We regard it as a way of binding policy actions over time. This view of
* For helpful comments and suggestions on earlier drafts of this paper we thank Charles Calomiris, Barry Eichengreen, Marvin Goodfriend, Lars Jonung, Leslie Pressnell, Hugh Rockoff, Anna Schwartz, Guido Tabellini, Warren Weber, and participants at seminars at Carnegie-Mellon University, the Federal Reserve Bank of Richmond, Columbia University, Queens University, Carleton University, the NBER Macroeconomic History Conference, June 1989, and the NBER Summer Institute 1991. For valuable research assistance we thank Mary Ann Pastuch and Bernhard Eschweiler.
† From Explorations in Economic History, 1995, pp. 423-30, 445-64, abridged. Copyright © 1995 Academic Press, Inc.