2.1Rules, discretion and the problem of the promise kept
The theoretical ground of the escape-clause reading is a paper on rules. Kydland and Prescott show that a policy plan which is best from today's standpoint may cease to be best when the future arrives: once private agents have made their decisions in reliance on the plan, the policy maker has an incentive to depart from it. This is the problem of time inconsistency. Their conclusion is that discretionary policy can produce worse results than a fixed rule, even when the policy maker's objective never changes, and they argue for rules in place of discretion (Kydland and Prescott 1977).
The study's note on the paper does not mention suspensions of convertibility. Applied to them, its logic makes a suspension suspect: it is the departure from an announced plan that those who relied on the plan, note holders among them, have reason to fear.
2.2The gold standard as a commitment with an escape clause
Bordo and Kydland take the same theory to the history of gold. In their reading, adherence to the gold standard served as a credible commitment to low inflation and to the stability of the value of money. The rule contained an escape clause: in emergencies such as war or a financial crisis, a country could suspend convertibility temporarily, so long as the public expected a return to the old parity. They examine historical cases of suspension and resumption, and their paper links the history of suspensions to the theory of rules (Bordo and Kydland 1995).
The reading changes what a suspension is. It is no longer a breach of the rule but an exercise of a provision within it, and it remains credible on one condition, an expectation of return. The reading therefore puts weight on something the suspension documents might or might not contain: an indication that the emergency is bounded and that the old terms will come back. Bordo and Kydland's note does not say what form that indication must take, whether a date, a named event, a promise in words or simply a reputation built over earlier suspensions and resumptions. That gap is where this article works. If the escape clause was written anywhere, the suspending documents are a natural place for it; if it was not written there, the expectation had to come from elsewhere.
2.3Golden fetters: the value of leaving
A second literature looks at the same rule from the other side and at a later time. Eichengreen argues that the interwar gold standard transmitted and prolonged the Great Depression. The gold standard of the 1920s, in his account, rested on credibility and cooperation that had weakened since 1914; the countries that kept to it were forced into deflationary policy, and the countries that left it were freed to expand. Recovery in the 1930s began after countries abandoned gold and devalued, and the book ties the choice to stay or leave to domestic politics, which determined whether governments could stay on gold (Eichengreen 1992). Eichengreen and Sachs compare countries by when they left the gold standard and devalued, and argue that those which left earlier and let their currencies depreciate recovered sooner than those which stayed, because devaluation allowed monetary expansion and improved competitiveness; they add that the gain was partly at others' expense and that cooperative reflation would have done better for all (Eichengreen and Sachs 1985). Temin's lectures make a related case: the Depression was an international event tied to the gold standard; the standard, and the ideas of those who defended it, led governments and central banks to keep money tight as demand fell, and recovery came as countries left it (Temin 1989).
On this side of the field, the escape clause looks different. What mattered in the 1930s, on these accounts, was leaving, and leaving in a way that freed policy. A promise to return at the old parity, the very thing that made a suspension credible in Bordo and Kydland's reading, would have tied the hands that leaving was meant to free. Eichengreen's broader history of the international monetary system frames the contrast in political terms: the gold standard worked while governments were not pressed to put domestic employment ahead of the exchange rate (Eichengreen 1996). A suspension in an age when governments were so pressed is a different act from one in an age when they were not, even if the legal form is the same.
2.4The Restriction in its historians
The suspension of 1797 has its own historians. Fetter traces British thinking about money and banking from the Bank Restriction of 1797 to the 1870s: the bullion controversy, the debates between the currency and banking schools that led to the Bank Charter Act of 1844, and later discussions of the Bank of England's responsibility in a crisis. His book shows how an orthodoxy about convertibility and the management of the note issue formed, and how crises, including the suspensions of the Act of 1844 in 1847, 1857 and 1866, shaped it (Fetter 1965). Clapham's two-volume history of the Bank of England, written with access to the Bank's records, describes its origins as a lender to the state, the growth of its role in the banking system and the money market, and the crises it faced, including the restriction of cash payments from 1797 (Clapham 1944).
Two of the primary texts read here belong to that history as well as to its sources. Thornton, a banker and member of Parliament, analysed the paper credit system of Britain during and after the Restriction; he argued that the Bank, as holder of the nation's reserve, should support the banking system by lending in a crisis of confidence while limiting issue in ordinary times, and that a failure of credit can spread from one bank to others. His book is commonly read as an early statement of the lender-of-last-resort function and as a key text on the Restriction itself (Thornton 1802). Humphrey traces the lender-of-last-resort idea through its main authors, notably Thornton and Bagehot, and through the later debate (Humphrey 1989). The Bullion Committee's report of 1810 held that the high price of bullion and the fall of the exchanges showed an excess of paper, and recommended that cash payments be resumed within a fixed period (House of Commons, Select Committee on the High Price of Gold Bullion 1810).
Fetter's account touches the escape-clause question without posing it. The orthodoxy about convertibility that he follows from 1797 was shaped by crises, among them the suspensions of the Act of 1844 in 1847, 1857 and 1866 (Fetter 1965). Suspension and resumption are the material Bordo and Kydland examine; repeated departure from an announced plan is what Kydland and Prescott's argument makes suspect. Which of the two the nineteenth-century suspensions resemble is not a question the works' notes answer, and this article leaves it open.
2.5Emergency law: inside the rules or outside them
A last, smaller literature bears on the form of the documents rather than their economics. Gross and Ní Aoláin, working chiefly on terrorism and national security, set out models by which legal systems deal with emergencies: that ordinary law applies fully, that emergencies lie outside the law, and that emergency powers can be accommodated within it (Gross and Ní Aoláin 2006). Posner and Vermeule argue that in modern American government the executive acts first in emergencies and the other branches defer, that informal checks such as public opinion, parties and the media do the main work of constraint, and that this is acceptable (Posner and Vermeule 2010). Neither note mentions money. Both works offer a vocabulary for what the British documents do: one is an executive order awaiting Parliament, the other an Act of Parliament that hands the decision to end back to the executive.
2.6The debates side by side
| Question | One side | The other side | What a suspension document can show |
|---|---|---|---|
| Is a suspension part of the rule or a departure from it? | A departure: discretion invites the time-inconsistent break, and rules do better (Kydland and Prescott 1977) | Part of the rule: a temporary suspension in war or crisis, with an expected return to the old parity, is the escape clause (Bordo and Kydland 1995) | Whether the document bounds the emergency, names a return, a parity, or an event or date on which payment resumes |
| Was the value of a suspension in returning or in leaving? | In returning at the old parity, which kept the commitment credible (Bordo and Kydland 1995) | In leaving, which freed policy to expand; earlier leavers recovered sooner (Eichengreen 1992; Eichengreen and Sachs 1985; Temin 1989) | Whether the document promises anything about return at all, and who it leaves in charge of deciding |
| How did the Restriction shape what came after? | An orthodoxy about convertibility formed from the bullion controversy to 1844, and was tested by later suspensions (Fetter 1965) | The Bank grew into a central bank through the crises it faced, the Restriction among them (Clapham 1944) | What the actors wrote at the time about why the suspension continued and on what terms it would end |
| Where does emergency power sit? | Accommodated within law, or outside it, on a spectrum of models (Gross and Ní Aoláin 2006) | Executive first, legislature deferring, informal checks sufficing (Posner and Vermeule 2010) | Who suspends, who confirms, and who is given the power to end |
The first two rows hold the debate that matters most here. The escape-clause reading and the golden-fetters reading are not opposite claims about the same facts; they are claims about different periods and different questions. They meet, however, on one point that a document can show: whether a suspension was written as something that would be undone on known terms, or as something whose undoing was left open.