2.1Why the window closed: a domestic choice or a system worn through
The first debate concerns the decision of August 1971. Gowa explains the American decision to end the convertibility of the dollar into gold as a result of domestic politics. In her account the Nixon administration's priorities, including the aim of lower unemployment and the electoral calendar, together with pressure on the balance of payments, led to the suspension, and external events alone did not. Her book examines the choice among the options available to the administration and the role of domestic actors (Gowa 1983). On this reading the question to put to August 1971 is who in Washington wanted what, and which option won.
The institutional histories frame the same event as a moment in the life of a system. James follows the rise and breakdown of the par value system of fixed exchange rates, through to the era of floating rates and the debt crises of the 1980s. He argues that international monetary cooperation was shaped by repeated crises and by the interests of the major powers; his history was written with the support of the Fund (James 1996). Eichengreen's history of the international monetary system argues that each regime was shaped by the politics of its day, that the gold standard worked while governments were not pressed to put domestic employment ahead of the exchange rate, and that Bretton Woods relied on capital controls that later eroded; it follows how crises, including the collapse of fixed-rate arrangements, led to new regimes (Eichengreen 1996). On these readings the question to put to August 1971 is what had worn away before anyone in Washington chose.
The two kinds of account are not exclusive. Eichengreen's stress on the politics of each period sits close to Gowa's, with a difference of scale: one administration in one summer, against a system over decades. Meltzer's history of the Federal Reserve from 1951 to 1969, drawn on the Federal Reserve's own records, treats its dealings with the Treasury and the White House and the strains on the dollar under the gold exchange system, and is critical of the way policy responded to inflation as it grew in the 1960s (Meltzer 2009). That book ends in 1969; it treats neither August 1971 nor October 1979, and it is used here only for the decade it covers.
An announcement cannot settle a dispute about motive: its stated reasons are those its authors chose to give to voters, markets and foreign governments at once. It can show where it placed the cause in public, and what it told each audience about how long the change would last and on what condition it would be undone.
2.2What October 1979 was: a procedure that signalled, or a person who persisted
The second debate concerns the Federal Reserve's change of 6 October 1979. Lindsey, Orphanides and Rasche examine the decision to change operating procedures so as to target nonborrowed reserves, the reserves banks hold that they have not borrowed from the Federal Reserve, rather than the federal funds rate, the rate at which banks lend reserves to each other overnight. They describe the background of rising inflation, the debates within the Federal Open Market Committee and the role of Paul Volcker, and they argue that the move was a way to permit larger swings in interest rates and to signal commitment against inflation. Their article is a documentary account of a decision that began the disinflation (Lindsey, Orphanides and Rasche 2005).
Silber's biography covers Volcker's career at the Treasury, at the Federal Reserve Bank of New York and at the Board, including the policy change of October 1979 and the tight money that followed. It argues that Volcker's persistence in the face of political and economic pressure was central to the outcome. It is written for a general audience (Silber 2012).
The two accounts differ in where they put the weight: the first on a change of procedure and what it permitted and signalled, the second on a person's persistence under pressure. The first is a claim about what the announcement was built to communicate; the second is a claim about an outcome, which no announcement could contain.
2.3Rules, escape clauses and the promise of return
Behind both cases stands a theoretical argument. Kydland and Prescott show that a policy plan that is best from today's standpoint may not remain best when the future arrives, because a policy maker, once private agents have made decisions based on the plan, has an incentive to depart from it. This is the problem of time inconsistency. They conclude 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).
Bordo and Kydland interpret the gold standard as a commitment rule in that sense. Adherence to gold, they argue, served as a credible commitment to low inflation and to the stability of the value of money, and the rule contained an escape clause: in an emergency such as war or financial crisis, a country could suspend convertibility temporarily, so long as the public expected a return to the old parity (Bordo and Kydland 1995).
The two positions meet at the point examined here. Kydland and Prescott's argument concerns the incentive to depart from an announced plan, and their preference for rules over discretion; applied to a suspension, which they do not discuss, it would treat the suspension as a departure of that kind. On Bordo and Kydland's account, a suspension can be part of the rule, provided it is understood as temporary and a return is expected. Which reading fits a given suspension depends partly on what its announcement said about return. An announcement that names a parity and a condition gives the public something to expect; one that says only temporarily leaves the expectation to be formed elsewhere.
The change of 1979 sits differently. It suspended no obligation. It replaced one way of administering a target with another, and the target, on the announcer's own account, stayed the same. The rules debate reaches it through credibility rather than through the escape clause: a procedure that lets the overnight rate move freely binds its author not to resist the move.
2.4To whom the announcer answers
The fourth debate concerns emergency power. Posner and Vermeule argue that the modern American executive is in practice little constrained by legislation and the courts, that political and informal checks such as public opinion, parties and the media do the main work, and that in emergencies the executive acts first and the other branches defer, which they hold acceptable (Posner and Vermeule 2010). Tucker, writing as a former central banker, argues that delegating great power to an independent agency such as a central bank needs principles of legitimacy: a clear mandate, limits on what the agency may do, transparency and accountability to elected bodies (Tucker 2018). 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).
The two announcements fall on different sides of this field without settling it. One is an executive speaking to the nation and directing a cabinet secretary to act; the other is a delegated agency reporting to the press and then to a committee of the legislature. Each text shows to whom its author chose to explain the act, and in what terms.
2.5The debates side by side
| Question | One reading | Another reading | What an announcement can show |
|---|---|---|---|
| Why was convertibility suspended in 1971? | Domestic politics: the administration's priorities, including lower unemployment and the electoral calendar, and balance of payments pressure (Gowa 1983) | A system shaped by repeated crises and great-power interests, resting on capital controls that eroded (James 1996; Eichengreen 1996) | Where the announcer placed the cause in public; what it told each audience about the length of the act and the condition of its end |
| What was the change of October 1979? | A procedure that permitted wider swings in rates and signalled commitment (Lindsey, Orphanides and Rasche 2005) | A turn in which the chairman's persistence was central to the outcome (Silber 2012) | What the announcer said the procedure would and would not do, what would be watched, and whether an end was named |
| Is a suspension a breach of a rule or part of it? | Discretion is suspect; rules do better (Kydland and Prescott 1977) | A temporary suspension with an expected return is the rule's escape clause (Bordo and Kydland 1995) | Whether the text names a return, a parity or a condition on which the public could form an expectation |
| To whom does an emergency announcer answer? | The executive acts first, others defer, informal checks suffice (Posner and Vermeule 2010) | Delegated power needs a mandate, limits, transparency and accountability to elected bodies (Tucker 2018) | To whom the text explains the act, and in what terms |
One further observation joins the table to the question asked here. In their survey of financial crises, Kindleberger and Aliber hold that a lender of last resort is needed to stop a panic from spreading, and that the timing and wording of its announcement matter (Kindleberger and Aliber 2005). Their point concerns rescues in a panic, not changes of regime; extending it to regime changes is a step they do not take. If the timing and wording of an announcement matter, a weekend announcement is a choice about timing, and its wording is the evidence.