“Unconventional monetary policy in the past: Lessons for today” CGR working paper covered in VOX

In one of the latest CGR working papers, “Danger to the Old Lady of Threadneedle Street? The Bank Restriction Act and the Regime Shift to Paper Money, 1791-1821”, Prof Patrick O’Brien and Dr Nuno Palma obtain important lessons of past monetary policies to explain today’s unconventional monetary policies. As they describe in the abstract:

The Bank Restriction Act of 1797 made legal the Bank of England’s suspension of the convertibility of its banknotes. The current historical consensus is that it was a result of the state’s need to finance the war, France’s remonetisation, a loss of confidence in the English country banks, and a run on the Bank of England’s reserves. We argue that while these factors help us understand the timing of the Restriction period, they cannot explain its success. We deploy new long-term data which leads us to a complementary explanation: the policy succeeded thanks to the reputation of the Bank of England, achieved through a century of monetary stability

The episode offers a relevant precedent for the hitherto unprecedented monetary policies currently pursued by central banks, as Prof O’Brien and Dr Palma summarize in a recent article published in VOX, CEPR’s Policy Portal:

“Economists and the media often portray the recent unconventional monetary policies of several central banks as unprecedented. There is some truth in this, but there have been episodes in the past where the policies adopted were every bit as radical, given the standards of their time. One such case is the Bank of England’s suspension of convertibility between 1797 and 1821.

The Bank of England – which was not yet a central bank in the modern sense, though it was already beginning to play a public role – had suffered a significant drain in its reserves from the mid-1790s. In 1797 it suspended convertibility of its notes into gold. It also issued small denomination notes for the first time. Banknotes became increasingly important as a means of payment (Figure 1).

Figure 1. The ratio of Bank of England notes to coin supply, 1696-1844


Sources: See O’Brien and Palma(2016)

This episode parallels the better-known 1914 suspension of the gold standard, but there are some important differences too. The 1797-1821 suspension had only moderate effects. It did not lead to a major financial crisis. Inflation and discount on banknotes remained moderate…”

If you are interested in the insights that the 1797-1821 period offers for today, you can read the full VOX article:


Or, for a more detailed version, read the full working paper:

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s