Revisiting the Rules-versus-Discretion Debate: Forecasting Evidence from the Bank of England, 1870-1913

Abstract

Under the classical gold standard, historians have long debated what guided the Bank of England's adjustments to Bank Rate: whether policy followed a mechanical gold-standard rule or discretion when City or exchange conditions required it, and whether domestic money-market stability or external convertibility carried greater weight. This paper revisits those questions with a London-specific monthly panel, 1870-1913, jointly testing ten domestic and external indicators the Court watched when setting the published minimum rate. The findings fit neither a single frozen channel nor unstructured ad hoc policy. Instead, the Bank appears to have drawn repeatedly on a multivariate information set-trade settlement, gold movements, City asset prices, bill-market conditions, and episodic convertibility pressure-with state-dependent weights across subperiods. In the confirmatory specification, exports, gold flow, and industrial share prices carry the clearest joint forecasting content for changes in Bank Rate. Gold flow forecasts rate changes even when reserve stock does not, separating bullion settlement from balance-sheet position. Bill-market and convertibility pressures also carry incremental forecasting content in the multivariate specification, though their prominence depends on how domestic and external indicators are modeled together. The overall pattern is most consistent with systematic discretion under the classical gold standard.