The Suspension of Cash Payments as a Monetary Regime

By setting bounds on money growth, the commodity standard is a solution to the monetary authority’s time inconsistency problem, which arises from the fixed wage structure of the economy. If there is a supply shock to the backing commodity, the suspension of the commodity standard may be desirable in terms of stabilisation of production and consumption. By representing a credible commitment to return to the commodity standard, the suspension of cash payments maintains the value and circulation of money. Lessons and evidence are taken from England’s experience of the suspension of cash payments between 1797 and 1821.