Chapter 21 Rules versus discretion in monetary policy Discretionary monetary policy has long been an anomaly to liberal economists. Henry Simons addressed the issue in his classic paper Rules versus Authorities in Monetary Policy. This chapter discusses the gold standard as a quasi automatic monetary policy regime and alternative monetary rules are also examined. The modern literature centered on the concept of dynamic inconsistency and its relevance to the rules versus discretion debate is discussed in the chapter. A pure gold standard is a fully automatic monetary system. The specie flow mechanism in which the money stock adjusts through the balance of payments reveals the equilibrating tendencies inherent in the system. With all goods traded and their prices equalized worldwide adjustment comes purely through wealth effects as the outflow of gold from a country with a current account deficit reduces the flow of spending in that country. The pre 1977 arguments of principle for rules lacked any convincing demonstration that rules might systematically be better than discretion. This demonstration came with the dynamic inconsistency literature.