Abstract
This article examines the potential of option clauses to stabilize a banking system with multiple banks of issue and convertible banknotes. It suggests that under laisser faire, banks will introduce option clauses and the public will be willing to accept them even when fully convertible notes are also available. This will be in the interest of both parties since option clauses protect banks against a liquidity crisis. The article then examines the historical experience of option clauses in Scotland in 1730–1765 and finds it to be broadly consistent with our prior expectations.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Checkland, S. G. Scottish Banking: A History. Glasgow and London: Collins, 1975.
ClaphamSir, J. The Bank of England: A History, Vol. I 1694–1797. Cambridge: Cambridge University Press, 1970.
Diamond, D. W. & Dybvig, P. H. Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy (Vol. 91, 1983), pp. 401–419.
Graham, W. The One Pound Note. Edinburgh: James Thin, 1886.
Kerr, Andrew W. History of Banking in Scotland, 3rd ed., London: A. & C. Black Ltd., 1918.
MacLeod, H. D. A History of Banking in Great Britain, (1896) in Vol. III of A History of Banking in All the Leading Nations, edited by W. G. Sumner, reprinted by Augustus M. Kelley. New York: 1971.
Meulen, H. Free Banking: An Outline of a Policy of Individualism, London: Macmillan, 1934.
Smith, A. An Inquiry into the Nature and Causes of the Wealth of Nations (1776), edited by E. R. A. Seligman and reprinted by J. M. Dent and Sons, Ltd., London, and E. P. Dutton and Co., New York, 1911.
White, L. H. Free Banking in Britain: Theory, Experience, and Debate, 1800–1845, Cambridge: Cambridge University Press, 1984.
White, L. H. Accounting for Non-Interest-Bearing Currency: A Critique of the “Legal Restrictions” Theory of Money, Journal of Money, Credit, and Banking (Vol. 19, 1987), pp. 448–456.
Whittick, W. A. Value and an Invariable Standard of Value. Philadelphia: J. B. Lippincott, 1896.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Dowd, K. Option clauses and the stability of a laisser faire monetary system. J Finan Serv Res 1, 319–333 (1988). https://doi.org/10.1007/BF00235202
Issue Date:
DOI: https://doi.org/10.1007/BF00235202