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.
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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
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DOI: https://doi.org/10.1007/BF00235202