The Option Clause in Scottish Banking, 1730-65: A Reappraisal

James A Gherity

Journal of Money, Credit and Banking, 1995, vol. 27, issue 3, 713-26

Abstract: Many writers, from Adam Smith's time on, have held that the option clause encouraged overissue of notes and was, therefore, a source of instability. Recently, proponents of the legal-restrictions theory of money and some proponents of free banking have argued that the clause produced a number of desirable effects. Neither position is consistent with the historical facts. These facts indicate that the impact of the clause on the stability of the banking system was limited to discouraging note wars and providing a means by which to deal with specie drains caused by external shocks. Copyright 1995 by Ohio State University Press.

Date: 1995
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