Free Banking: Theory, History and a Laissez-Faire Model (Larry J. Sechrest)

Free Banking: Theory, History and a Laissez-Faire Model (Larry J. Sechrest)
- Highlight Loc. 452-58  | Added on Tuesday, October 25, 2011, 01:00 AM

To economize on the use of commodity money and to reduce the marginal liquidity costs of maintaining large specie reserves, banks naturally sought some form of regular note-exchange system, which would, by increasing the frequency with which rival banks’ notes were accepted at par, increase the marketability of their own notes. The same result might be accomplished in a very different way. Banks might engage in “note-duelling.” That is, they might begin buying a rival’s notes with the express purpose of presenting them suddenly to the issuer for redemption in specie, thereby hoping to damage the rival’s reputation or even precipitate his insolvency. Still, the likely result is widespread mutual acceptance of banknotes at par (Selgin and White 1987, 446–47).