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. 2034-39  | Added on Sunday, November 20, 2011, 05:31 PM

An important feature of the Scottish system was the weekly note-exchange. This developed spontaneously in the late 1760s. Banks realized that in order to maximize the market for their own notes, they would need to accept their rivals’ notes at face value. That is, if consumer X is presently holding notes issued by bank A, he is unlikely to open an account with bank B unless B is willing to credit him with the face value of the banknotes he possesses. This note-exchange process involved the weekly clearing of interbank holdings of one another’s notes. It served not only to increase the marketability of banknotes relative to specie, but also to check any attempt at overissue on the part of an individual bank (White 1984a, 20–22).