The option clause is incentive-compatible: if correctly designed with the right interest rate, it only pays a bank to invoke it (rather than wind up) when the bank is actually solvent but facing an irrational panic; an insolvent bank with bad loans gains nothing from invoking it and simply shuts down—so it creates no moral hazard.

causalpending

Speaker

George Selgin

Evidence Quote

it's a it's an incentive compatible arrangement and that's why it didn't produce any sort of hazard to have it there

Source

George Selgin on Free Banking 11/17/2008EconTalk
Created: 6/15/2026, 9:20:23 AM

My Notes

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