Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

HIERARCHICAL METAPHORSdemand’, their notes were redeemable on demand or in six monthsat 5 per cent interest, at the bank’s discretion. The notes gave thebank the option of suspending redemption for a limited period oftime with compensation paid to the note holder.This innovation can be viewed as an example of institutionalflexibility in the face of uncertainty. Scottish banking practices werenot so institutionally specific as to be unable to react to externalchange. At first, the Bank of Scotland simply unilaterally declaredthat note redemption would be suspended for some period andinterest would be paid to note holders, without having specified thisin writing on the note. This ad hoc policy was used on threeoccasions in the early 1700s (White 1984:25–6). Eventually, such adhoc manoeuvres faced legal challenges.The period (1727–30) during which an actual option clause wasadded to Scottish notes was one of new entry and intensecompetition (Dowd 1991:769). Faced with the uncertainty inherentin such a situation, the Bank of Scotland first used the ad hocinvocation of temporary suspension with interest to prevent itselffrom being drained of reserves by a new competitor, the Royal Bankof Scotland. In this case, however, a suit was brought charging theBank of Scotland with violating the terms of its charter by notredeeming notes on demand. According to White (1984:26): ‘Aftermuch legal wrangling the note holder’s right of “summarydiligence” or immediate payment on Bank of Scotland notes…. wasupheld’. Shortly after this decision, the Bank of Scotland added anexplicit option clause on the obverse of all of its notes indicating itsright to suspend redemption and the corresponding payment ofinterest.The problem facing both the banks and the law was how to besufficiently flexible to deal with the challenges of innovation anduncertainty, while still maintaining a coherence andcomplementarity that could provide a stable institutionalenvironment for market actors. The whole Scottish option clauseepisode can be seen as an attempt to fill in the ‘gaps’ in both themonetary and legal institutional orders. 20 Judges had to react tofinancial innovations, and banks had to wait to learn the officiallegal status of their innovations before extending or advancing onthem. It would be difficult in this case to point to either the legal ormonetary order as being internal or external or up or down in somehierarchy. Rather it seems more like a story of shuffling andreshuffling and searching for complementarity in the face ofexternal change, much like the Austrian theory of capital.157