I was going to initially phrase the title "do you allow?", but I suspect most old school DM would allow such an attempt, even if they weren't actively encouraging it.
I remember working with my players back in my college days when they wanted to create a signature spell for their character. My experience was that players instinctively lowballed the spell level of their creations - a spell comparable to spells in the AD&D Player's Handbook for third level were often suggested as second. I don't think that was intentional, more of a subconscious decision on their part.
Now, as a DM / content creator, I've written new spells, but I've tended to steer away from spells that have obvious uses in combat - which is where the vast majority of spells written for D&D-like RPG fall into. "Brew Beer" or "Bless Homestead" are more practical for the peasants, but less useful in the depths of a dungeon.
I fully expect as my current S&W Complete campaign picks up speed that one or more of the players will look to customize a current spell and create a new one, and I expect to be ready for the challenge of keeping the new creation balanced yet still within the player's vision of it's scope.
So, where do you stand on players creating new spells in an "Old School" campaign? Encourage it? Hope to avoid it? It's never happened before, so why should it happen now? ;)
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