Reciprocal linking is a practice that's been around since the web was in its infancy. In the earlier, wilder years, many people built websites and linked to their friends, and their friends reciprocated. The revolutionary idea of a "world wide web" as a network of linked sites was a primary reason for the huge success of the internet.
Now, it seems that Google is threatening to ban sites that use reciprocal linking techniques. From the Google Webmaster Help Center on techniques that are a violation of their guidelines:
Since the goal of the real estate guide is to be a "one-stop shop" for real estate services, linking to websites representing those relevant services is a must. What, do I tell users that "Company A is a real estate agent, but if you want to visit their website, go do a search for them on Google and find the site yourself"? The links back to my site are completely natural - I didn't solicit those websites for backlinks. The burning question is: will I be banned from the Google index for having a large number of reciprocal links? I shouldn't be penalized, but according to Google's guidelines, I've broken the rules.
When it comes down to it, will Google be banning itself for reciprocal linking? After all, they link to every website on the web, and many websites link to them.