Trust is the bedrock of a sound monetary system. This paper examines the rise and fall of the Bank of Amsterdam (1609-1820) to gain insights on the central bank underpinnings of money. It sheds light on the governance of digital currencies.
This paper draws lessons from the Bank of Amsterdam for the
governance of money. The early operational framework of the Bank of
Amsterdam resembled a "stablecoin" - where account-based money is backed
by assets of stable value and where the money stock is managed
passively by the inflows and outflows of assets. Over time, the Bank
began to use its balance sheet in a more elastic manner, and to take on
some functions of a central bank, including lending activity through
overdrafts. In the 1780s, the Bank's lending activity grew excessive,
and led ultimately to its downfall.
Findings
Empirical analysis with monthly balance sheet data shows that
confidence in Bank of Amsterdam money as reflected in the premium over
metal coins was eroded as the share of loans in the Bank's assets
increased. While short-term fluctuations in lending had little impact on
confidence in Bank money, the relationship reasserted itself in the
medium run.
The Bank of Amsterdam and its rise and fall provide many useful
lessons, but two resonate particularly loudly for current debates on the
nature of the money and the role of the central bank. First, rigid
stablecoins are poorly suited as the foundation for a modern monetary
system. Second, for a central bank to play its role, the fiscal backing
of the sovereign and its fiscal sustainability are essential.
Abstract
This paper draws lessons on the central bank underpinnings of money
from the rise and fall of the Bank of Amsterdam (1609-1820). The Bank
started out as a "stablecoin": it issued deposits backed by silver and
gold coins, and settled payments by transfers across deposits. Over
time, it performed functions of a modern central bank and its deposits
took on attributes of fiat money. The economic shocks of the 1780s,
large-scale lending and lack of fiscal support led to its failure. Using
monthly balance sheet data, we show how confidence in Bank money gave
way to a run equilibrium, where the fall of the premium on deposits over
coins ("agio") into negative territory was swift and precipitous. This
holds lessons for the governance of digital money.
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© BIS - Bank for International Settlements
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