Domestic Coinage and the Bank of Amsterdam

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1 Domestic Coinage and the Bank of Amsterdam August 2008 Draft of Chapter 7 of the Wisselbankboek By Stephen Quinn and William Roberds* * Department of Economics, Texas Christian University, Box , Fort Worth, TX 76129, and Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree St., NE, Atlanta, GA , 1

2 Domestic Coinage and the Bank of Amsterdam Modern definitions of a central bank often focus on the role of central bank money as the ultimate means of settlement. People make payments using a variety of credit instruments such as credit cards today or bills of exchange four centuries ago, but what money is used to settle those debts? While currency can fulfill this function, today the final settlement of most payments occurs on the ledgers of a central bank. This chapter tells how the Bank of Amsterdam, by providing this very modern type of service, came to create a type of money distinct from coins. Having a distinct money at the heart of the payment system also allows for the exercise of monetary policy in a contemporary sense. Today, the term monetary policy is commonly understood as the manipulation of the price of central bank money relative to slightly less liquid assets held by banks, assets such as government securities, commercial credits and foreign currencies. Four centuries ago, the principal assets outside the Bank of Amsterdam were coins, and the Bank learned to manipulate the relationship between money in its accounts and the coins used as assets outside of the bank (Gillard 2004). Thus, as an agent of monetary policy, the Bank of Amsterdam had become a type of central bank by Pit Dehing s Chapter? will discuss how the Bank of Amsterdam managed its special position. This chapter will explain how the Bank of Amsterdam evolved from being the guardian of coinage standards to the provider of a standard money distinct from coins. 2

3 The city of Amsterdam founded the exchange bank to protect merchants from unreliable coinage. In the original design of the Bank, this protection took a simple form: deposits at the Bank of Amsterdam were fully backed by coins of a constant quality. Merchants sought refuge from declining silver contents of circulating coins by holding accounts at the bank. The Bank of Amsterdam, however, could not protect depositors when the States General adjusted coinage standards. During the Bank of Amsterdam s early years, such adjustments occurred repeatedly. Eventually, the Bank of Amsterdam defied the Republic in an effort to protect creditors. In 1645, the Bank retained old coin prices while the rest of the Dutch economy moved on to new coin prices. As a result, the bank guilder became a distinct unit of account from the current guilder. This era marks the beginning of the bank guilder as a privileged settlement medium, and an open market of exchange between bank money and current money developed. A market exchange rate called the agio mediated the relationship between bank money and current money. The separation of the bank guilder from the current guilder became complete when reinforcing changes occurred in the 1680s. In 1681, the Republic introduced the guilder coin for circulation outside the bank. The Bank of Amsterdam also limited the right to withdraw coins from the bank. As a result, Bank of Amsterdam accounts became a medium of exchange fully distinct from coins. The relationship between bank money and domestic coins became entirely one of an exchange rate. 3

4 The separation of bank money from current money removed the persistent threat caused by changes in coin regulations, and Bank of Amsterdam money became the undisputed means for settlement of large-value debts. The displacement of coins by the bank also corresponded with an improved reliability of coins as the Bank of Amsterdam learned to regulate the agio relationship between accounts and coins. The Bank of Amsterdam thus oversaw a profound transformation in the nature of money, whose consequences for international payments and Bank policy will be explored in subsequent chapters by Gillard and Dehing. To set the stage, this chapter focuses on the story of the very gradual process by which this transformation took place. The story begins with coins, the ultimate means of settlement before the Bank of Amsterdam. I. Coins Around 1600, coins were the primary form of money used to settle debts. Coins were minted within the Republic at 6 provincial mints, several regional and municipal mints, and a large number of private mints. Each mint produced a variety of coins. Moreover, because the Republic was a small economy open to world trade, foreign coins were also widely used. As a result, moneychangers had to deal with 800 to 1,000 different types of coin (Dehing and t Hart 1997, 40). For moneychangers, the value of a coin depended on two aspects: the amount of precious metal contained within the coin and the price of the coin in terms of a ghost unit of account, the guilder. For example, the rijksdaalder and the leeuwendaalder were big 4

5 silver coins used for large-value business payments. A rijksdaalder contained percent of a mark of pure silver and had an assigned price of 2.35 guilders. A leeuwendaalder contained 8.44 percent of a mark of pure silver and had an assigned price of 1.9 guilders. These figures along with all other coin specifics in this chapter are taken from M.S. Polak s Historiografie en Economie van de Muntchaos, De Muntproductie van de Republiek But how would moneychangers compare the two coins? They would compare the ratio of guilders to metal for each coin. The ratio is m p where p is value of the coin in guilders, m is the pure metal content of the coin in marks. A higher ratio means more guilders per mark of silver. The rijksdaalder s ratio was guilders per mark and the leeuwendaalder s ratio was guilders per mark, so the leeuwendaalder offered slightly more guilders for its silver than the rijksdaalder did. The higher ratio should also mean that if someone wanted to turn silver bullion into coins, then they should prefer to get leeuwendaalders rather than rijkdaalders. The creation of new coins, however, also involved paying the mint to perform this service. Most of the silver went into the coin, but ordinances assigned some silver, called seigniorage, to the province or city upon whose authority the mint operated. Ordinances also assigned some of the silver, called brassage, to the mint master to pay workers for their efforts and as profit. 5

6 Before deciding on a type of coin, a mint s customer would want to subtract the costs of seigniorage and brassage. The adjusted ratio is called the mint price, for it tells a customer how much a mint will pay, in the form of new coins, for a mark of pure silver. Leeuwendaalders, at 22.2 guilders per mark, had a higher mint price than rijksdaalders at because of the higher price-to-metal ratio and because costs were greater for rijksdaalders. While a difference of one-twentieth of a guilder may seem inconsequential, it represented about 15 percent of the cost to have new coins produced. The story of the Dutch Republic s coinage during the life of the Bank of Amsterdam revolves around adjustments to mint prices and their consequences. Mints, and their authorizing governments, cared about mint prices because mints only made profits when customers chose to bring metal to the mint. A higher mint price meant more business and more profits. Efforts to increase a mint price, and attract business, took a variety of forms. A coin s mint price is composed of three elements with the relationship p c m, where p is value of the coin in guilders, m is the pure metal content of the coin in marks, and c is the amount in guilders per mark removed by the mint for the costs of seigniorage and brassage. Viewed this way, increasing the price of a coin (p), reducing the metal in a coin (m), and reducing mint charges (c) are all ways to increase a coin s mint price. Individual mints could not set a price for a coin, but individual mints could reduce the metal content (m) of their coins. This is called debasement. In the Dutch Republic, 6

7 debasement was incremental, for slightly lighter coins could retain the same price (p) as heavier coins. The mint price increased, and a mint attracted business. Debasement profits, however, require a victim. Mints could target their customers by secretly handing out lighter coin than the customers were expecting. While secret debasement provided the mint with immediate profits, it would not attract additional customers. Indeed, once discovered, secret debasement would discourage future customers. In contrast, openly sharing debasement s profits with customers could attract additional business by raising the mint price, but mint customers could only profit from debasement if they could pass the light coins onto others. The eventual victim might be a seller who was unaware of the lightness, or the victim might be a creditor who can do nothing about it. We have not measure of how much mints shared their debasement profits with customers, but we do know that just before the founding of the Bank of Amsterdam, mints that debased coins attracted more customers. Figure 1 plots rijksdaalder (blue) and leeuwendaalder (pink) production in 1607 for each provincial mint. The production in marks of silver is plotted against the lightness of the coins measured as the percent deviation from full weight and full fineness. Trend lines have been added to highlight the positive relationship. This data is available only because the States General sent 7

8 examiners to assay the quality of coins produced by the provincial mints (Polak 1998a: ). Figure 1. Production and Debasement in % Percent Deviation 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0 2,000 4,000 6,000 8,000 Rijksdaalder, 1607 Leeuwendaalder, 1607 Rijksdaalder Trend Leeuwendaalder Trend Production in Pure Marks Source: authors calculations derived from Polak 1998b: , Also, at the turn of the seventeenth century, cashiers (proto-bankers) were accused of intentionally creating debased coins and passing them onto creditors. In 1604, the Amsterdam municipal council claimed that cashiers, allow for fraudulent activity, especially the removal of heavy gold and silver coins, and their transport to prohibited and other Mints, in order to be converted into new (light) coins, which are then circulated within the community (Van Dillen 1964: 344). 8

9 Debased rijksdaalders and leeuwendaalders particularly affected merchants, for commercial debts, such as bills of exchange, were large enough to require these big coins for settlement. The city of Amsterdam suffered as the costs of the victims of these debasements were its merchants and their foreign counterparties. A less obvious effect of debasement was to increase the overall rate of inflation within the Republic (Quinn and Roberds 2007). Inflation led, in turn, to a downward pressure on the real money stock and a need to bring more metal into the mints to counteract this tendency. And, it was undoubtedly the less virtuous mints who garnered most of the new business. The result was a self-perpetuating race to the bottom in terms of the provision of a monetary standard. II. The Bank of Amsterdam In an effort to protect commercial creditors from debasement, Amsterdam replaced cashiers with the Bank of Amsterdam in January Unlike cashiers, the Bank of Amsterdam would guarantee the quality and value of the coins depositors would receive upon withdrawal from the exchange bank. To promote participation, Amsterdam banned cashiers and offered depositors free giro transfer within the bank. In essence, Amsterdam sought to replace private cashiers with a municipal monopoly. To further encourage participation, the city required debtors to settle all bills of exchange worth 600 guilders or more through the Bank of Amsterdam. The bank explicitly connected good coins with debt settlement. 9

10 The initial purpose of the Bank of Amsterdam contrasts with the Bank of England founded in The purpose of the Bank of Amsterdam was to limit the predatory taxation powers of mints whose coin output was circulating in Amsterdam. The purpose of the Bank of England was to finance state borrowing in exchange for a profitable monopoly on corporate banking. The Bank of Amsterdam did not lend while the Bank of England lent aggressively. Instead of fractional reserve banking, the Bank of Amsterdam profited from money changing, from fees on withdrawals, and from fees for illegal overdrafts. With full reserves, merchants all over Europe could receive a bill of exchange drawn payable on the Bank of Amsterdam and have confidence that the bill would be paid in proper rijksdaalders at official values. Also, it was no coincidence that the business community in Amsterdam pushed to solve large-value payment problems during the same years that the stock market for VOC shares was creating a financial revolution in Amsterdam (Gelderblom and Jonkers 2004). A flourishing stock market creates many large-value transactions, so a reliable payments system is a critical supporting institution. III. Increasing Coin Prices The Bank of Amsterdam pledged to give out coins at official quality and price, but the bank did not control state policy. Mint ordinances assigned a value to each element of a mint price: the price of the coin in guilders (p), the metal content of the coin (m), and cost to customers of having the coins manufactured (c). Debasement, however, frustrated the 10

11 relevance of assigned prices. As coins went into circulation with less metal than officially assigned, the market price of heavy coins rose above assigned values to reflect their higher silver content. The problem was greater than suggested by Figure 1 because the provincial mints reported in this chapter produced better quality coins than the municipal, private and foreign. In this environment of debasement and even counterfeits, the market price of old, heavy coins like the rijksdaalder and the leeuwendaalder rose above their assigned prices. Officials viewed the price mismatch as price gouging (steygeringhe) but were unable to stop it. To correct the mismatch between ordinance prices and market prices, the States General increased the price of leeuwendaalders in 1615 and rijksdaalders in Each increase in official price raised the coin s official mint price, and mint production surged. Again, production favored mints offering the lightest coins. Figure 2 plots the surge of leeuwendaalder production 1615 and the later surge in rijksdaalder production. 11

12 Figure 2. Production of Large Silver Coins, 1606 to , , ,000 50, Marks Pure Silver Rijksdaalder Leeuwendaalder Source: authors calculations derived from Polak 1998b: Unfortunately, the ordinances caused the Bank of Amsterdam to fail to protect depositors. For example, if a customer gave the Bank of Amsterdam 250 rijksdaalders at the bank s founding in 1609, the customer gained a deposit of 600 guilders. By increasing the official price of rijksdaalder from 2.4 to 2.5 guilders in 1619, the 600 guilder deposit now delivered only 240 rijksdaalders at withdrawal. Depositors lost 4 percent of their silver. After this episode, the Republic stopped changing the price of the large silver Dutch coins. 12

13 The Dutch Republic also contended with foreign coins. In particular, the Spanish Netherlands created the patagon to mimic the rijksdaalder but with about 4 percent less silver. After 1612, the patagon came into common circulation in the Dutch Republic, yet it had no official price. To discourage use of the patagon, a 1622 mint ordinance assigned the Flemish coin an official price of 2.35 guilders, as compared to the rijksdaalder s price of 2.5 guilders. At the official prices, borrowers would favor rijksdaalders when repaying a debt because the Dutch coin had 4 percent less silver but a 6 percent greater price. Mint production in Antwerp did drop substantially after 1622 (Cauwenberghe and Metz 1984: 142). The 1622 ordinance, however, had unintended consequences. The patagon s official price meant that people no longer had to convert patagons into rijksdaalders to gain the ability to settle debts at official prices. Also, the seigniorage charged for creating rijksdaalders eliminated any profit from melting patagons to create the Dutch coin, so extraordinary mint production in the Dutch Republic also ended. Returning to Figure 2, the surge in rijksdaalder production recedes after Also, the official prices did not drive the patagon out of the Republic. The rijksdaalder had greater value when settling debt, such as at the Bank of Amsterdam. Also, the rijksdaalder was in demand as a money for international payments. In domestic payments, however, the rijksdaalder had no advantage over the patagon. The market prices of the two coins (2.6 guilders for the rijksdaalder and 2.5 guilders for the patagon) 13

14 only differed by the 4 percent gap in metal contents. Because the rijksdaalder had attractive alternative uses, the patagon slowly increased its role as a circulating coin. This crowding out effect is consistent with mathematical calculations (Quinn and Roberds 2007) that show that, in response to an inflationary debasement, the real stock of the debased coin will rise, while the real stock of non-debased coins will diminish (even as the market value of the latter increases). What did all this mean for the Bank of Amsterdam? From the creation of the Bank of Amsterdam to the mid-1630, the influx of foreign coinage and the debasement of all coinage created demand for deposits at the Bank of Amsterdam. Figure 3 contrasts the guilder value of deposits at the Bank of Amsterdam in blue with the debasement of rijksdaalders and leeuwendaalders in grey. Deposits grew substantially during two periods of pronounced debasement of the big silver coins. Deposits jumped by 1 million guilders from 1615 to 1618 as debasement of leeuwendaalders flourished. In the mid- 1630s, leeuwendaalder debasement again surged and deposits increased by 1.5 million guilders. Of course, the picture does not include other factors, such as the patagon or Amsterdam s growing economy, but customers also viewed the early bank as a refuge from debasement. Figure 3. Bank of Amsterdam Deposits and Levels of Debasement 14

15 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000, Guilders 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0.00% Bank Balances (left scale) Big Silver Lightness (right scale) Sources: bank balances from van Dillen 1934: 962-7; percent deviation from full is the authors calculations derived from Polak 1998b: , Depositors could also view the Bank of Amsterdam as protection from inflation, for debasement translates into higher prices. Also, inflation reflects changes in foreign coins like the patagons minted in Antwerp. Figure 4 compares the price level with the same balances at the Bank of Amsterdam presented in Figure. Over the first three decades of the Bank of Amsterdam, domestic inflation followed a similar trend to deposit growth. Also, bursts of inflation around 1616, 1622, and 1629 seem to be followed by increased deposits at the Bank of Amsterdam. Again, to a degree, the Bank of Amsterdam offered shelter from unstable prices. Figure 4. Bank of Amsterdam Deposits and the Price Level 15

16 6,000, Guilders 5,000,000 4,000,000 3,000,000 2,000,000 1,000, Index, 1600=1 0.8 Bank Balances (left scale) Price Level (right scale) Sources: bank balances from van Dillen 1934: 962-7; Dutch Republic price index from van Zanden IV. Two Units of Account The story of the Bank of Amsterdam and Dutch coinage took a radical turn in In 1622, the ordinance price of patagons had been set low to discourage the Flemish coin, yet patagons still came to dominate the coinage in circulation. In 1638, the States General decided to correct the mismatch between official price and market price, so the Republic raised the official value of the patagon to match the rijksdaalder at 2.5 guilders, despite the patagon containing 4 percent less silver. In 1638, the mint price of a patagon now clearly exceeded the rijksdaalder, and rijksdaalder production ceased. Leeuwendaalder production continued for it had a more attractive mint price, but the 16

17 coins were used for export purposes (handelspenningen). Patagons completed their conquest of circulating large silver coin by becoming the preferred large silver coin for payments after 1622 and for debt settlement after The new patagon price created a big problem for the Bank of Amsterdam. The difference in silver between rijksdaalders and patagons contents meant that people could earn arbitrage profits by converting one into the other, if the heavier coin could be found at its official price. Unfortunately, ordinances obliged the Bank of Amsterdam to accept patagons at the official price and supply rijksdaalders at the same official price, so the bank suffered a rijksdaalder run (van Dillen 1934: 361). Curiously, deposits surged from 5.8 million guilders at the start of 1639 to 8.1 guilders a year later as customers took advantage of the situation by depositing patagons. By 1641, the Bank of Amsterdam had run out of rijksdaalders, so the Amsterdam city council allowed the Bank to break its obligations to depositors. The Bank of Amsterdam began to issue out patagons instead of rijksdaalders. The move not only ended the arbitrage, but it also created a 4 percent loss for all depositors. Again, the bank failed to protect depositors because the States General had changed official coin prices. This time, however, the story was not over, for the States General soon tried to reverse the patagon s official status. In response, Amsterdam acceded to various bank requests to 17

18 reinstate patagons. After some chaotic regulatory give-and-take, the situation settled in 1645 with the city allowing the bank to value patagons at 2.4 guilders, 4 percent less than the official price of 2.5 guilders. Giving the patagon a second price was an unconventional solution, but it was a solution, for the different price let the bank compensate depositors for the shift to patagons. Using the lower price of 2.4 guilders meant that a customer having a 600 guilder deposit would receive 250 patagons, or 10 more coins than if the Bank used the official price of 2.5 guilders. The 1645 arrangement unintentionally created two official units of account. Again, 600 guilders on deposit at the bank represented the same amount of coins as 624 guilders outside the bank. The two units of account, bank guilder and current guilder, emerged because the patagon had two prices. Distinct units of account allowed for an exchange rate: the price of one unit of account in terms of another unit of account. The exchange rate that emerged between bank guilder and current guilder was called the agio, and the people measured the agio as the banco guilder s premium. If 2.5 current guilders bought 2.4 banco guilders, then the agio was 1-(2.5/2.4) or percent. To be clear, before 1645 the Bank of Amsterdam often charged a premium, also called an agio, when charging customers for changing one coin into another coin. After 1645, however, the agio was the premium charged for changing guilders in one unit of account into another unit of account. 18

19 Despite having a distinct unit of account after 1645, a Bank of Amsterdam customer could still withdraw patagons for a fee. Selling the deposit in exchange for patagons outside of the bank avoided the fee and the hassle of the withdrawal process. A network of cashiers, brokers and dealers soon developed. These intermediaries met in front of the bank, and profited by lowering the costs of exchange and by making sure customers could confidently find someone to transact with at the market agio. Indeed, rather than exchange coin at all, most transactions transferred deposits at a cashier outside the bank, denominated in current guilders, in exchange for a counter-transfer in the Bank of Amsterdam denominated in banco guilders. The agio market marks the beginning of the bank s role of stabilizing the value of circulating coins by adjustment of the exchange rate between coins and accounts. This system may seem quaint to modern eyes, but it resembles arrangements by which large-value financial obligations are settled 400 years later. Today, holders of even relatively secure assets such as government securities do not commonly make direct payments in these assets, but first they convert these into bank balances before transferring final value to a creditor. Banks in turn, settle obligations among themselves through transfers of balances on account with a central bank. By the mid-seventeenth century, Amsterdam financial markets seem to have acquired this tiered architecture of settlement that remains prevalent today. 19

20 The development of a deep market for agio-priced exchange reduced the flow of coins and increased the flow of paper money of account. The success of the market made people comfortable with the alien concept of dual units of account. People had so accepted the agio by the late 1650s that the dual unit of account system was retained when political will coalesced to displace the invading patagon. In 1659, the Dutch Republic replaced the patagon with the silver dukaat priced at 2.4 banco guilders and 2.5 current guilders. The larger silver rijder was also introduced at 3 banco guilders per coin or 3.15 current guilders per coin. In 1659, the agio moved from being an ad hoc response to the patagon to being a permanent feature of the Republic s own coinage system. V. New Coinage Besides giving the silver dukaat the same two official prices as the patagon, the ordinances also gave the new coin the same weight and fineness. Also, the Republic increased the amount of seigniorage collected per coin, so both the provinces and the States General profited. Increasing costs while keeping prices and metal constant reduced the new dukaat s mint price and so discourage adoption. To instead raise the mint price, the Republic lowered the share assigned to brassage (Polak 1998b: 172-3). The mint masters seemingly paid the price. The situation, however, was more nuanced. While mint masters were assigned little profit per coin, the 1659 ordinance relaxed the tolerances that defined official 20

21 debasement. The old rijksdaalder became debased when it lost over 0.5 percent of its silver. The new silver dukaat could be light up to 1 percent without sanctions on the mint master. In this way, the new coins were debased by mint ordinance. Figure 5 plots the amount of big silver coins produced and the amount of debasement for the 6 provincial mints in Unlike earlier in the century, all the mints participated in lightening the new coins by more than the old standard of 0.5 percent but less than the new threshold of 1 percent. Mint behavior grew more uniform and the coins more reliable since 1619 but debasement had not completely disappeared. Figure 5. Production and Debasement in % 1.00% Percent Below Full 0.75% 0.50% 0.25% Silver Dukaat, 1660 Silver Rijder, % Production in Pure Marks (log) Source: authors calculations derived from Polak 1998b: ,

22 The new coins became the new basis for the Bank of Amsterdam, so depositors suffered yet another reduction in the amount of silver a deposit represented. The coins fell into the middle of an era wherein deposit levels at the Bank of Amsterdam stopped their longterm growth. To show this, Figure 6 plots the level of deposits from the start of the patagon crisis in 1638 to For four decades, deposits fluctuated between 9 million and 5 million banco guilders. Figure 6. Deposits at the Bank of Amsterdam up to Guilders 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Index, 1600=1 Bank Balances (left scale) Price Level (right scale) Source: van Dillen 1934: To help explain then end of deposit growth, we stress changes in the monetary environment, for inflation also stopped its long-term rise. To see this, Figure 6 also 22

23 reports the domestic price index. The prices were highly volatile after 1645, but the average price level remained stable. For a coin based monetary system, long-term price stability indicates successful maintenance of coin quality. The introduction of the silver dukaat and rijder in 1659 helped, but so did the Bank of Amsterdam s agio. So long as the Bank of Amsterdam delivered reliable coins, the agio could respond to a lightening of coins outside the bank by increasing the premium on bank money. The success of the agio in protecting bank money worked to discourage incremental debasement and longterm inflation. Ironically, the transition to stable coinage and low, if volatile, inflation reduced demand for the protection offered by Bank of Amsterdam deposits. Despite long-term stagnation, the level of Bank of Amsterdam balances did respond to crises. Deposits jumped during the patagon crisis of 1638 to 1641 and during the birth of the agio in Deposits also temporarily increased during the Anglo-Dutch war in the 1660s. In contrast, the French invasion of 1672 saw deposits fall from 7.2 million bank guilders in January to 4.9 million a year later. Why deposits had soared in 1671 is unclear, but, as customers pulled money out of the Bank of Amsterdam in 1672, production of silver coins surged. Holland s provincial mint, temporarily relocated to Amsterdam, turned more than 300,000 pure marks of silver into ducats and riders (worth about 7 million banco guilders) in 1672 and Although the agio market worked well most days, people wanted coins when they feared for the survival of the state. 23

24 VI. Final Separation Surviving het rampjaar (the year of disaster) bolstered the reputation of the Bank of Amsterdam, and, at the same time, the mints grew discontent with the silver coinage. Rising silver prices made the dukaat s mint price relatively unattractive so, except for the crisis of 1672, production stagnated. Mint mischief began anew when Zeeland broke the 1659 monetary regime by introducing a daalder coin worth 1.5 guilder in The daalder was lighter and less pure than the dukaat, so its mint price was well above dukaat s. By the mid-1680s, the provinces of Utrecht, West-Friesland and Overijssel had started producing similar coins (Polak 1998a: ). Yet again, the coinage standard of the Bank of Amsterdam (the silver dukaat) was being driven from circulation. Now, instead of patagons invading from the southern Netherlands, daalders were invading from the other provinces of the Republic. The province of Holland responded by championing a new coin for domestic payments only. In 1681, Holland introduced the guilder coin. Guilder coins lacked the dual prices assigned to silver dukaats and rijders, for guilder coins were to be current money distinct from bank money. Adoption of the guilder coin was slow because regional daalder coins had higher mint. In 1686 Holland turned aggressive. Holland banned moneychangers, which would include the Bank of Amsterdam, from accepting the regional daalders. The Estates General then adopted the policy for the Republic, and production of the regional daalders abruptly ended in the early 1690s. Finally, in 1694, the Estates General declared guilder coins standard current money and prohibited their export (Polak 1998a: 201). 24

25 Another type of separation was the introduction of the receipt system in Instead of a deposited coin joining the bank s pool of specie, depositors could retain a claim on the particular coins deposited. The claims were called receipts, but the claims can be more accurately thought of as options to withdraw that particular type of coin from the bank. The system gave international merchants a way to park foreign coins in the bank, and to hedge against fluctuations in the value of precious metal. Receipts took advantage of the superior liquidity of Bank of Amsterdam deposits, for coin was more liquid sitting inside the bank than circulating outside the bank. Receipts also segregated customers interested in eventually withdrawing metal from those who lacked interest. Segregation was important, for the third change of the 1680s ended a customer s right to withdraw coins on demand without a receipt. We have no precise date for this change, but the policy complemented the introduction of receipts and the guilders. Together, the guilder coin and limited withdrawal completed the separation of the bank guilder silver coins. A bank guilder was worth the market agio, and the agio represented the exchange rate between guilder coins on the current side and ledger balances on the bank side. The ledger balances became a fiat paper money in the sense that the Bank of Amsterdam no longer had an obligation to convert the paper into coin. The Bank of Amsterdam had now finished its evolution into a defining aspect of a modern central bank, for the bank now supplied a fiat unit of account used to settle largevalue payments (Quinn and Roberds 2007). 25

26 VII. The International Guilder After fully decoupling accounts from coins in the 1680s, deposits at the Bank of Amsterdam again started to grow. Figure 7 gives the balances from 1681 to The periods of decline in the 1690s and 1700s correspond to wars. Otherwise, balances were growing until reaching a dramatic peak during the early 1720s. The peak reflects money that fled from the Mississippi Bubble in Paris and the South Sea Bubble in London. Figure 7. Balances at the Bank of Amsterdam guilders banco 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000, Source: van Dillen 1934:

27 The receipt system of 1683 contributed to this growth by promoting the expansion of Amsterdam as a bullion entrepot (Gillard 2004). During the turbulent years around the turn of the Eighteenth Century, the Bank of Amsterdam was an international refuge. The Bank retained this role through the Eighteenth Century. As Adam Smith observed in the Wealth of Nations, The bank of Amsterdam has for these many years past been the great warehouse of Europe for bullion, for which the receipts are very seldom allowed to expire, or, as they express it, to fall to the bank. The far greater part of the bank money, or of the credits upon the books of the bank, is supposed to have been created, for these many years past, by such deposits which the dealers in bullion are continually both making and withdrawing. After the 1720s, the bank s balances fluctuated between 15 and 20 million guilders for most of the rest of the century. The great exception was Deposits surged as merchants fled debasements in German states and Sweden (Schnabel and Shin 2004: 940). Otherwise, the Bank of Amsterdam settled into the great international payments institution highlighted by Lucien Gillard (2004). Chapter 8 develops these themes, but Figure 8 does offer a long-term view. Both deposits at the Bank of Amsterdam and the Dutch price level are plotted over two centuries. A polynomial trend of the price level has been added to highlight how stable, on average, inflation was for over a century. 27

28 Figure 8. The Bank of Amsterdam and Inflation over Two Centuries Guilders 32,000,000 28,000,000 24,000,000 20,000,000 16,000,000 12,000,000 8,000,000 4,000, Index, 1600=1 Bank Balances (left scale) Price Level (right scale) Polynomial Trend for Price Level The international role of the Bank of Amsterdam also related to changes in domestic coin production. First, gold returned to prominence at the Dutch mints. Figure 9 reports the marks of pure gold minted at the six provincial mints for most of the two centuries. The scale has been logged so gold can be more easily compared to silver. After the agio and the new coinage of 1659, gold production dwindled. With the 1680s, however, gold rebounded and gold coin production reached huge volumes at mid-century. Much more than silver, gold reflects international trends, for gold played little role as a means of 28

29 payment in the domestic money supply. Instead, the economy used gold for large-value savings and international payments. Figure 9. Gold and Silver Coin Production over Two Centuries 1,000,000 Marks Pure Metal, Log Scale 100,000 10,000 1, Silver Gold Source: derived from Polak 1998b: For silver, the eighteenth century trend was the constant production of big silver coins for export. As the guilder became the standard domestic coin, the dukaat and rijder became trade coins intended for export. The two exceptions were the provincial daalders produced until 1693 and the Zeeland dukaat. Unlike the other provinces, Zeeland raised 29

30 the official price of its dukaat, so the Zeeland dukaat remained in current circulation. As a result, large silver coins used for domestic payments were the guilder and the Zeeland dukaat. The regional daalders also circulated in the 1680s and 1690s. To see their patterns of production, Figure 10 plots the production by year of large silver coins by the six provincial mints by year from 1681 to Production is broken into four types: guilder coins, daalders, Zeeland dukaats, and trade coins (rijksdaalders, leuweendaalders, the other dukaats and rijders). A few trends emerge. Again, the production of trade silver is fairly continuous, but guilder production is not. The minting of guilder coins becomes episodic after the 1720s. Except for bursts of production ( , , and ), customers rarely demanded guilders, and, when customers did demand guilder coins, the spikes in production related to international events. The 1763 demand for guilders accompanied a surge in deposits at the Bank of Amsterdam. The demand for guilders in the 1790s followed from the wars and instability of the French Revolution. Merchants viewed Bank of Amsterdam balances as a shelter until 1794 when French expansion caused deposits to precipitously decline. Despite the official preference for guilder coins, the other silver coins dominated production for domestic use in some eras. Daalder production was substantial until the Estates General repressed their circulation. After daalder production ended, Zeeland switched to producing dukaats, but those also faded until In that year, Zeeland raised the price of its dukaats enough to make the coin attractive again. For example, at 30

31 the 1762 price of 2.65 guilders per dukaat, the Zeeland dukaat s mint price was 2.7 percent higher than a guilder coin s mint price ( guilders per mark versus 25.1 guilders per mark). The Zeeland dukaat became routinely produced for three decades, and, referring back to Figure 8, domestic inflation revived. Figure 10. Production of Big Silver Coins marks pure silver Trade Silver Daalders Zeeland Dukaat Guilder Source: derived from Polak 1998b:

32 VIII. Conclusion The concluding irony is that the quality of large Dutch coins stabilized as the Bank of Amsterdam emerged as the dominant means of settlement. Distancing coins from the bank s system of settlement reduced incentives for mints to debase coins or offer new, lighter coins. As noted above, macroeconomic factors were at work in this stabilization. Reducing mints incentives to debase also reduced upward pressures on prices and downward pressure on the real money stock, thereby lessening the need to offset this pressure through increases in nominal money. Also, immobilizing large coins within the Bank increased their velocity, again leading to a reduced nominal money demand. Coin prices also stabilized. The guilder coins tied the current unit of account to the current coin, for a guilder coin defined a current guilder. Instead of coin prices changing, the purchasing power of the current guilder could change, but the Bank of Amsterdam could help stabilize the value of the current guilder by managing the agio. In other words, the Bank of Amsterdam could not only offer central bank money as a medium for the settlement of debts, it could also act like a central bank by manipulating the value of its money relative to other liquid assets like bank accounts and circulating coins. While some of the details have changed over the past 400 years, these two essential functions are carried out by virtually all central banks today. References: 32

33 Cauwenberghe, Eddy van and Rainer Metz, 1984, Geld und Währung in den Südlichen Niederlanden während der frühen Neuzeit. In Muzpragung, Geldumlauf und Wechselkurse, ed. Eddy van Cauwenberghe and Franz Irsigler, Trier, Trierer Historiche Forschungen. Dehing, Pit, and Marjoleine 't Hart, 1997, Linking the fortunes, currency and banking, In A Financial History of the Netherlands, ed. Marjoleine 't Hart, Joost Jonker and Jan Luiten van Zanden, Cambridge: Cambridge University Press. Gelderblom, Oscar and Joost Jonker, 2004, Completing a Financial Revolution: The Finance of the Dutch East India Trade and the Rise of the Amsterdam Capital Market, , Journal of Economic History 64: Gillard, Lucien La banque d Amsterdam et le florin européen au temps de la République neerlandaise, Paris: l'école des hautes études en sciences sociales. Polak, M.S. 1998a. Historiografie en Economie van de Muntchaos, De Muntproductie van de Republiek , Deel I. Amsterdam: Nederlandsch Economisch- Historisch Archief. Polak, M.S. 1998b. Historiografie en Economie van de Muntchaos, De Muntproductie van de Republiek , Deel II. Amsterdam: Nederlandsch Economisch- Historisch Archief. 33

34 Quinn, Stephen and William Roberds The Bank of Amsterdam and the Leap to Central Bank Money. American Economic Review Papers and Proceedings 97: Schnabel, Isabel and Hyun Song Shin Liquidity and Contagion: The Crisis of Journal of the European Economic Association 2(6): Van Dillen, Johannes Gerard Oprichting en Functie der Amsterdamse Wisselbank in de zeventiende Eeuw In Mensen en Achtergronden, Studies uitgegeven ter gelegenheid van de tachtigste jaardag van de schrijver, ed. Johannes Gerard van Dillen. Groningen: J.B. Wolters. Van Zanden, Jan Luiten The prices of the most important consumer goods, and indices of wages and the cost of living in the western part of the Netherlands, Accessed online at #netherlands. 34

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