When central banks were created in the 17th century, they didn’t everywhere change the nature of money. Indeed, the Bank of England was founded not with any particular monetary objective in mind, but rather with a fiscal one. In Holland by contrast, the Bank of Amsterdam was established with a monetary raison d’etre. Almost immediately after it commenced operations, the bank created not just a new form of Dutch money but one with a higher value than the age-old circulating money with which people were accustomed. Indeed, a florin at the bank carried a considerable premium to a florin in one’s pocket, mostly thanks to the ability to transact with the former far more easily than with the latter.
The Exchange Bank of Amsterdam, or Amsterdamsche Wisselbank, was founded in 1609 by the Amsterdam city council. This occurred at a time when the Netherlands were ascendant in terms of their relative commercial power, at the beginning of the ‘Dutch Golden Age’. The Dutch East India Company was founded just seven years earlier and the Dutch Republic altogether was not even thirty years old. But it was already a rich country, and it was getting richer. In a sense, the bank was a product of the city’s success, or rather an attempt to solve a problem created by that success, namely that foreign trade was introducing new monies from abroad into the Netherlands, complicating commerce.
Small states like Holland also had to contend with especially large amounts of currency from larger neighbors comprising the local money supply. This was the product of local rather than overseas trade and the movement of people, especially merchants and the wealthy to and from Amsterdam and other Dutch cities. Accentuating the problem in the Netherlands itself, there were fourteen state mints and forty private mints producing different coins.
The problem the bank was intended to solve was a common one afflicting small mercantile countries like Holland, a proliferation of many different monies. So, the Bank of Amsterdam was established as a state deposit bank to regulate the money supply by issuing a new standardized money, in the form of bank balances, as a substitute for coins from different regions. These were not banknotes issued by the bank, but bank balances that were denominated in a common unit of account.
This solved a common frustration in Dutch commerce. Because foreign and local coins varied in size and composition, those of lesser quality or those less commonly used in trade were valued at a discount. These discounts to the metal value of coins could reach close to 10%, a risk premium for the merchant accepting less common and readily usable forms of money. This disadvantaged those who held came to hold less common or debased coins and who therefore could not settle their obligations without accepting some discount. It also disadvantaged vendors who had to be wary of receiving less valuable coins in lieu of those expected.
Indeed, the incentive to pass on debased coins in trade and hoard the more valuable, a phenomenon known as Gresham’s law, caused a gradual debasement of the coinage in the Netherlands. It was this trend that generated calls for a new universal unit of account of a single value. Thus, the guilder became the unit used by the Wisselbank. It was purely a unit used in measuring bank balances; an actual guilder coin wouldn’t be minted until decades later, in the 1680s. If bank money is taken to mean the money deposited with the bank, as opposed to physical currency, then the guilder was essentially a unit of account specific to bank money.
In essence, depositors could leave coin and bullion with the Wisselbank and receive a bank balance they could use in trade. In the meantime, their money was safe. Deposits with the bank were guaranteed by the city government and the Wisselbank nonetheless kept all the deposits it received in reserve. As such, it was unlike private banks and even other proto-central-banks which lent money either privately or to the state. Because it did not lend, the Bank of Amsterdam also paid no interest on its deposits. Instead, depositors paid a small fee to leave money with the bank, one-half stiver for every one hundred guiders, or .025%.
The bank eased commerce in Amsterdam. Transactions could be cleared at the bank without actually exchanging physical coin or bullion. In fact, to put a stop to the debasement of the circulating coinage, a law was enacted requiring that all private bills of over six hundred florins payable in Amsterdam be settled through the Wisselbank. This essentially required that all merchants keep an account with the Bank of Amsterdam and made it a vital fixture in Dutch commercial life. Those who deposited coins would only receive a credit to their account equal to the coins’ metal value, not necessarily the stated official value. This meant it was impossible to pass along debased coins in trade as was once common.
“It is secure from fire, robbery, and other accidents; the city of Amsterdam is bound for it; it can be paid away by a simple transfer, without the trouble of counting, or the risk of transporting it from one place to another.” – Adam Smith on Dutch bank money in The Wealth of Nations, 1776
The safety and convenience of bank money meant that deposits at the bank actually came to be valued at a premium compared to ordinary coins. This accelerated the growth of the bank; deposits rose from just over one million florins in the early 1610s to eight million florins by the 1640s. During that rise, it became clear that Amsterdam had stumbled upon something ingenious and so other Dutch cities created their own public deposit banks of similar form. The Middelburg Wisselbank was formed in 1616 and other similar banks were established in Delft in 1621 and in Rotterdam in 1635.
The premium which bank money usually held meant the Bank of Amsterdam rarely received demands for withdrawals into currency. This tendency was further maintained by a fee levied on withdrawals which encouraged depositors to sell rather than redeem their bank balances.
What they would sell was not just their bank balance but also a separate receipt that had its own unique value. In fact, when someone deposited bullion with the bank, they were usually credited with a smaller amount of bank money than the market price of their bullion would warrant. However, the depositor also received the right to repurchase, or withdrawal, the bullion at this lower price within six months. The right to this option was represented by a receipt given to the depositor which could be traded with others.
Regardless, after a financial panic threatened the bank in the late 1600s, the right to redeem bank deposits into coin by withdrawing from one’s account was abolished. The bank balances had essentially become a non-physical fiat money.
Though bank money still saw tremendous demand, merchants occasionally needed coins or bullion. So, a market developed in front of the Amsterdam town hall where the bank was based. There, each morning, merchants would trade physical currency for bank deposits and the aforementioned receipts. Together, the latter carried a premium, or agio as it was more commonly called, to the physical coins of the same nominal value. This agio ranged between 0% to 10%, so a merchant wishing to transfer his bank money out of the Wisselbank would not feel deprived by being unable to withdrawal since he could get more by selling his deposits in this market anyway.
The bank kept the agio in the desired range, preferably between 3% and 5%, preventing a total divorce between physical coins and bank money. This was done by acquiring coins and bullion when the agio rose too high and selling metal when it fell too low. These ‘open-market’ purchases of coin and bullion would be funded by accepting new deposits and were activities not uncommon among central banks. Regardless, by buying coin with bank deposits when bank money was worth more and selling when it fell, the Bank of Amsterdam profited from market interventions.
“What is called bank money, is always of more value than the same nominal sum of common currency. A thousand guilders in the bank of Amsterdam, for example, are of more value than a thousand guilders of Amsterdam currency. The difference between them is called the agio of the bank, which at Amsterdam is generally about five per cent.” – Adam Smith on Dutch bank money in The Wealth of Nations, 1776
In its two-century history, the Bank of Amsterdam faced many crises. One of the more notable coincided with a Dutch war against France in 1672. During the fighting, a French army came close to Amsterdam in the midst of what became known as the Rampjaar, or ‘Disaster Year’. Their advance was only stopped with an intentional flooding of the Dutch Water Line inundated the countryside and prevented further movement. Nonetheless, there were fears in Amsterdam that the bank might be seized. At that time, deposits could still be readily withdrawn and bank balances fell 34% in just two weeks. Not unsurprisingly, bank money lost value in relation to precious metal, trading at a 5% discount to physical money. The bank survived the crisis though.
The Wisselbank also survived a financial panic in 1762, though the value of bank money again fell below that of metal coins. Rather, the end for the bank began not long after when it started to lend to large Dutch institutions like the East India Company. This meant the bank’s reserves became less than its liabilities, with the balance going to fund loans instead. After this became public knowledge, and the health of some of its borrowers waned, the bank struggled and was taken over by the city government in the 1790s. After another thirty years, it was closed in 1820.
The Bank of Amsterdam was among the most transformative monetary institutions. It changed the nature of money in one of the wealthiest cities in the world, one where the money of old was proving inadequate, partially because of the city’s own success. Coins from various different lands circulating together had made trade difficult but that was changed. Prior to the bank’s formation, money was nothing more than the tangible coins in a Dutch merchant’s moneybox, now it had become something more abstract, a balance in an account, locked away somewhere else but still somehow more readily usable.
More from the Tontine Coffee-House
Learn more about how the Bank of Amsterdam reacted to a commercial paper crisis in 1763. Complement it with posts on other Dutch financial firsts, including a Dutch tulip bubble, the first initial public offering, and the first mutual fund.
1. Kindleberger, Charles P. A Financial History of Western Europe. George Allen & Unwin, 1984.
2. Mosselaar, Jan Sytze. A Concise Financial History of Europe. Robeco, 2018.
3. Quinn, Stephen, and William Roberds. “An Economic Explanation of the Early Bank of Amsterdam, Debasement, Bills of Exchange and the Emergence of the First Central Bank.” The Origins and Development of Financial Markets and Institutions, pp. 32–70.
4. Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. W. Strahan and T. Cadell, 1776.
5. Sumner, W.G., et al. A History of Banking in All the Leading Nations: Comprising the United States, Great Britain, Germany, Austro-Hungary, France, Italy, Belgium, Spain, Switzerland, Portugal, Roumania, Russia, Holland, the Scandinavian Nations, Canada, China, Japan. Vol. 4, Journal of Commerce and Commercial Bulletin, 1896.