Friday, November 20, 2020

"Was the Bank of Amsterdam the world’s first central bank?"

A very interesting post that elicited some interesting comments from the bankers among the commentariat. 

From Claire Jones writing at FT Alphaville, November 11:

The Bank of Amsterdam is to central banking history what Little Richard is to rock ‘n’ roll. While the public might like to think it was Elvis or the Fab Four that invented it, the purists know they merely popularised it. Google “what was the first central bank in the world” and you’ll get Sweden’s Riksbank, but — as we found out from a Bank for International Settlements paper out on Tuesday — an increasing number of academics think that this honour should go to the Dutch lender. The reason this matters is that economists at the BIS and elsewhere draw lessons from the Bank’s failure to come up with today’s policy conclusions. The main arguments in its latest paper, An early stablecoin? The Bank of Amsterdam and the governance of money, posits that stablecoins are not fit for purpose and that central banks need a strong fiscal authority behind them. Here’s how the BIS puts it:  
First, rigid stablecoins are poorly suited as the foundation for a modern monetary system…. ...In the case of the Bank of Amsterdam, it began life as a rigid stablecoin, but its public policy function at the heart of the financial system pushed it increasingly to taking on the role of lending (an elastic structure). Without the ability to lend, it could not have performed its central role in supporting the financial system and international trade as long as it did. Our second key lesson is that for a central bank to play its role, the fiscal backing of the sovereign and its fiscal sustainability are essential.... The ultimate backing for the value of money is the solvency of the public sector — ie central bank solvency subject to the flow constraints in its interaction with the government. The Bank of Amsterdam’s failure is a vivid lesson in how a central bank that loses public trust can push its luck too far, beyond the threshold for failure. 
We buy the first argument, we’re less sure about the reasoning that goes into the second. Here’s the back-story in brief. The Bank of Amsterdam was set up in 1609, almost 60 years before the Riksbank. It was fully owned by the city of Amsterdam and its coins fully backed by gold and silver. According to the paper the Bank’s strong performance over more than 170 years, including through times of turbulence, helped to solidify trust in it as an institution. This drew attention from the likes of Adam Smith, who mentioned the lender in his seminal work The Wealth of Nations. Here’s an excerpt:
At Amsterdam, however, no point of faith is better established than that for every guilder, circulated as bank money, there is a correspondent guilder in gold or silver to be found in the treasure of the bank. The city is guarantee that it should be so....