The Bank of Amsterdam and the Bank of England laid the foundation for central banks. Although they cannot be considered central banks for all intents and purposes, they introduced some of the elements. Thus, it is important to analyse these two institutions in depth.
Both banks were established with a purpose to serve the public (facilitating trade by extending banking services for the Bank of Amsterdam, and raising funds for the government for the Bank of England), they came to be two entirely different financial institutions.
The Dutch Story
At the beginning of the 17th century, Amsterdam grew in importance as a commercial and financial centre. The volume and variety of financial transactions also rose, causing an increase in the circulation of foreign coins as media of exchange. As a consequence, the Dutch Republic suffered from the “small state” problem of incremental debasement, which led to uncertainty in the value of payments and created transaction costs that hampered commerce.
The Dutch authorities attempted to deal with the debasement problem through laws and regulations, but these were often slow and ineffective. Then, the council of Amsterdam established the Bank of Amsterdam in 1609.
The purpose of the founders was “not to allow for the creation of any central bank money, but merely to remedy the monetary confusion and to supply merchants with good trade-coins”. To this end, the ordinance establishing the entity imposed some legal restrictions, including most importantly a requirement that all bills of exchange of 600 florins and upwards were to be payable at the Bank of Amsterdam. Later on, the Bank of Amsterdam became a monopoly, which obliged every important merchant to have a deposits account.
Originally, the functions of the bank were exclusively “receiving money on deposit, transfer and clearing business, exchanging money, and purchasing both precious metal and ‘billion’ (non-current coins) to have them minted into good commercial coins by the Mints”.
The management provided by a Board of three Commissioners. These were elected by the Town-Council from the circle of the municipal authority, which were assisted by an expert (the assay-master).
The English Step In
Right after the Glorious Revolution, King William III of England had to fight against King Louis XIV of France for the hegemony over Europe. This personal duel gave rise to the famous Nine Years’ War, which was a “costly affair”. Indeed, if we look at the numbers, we notice an increase in English public expenditure from under £2m per annum in 1688 to between £5m and £6m per annum in the years between 1689 and 1702. Even though revenues from taxation grew substantially over the same period, collateral was not sufficient.
At first, the new regime relied on short-term borrowing, but over time realised that this was not the right option. Parliament contemplated several ideas to raise money over the long term. None of them were compelling nor persuasive until in 1694 William Patterson and Michael Godfrey put forward the new fund-raising scheme and the Bank of England was established. The main purpose of the bank? “Carrying on the war against France”.
The financial institution was required to lend £1.2m to the government in return for annual payments of £100,000, a sum which represented an interest of 8% and an additional administration fee of £4,000 per annum. The £1.2m was to be raised by a stock subscription that was open to all, “Natives and Foreigners, Bodies Politick and Corporate”. It saw much enthusiasm and the subscription books, which opened on 21 June 1694, were filled by 2 July.
The management and the government of the corporation were committed to a Governor, Deputy Governor and twenty-four Directors, who would be elected each year by the stockholders (holding £500 or more in stock) from the duly qualified members of the company.
Under its original charter, the Bank was allowed to issue bank notes, redeemable in silver coin, as well as trade in bills and bullion. The notes competed with other paper media of exchange, issued by the Exchequer and by private financial companies.
Also, customers could maintain deposit accounts with the Bank, which were transferable to other parties via notes drawn against deposit receipts, thus providing an early form of the cheque.
Two Players, One Game
The Bank of England, founded almost a century later, had been able to learn from the success of its Amsterdam counterpart. The Dutch practices were moulded into English structures.
The significant difference was that the Bank of Amsterdam was merely a bank of deposit while the Bank of England was something more and something better.
The former guaranteed that its depositors should always receive the same weight of money. Accounts were kept regarding an ideal money so that the paper issued by the banks was much superior to metallic money, which was liable to all kinds of depreciation.
The Bank Of England adopted a different policy: “it purported in its bills the equivalent of what it had received, but it never pretended to take the deposit for any other purpose than that of trading with it. “It never professed to make its issues square exactly with its coin and bullion, though, of course, it made its liabilities square with its assets, plus the capital of its shareholders, and in time, plus its rest or reserve also, i.e., its accumulated and undivided profits”.
Another significant difference between the Bank of England and the Bank of Amsterdam consisted in the fact that English notes were not legal tender, whereas in the case of the Dutch bank, debtors were obliged to offer and creditors to receive the paper money issued by the banks.
A third important distinction is that the Bank of Amsterdam enjoyed a monopoly while the Bank of England was granted no such privilege at the time of its foundation.
Dutch influence was limited, serving more as a model. The Bank of England, though inspired by the Dutch, was original and differed significantly from its rival. Nevertheless, both of them substantially contributed to change the nature of money forever.