An early stablecoin? The Bank of Amsterdam and the governance of money
Jon Frost and Giulio Cornelli tell the story of the Bank of Amsterdam, an 18th century deposit bank, and its lessons for the digital age.
Summary
Focus
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.
Contribution
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.
JEL classification: E42, E58, N13
Keywords: stablecoins, crypto-assets, central banks, money.
