Chapter 3b of Book 4

Digression on Bank Deposits, particularly of Amsterdam Icon

March 23, 2020

12 A big state, such as England, can have its currency consist almost entirely of its own coin. Should this currency be worn, clipt, or degraded below its standard value, the coin’s reform can re-establish its currency.

But a small state, such as Genoa or Hamburgh, can seldom have its currency all consist of its own coin.

  • It must be made up of the coins of the states it transacts with.
  • Such a state will not always be able to reform its currency by reforming its coin.

If foreign bills of exchange are paid in this currency with an uncertain value, the exchange will always be very much against the small state. Because its currency is necessarily valued even below what it is worth.

13 To remedy this inconvenience, small states frequently required certain foreign bills of exchange to be paid by the credit of a bank protected by the state.

Such bills were not paid by in common currency. This bank was always obliged to pay in true money to the state’s standard. The banks of Venice, Genoa, Amsterdam, Hamburgh, and Nuremberg, were all originally established with this view. Some of them later served other purposes. The money of such banks were better than the country’s common currency. It necessarily bore an agio . The agio depended on how degraded the currency was below the state’s standard The Bank of Hamburgh’s agio is about 14%. 14% is the supposed difference between= the good standard money of the state, and the clipt and worn currency from neighbouring states.

14 Before 1609, many clipt and worn foreign coins were brought into Amsterdam from Europe.

This reduced the value of Amsterdam’s circulating currency, around 9% below that of good money fresh from the mint. The good money was quickly melted down or carried away, as it always is in such circumstances. The merchants had plenty of worn currency. They could not always find good currency to pay their bills of exchange. The value of those bills became uncertain despite several regulations to prevent it.

Bank Money

15 To remedy these inconveniences, a bank was established in 1609 under the city’s guarantee.

This bank received= foreign coins, and local worn coins at its real good standard value. It deducted only the cost of coinage and management. It credited its books for the value which remained after this small deduction. This credit was called ‘bank money’. It represented money exactly according to the mint’s standard. It was always of the same real value. It was intrinsically worth more than current money. It was also enacted that all bills drawn on or negotiated at Amsterdam worth 600 guilders or more, should be paid in bank money. This immediately removed all uncertainty in the value of those bills. Because of this regulation, every merchant was obliged to keep an account with the bank to pay his foreign bills of exchange. It created a demand for bank money.

16 Bank money’s advantages were the following=

It had an intrinsic superiority to currency. It had an additional value because of this demand. 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 risk in transportation.

Because of those advantages, it bore an agio in the beginning.

All the money originally deposited in the bank was believed to remain there. Nobody cared to demand payment of a debt which he could sell for a premium in the market. By demanding payment from the bank, the owner of a bank credit would lose this premium. A new shilling from the mint will buy the same goods as a worn shilling. The bank’s good money, being mixed with the local common currency, would be of no more value than the local common currency. While it remained in the bank, its superiority was known and ascertained. When it went to a private person, its superiority could only be ascertained through more trouble than the difference was worth. By being removed from the bank, it lost all the other advantages of bank money= its security its easy and safe transferability its use in paying foreign bills of exchange Above all, it could not be removed from the bank without previously paying for the storage.

17 Those coin deposits were the bank’s original capital, represented by bank money.

Presently, coin deposits make up a very small part of the bank’s capital. To facilitate the trade in bullion, it gave credit in its books on gold and silver bullion deposits for many years. This credit is around 5% below the mint price of such bullion. At the same time, the bank grants a receipt. It entitles the depositor to withdraw the bullion any time within six months in exchange for bank money equal to the credit given in its books when the deposit was made. The depositor paid 0.25% for storing silver and 0.5% for storing gold. In default of such payment and on expiration of this term, the deposit would belong to the bank at the price it was received. The amount paid for storage may be considered as a warehouse rent. This rent was dearer for gold than for silver because= the fineness of gold is more difficult to be ascertained than silver, frauds are more easily practised with gold, the state encourages deposits of silver over gold as the standard metal.

18 Bullion deposits are commonly made when its price is lower than ordinary.

They are withdrawn when it happens to rise. In Holland, the market price of bullion is generally above the mint price, for the same reason that it was above the mint price in England before the recent gold coin reformation. The difference is commonly 6-16 stivers on the mark, or 8 ounces of silver of 11 parts fine and one part alloy. The bank price is 22 guilders the mark, when made in foreign coin of a known fineness, such as Mexico dollars. The bank price is the credit which the bank gives for deposits of such silver. The mint price is about 23 guilders. The market price is from 23 guilders 6, to 23 guilders 16 stivers, or from 2% to 3% above the mint price. The proportions between the bank price, mint price, and market price of gold bullion are nearly the same. A person can generally sell his receipt for the difference between the mint price of bullion and the market price. A receipt for bullion is almost always worth something. Very seldom do people allow their receipts to expire. No one would allow his bullion to fall to the bank by= not withdrawing it before the end of the six months, or neglecting to pay the 0.25% or 0.5% to obtain a new receipt for another six months This sometimes happens with regard to gold than with silver because of the higher warehouse-rent for gold.

  • [20 stivers = 1 guilder]

Below are the prices the bank of Amsterdam presently {September 1775} receives bullion and coin= Silver Guilders per mark Mexico dollars 22 French crowns 22 English silver coin 22 Mexico dollars new coin 21 20 Ducatoons 3 0 Rix dollars 2 0 Bar silver with 11-12ths fine silver 21 10 Fine bars 28 guilders/mark Gold= Guilders per mark Portugal coin 310 Guineas 310 Louis d’ors, new 310 Ditto old 300 New ducats 4 19 8 per ducat

19 Bar or ingot gold is received in proportion to its fineness relative to the foreign gold coins listed above.

The bank gives 340 per mark for fine bars. In general, something more is given for coin than bars. The fineness of bars can only be ascertained through melting and assaying.

20 The person who makes a bullion deposit obtains bank credit and receipt.

He pays his bills of exchange as they become due with his bank credit. He sells or keeps his receipt as the price of bullion is rises or falls. The receipt and the bank credit seldom keep long together. The person who has a receipt, and who wants to take out bullion, always finds many bank credits or bank money to buy at the ordinary price. The person who has bank money and wants to take out bullion, always finds receipts in equal abundance.

21 The bank has two kinds of creditors=

The owners of bank credits The holders of receipts

The receipt holder cannot draw out the bullion without giving bank money equal to the price the bullion had been received.

If he has no bank money, he must buy it from those who have it.

The owner of bank money cannot withdraw bullion without the bank receipts.

If he has none, he must buy them.

The holder of a receipt buys the power of withdrawing bullion when he buys bank money.

The bullion’s mint price is 5% above the bank price. The 5% agio which he pays for it, is paid for a real value. The owner of bank money buys the power of withdrawing bullion when he buys a receipt. The market price of such bullion is commonly from 2-3% above the mint price. The price which he pays for bullion, is paid likewise for a real value. The price of the receipt and the price of the bank money, make between them the full value of the bullion.

22 The bank grants receipts and bank credits on current coin deposits.

But those receipts are frequently of no value. For example, a ducatoon is equal to 3 guilders 3 stivers. The bank gives a credit of 3 guilders only, or 5% below the current value of a ducatoon. It grants a receipt entitling the bearer to withdraw ducatoons deposited at any time within six months after paying 0.25% for keeping. This receipt will frequently bring no price in the market. 3 guilders bank money generally sell in the market for 3 guilders 3 stivers, or the full value of the ducatoons if they were withdrawn from the bank. However, 0.25% must be paid for the keeping. It would be a loss to the receipt holder. If the bank’s agio falls to 3%, such receipts might bring some price in the market. It might sell for 1.75%. But the bank’s agio being now about 5%, such receipts are frequently allowed to expire or fall to the bank. The receipts given for deposits of gold ducats fall to it more frequently. Because a higher warehouse-rent, or 0.5% must be paid for keeping. The 5% which the bank gains, when coin or bullion deposits are allowed to fall to it, may be considered as the warehouse-rent for the perpetual keeping of such deposits.

23 The sum of bank money for which the receipts are expired must be very big.

It must comprehend the whole original capital of the bank which has been allowed to remain there from the time it was first deposited. Nobody cares to renew his receipt or to take out his deposit because neither could be done without loss. But whatever this sum, its proportion to the total bank money is very small. The bank of Amsterdam has been the great bullion warehouse of Europe for many years. Its receipts are very seldom allowed to expire or to fall to the bank. Most of the bank money, or the credits on the books of the bank, is supposed to have been created by such deposits. The dealers in bullion are continually making and withdrawing those deposits.

24 No demand can be made on the bank without a recipe or receipt.

The smaller mass of bank money is mixed with the bigger mass which are still in force, when the receipts are expired. There may be a considerable bank money which have no receipts. But there is no specific sum or portion of it which may not at any time be demanded by one. The bank cannot be debtor to two persons for the same thing. The owner of bank money who has no receipt cannot demand payment of the bank until he buys a receipt. Ordinarily, he can find no difficulty buying a receipt at the market price. The market price generally corresponds with the price he can sell the coin or bullion he can take out of the bank.

25 It might be otherwise during a public calamity, such as the French invasion in 1672.

The owners of bank money were all eager to draw it out of the bank for their own keeping. The demand for receipts might raise their price to an exorbitant height. Their holders might form expectations. Instead of 2% or 3%, they might demand half the bank money which was credited on the deposits of the receipts. The enemy, informed of the bank’s situation, might even buy them up to prevent the treasure from being carried away. In such emergencies, the bank would break its ordinary rule of making payments only to the holders of receipts. The receipt holders who had no bank money, must have received within 2% or 3% of their deposit value. In this case, the bank would= pay with money or bullion the full value credited in its books to the owners of bank money who could get no receipts pay at the same time 2% or 3% to holders of receipts who had no bank money That being the total value which in this state could justly be supposed due to them.

26 Even in ordinary times, it is the interest of the receipt holders to depress the agio to buy bank money, then bullion so much cheaper.

Their interest is to sell their receipts to those who= have bank money want to take out bullion much dearer The receipt price is generally equal to the difference between the market price of= bank money, and the coin or bullion it gets On the contrary, the interest of the owners of bank money is to raise the agio to= sell their bank money dearer, or buy a receipt cheaper To prevent the stock-jobbing tricks of those opposing interests, the bank has recently created a resolution to= sell bank money at all times for currency at 5% agio buy it in again at 4% agio Because of this resolution, the agio can never rise above 5% or sink below 4%. The proportion between the market price of bank and the market price of current money is always kept very near to the proportion between their intrinsic values. Before this resolution, the market price of bank money sometimes= rose so high as 9% agio sank so low as par, according as opposite interests happened to influence the market.

27 The bank of Amsterdam professes to lend out none of what is deposited with it.

For every guilder credited in its books, it keeps in its repositories the value of a guilder in money or bullion. It cannot be doubted that it keeps in its repositories all the money or bullion equal to the receipts. But it is uncertain whether it still keeps money or bullion for long expired receipts. At Amsterdam, the best faith is established in the promise that for every guilder of bank money, there is a guilder in metals in the bank. The city guarantees this. The bank is directed by four reigning burgomasters who are changed every year. Each new set of burgomasters= visits the treasure compares it with the books receives it on oath delivers it with the same solemnity to the set which succeeds Oaths are not yet disregarded in that sober and religious country. A rotation of this kind is alone sufficient security against any practices which cannot be avowed. Amidst all the revolutions which faction has created in the government of Amsterdam, the prevailing party has never accused their predecessors of infidelity in the bank’s administration. Such an accusation would have most deeply affected the reputation and fortune of the disgraced party. If such an accusation could have been supported, we may be assured that it would have been brought. In 1672, when the French king was at Utrecht, the bank of Amsterdam paid so readily. It left no doubt of its fidelity. Some of the pieces brought from its repositories appeared to have been scorched with the fire after the bank was established. Those pieces must have lain there from that time.

28 Many have speculated how much treasure is in the bank.

Only conjecture can be offered about it. There are about 2,000 people who keep accounts with the bank. If each one had £1,500 in their respective accounts (a very large allowance), the total amount of bank money and treasure in the bank will amount to about £3 million or 33 million guilders at 11 guilders the pound sterling. This is a great sum, sufficient to carry on a very extensive circulation. It is vastly below the extravagant estimates of some people.

29 The city of Amsterdam gets a big revenue from the bank.

Besides the warehouse-rent, each person pays a fee of:

  • 10 guilders when opening the first account,
  • 3 guilders 3 stivers for every new account,
  • 2 stivers for every transfer.

If the transfer is less than 300 guilders, the fee is 6 stivers. This is to discourage the multiplicity of small transactions.

25 guilders is forfeited by the person who neglects to balance his account twice in the year.

The person who transfers more than the amount in his account, must pay 3% for the sum overdrawn.
    His transfer is set aside into the bargain.
The bank also profits by selling the foreign coin or bullion that it gets.
    It keeps them until they can be sold with profit.
It also profits by selling bank money at 5% agio and buying it at 4%.

These emoluments are more than necessary to pay salaries and defray management expences. The revenue for keeping the bullion on receipts is alone supposed to amount to a net annual revenue of 150,000-200,000 guilders. This bank’s original object was public utility, not revenue. It aimed to relieve the merchants from the inconvenience of a disadvantageous exchange. The revenue which arose was unforeseen and accidental. I made this long digression to explain why the exchange between the countries which pay bank money and those which pay in common currency appears in favour of country which pays in bank money. The country that pays in bank money has its intrinsic value always the same and exactly agreeable to their mint’s standard. The country that pays in currency has its intrinsic value continually varying and frequently below that standard.


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