Deflation Made Simple (II)

The Story of Real Money (Entry 119)

Yesterday we spoke of the Wisselbank’s introduction of recepissen as a substitute, but not replacement for real money. We compared the recepissen with the promissory notes (Images 24, 25, and 27) issued by the banks of Seville in the mid-16th century and explained how they facilitated exchange. Unlike the promissory notes of Seville, however, the recepissen of Amsterdam were not mere promises; rather they represented real money holdings. Today we will develop these notions further and note the political and financial environments in which the recepissen came into being.

The real money of the 17th century and earlier was both heavy and difficult to transport. Six-hundred Guilders worth of silver in the mid-17th century, for example, weighed some nine kilograms — nearly 20 pounds! By way of comparison, a backpack loaded with a laptop, two standard-size textbooks, and a bottle of water is already the weight of a ten-pound barbell — surely, of little significance to someone who frequents a gym, but even for such a person, something that he is eager to unload after a long trek across a rolling university campus.

As the Dutch economy grew, so too grew the value of the kinds of things that were traded. Because the number of luxury items increased as a proportion of total trade, consummating many such trades became increasingly arduous. Not only was twenty pounds of silver difficult to carry, but it was a large, conspicuous sum that could be easily stolen and spent, if one let down one’s guard. What is more, having to stand in line at the Wisselbank waiting for a clerk to register a giro transaction (Images 44 and 86) was unlikely a task that everyone enjoyed.

The recepissen mitigated these hardships and encouraged trade by increasing the velocity of money (Image 10). Indeed, the recepissen were still another technical bank improvement that encouraged commercial behavior, furthered economic growth, and improved the material well-being of everyone who engaged in such trading and beyond.

Further, unlike the promissory notes issued by the banks of Seville (Images 26 and 27) struggling for their survival under the reign of Charles V in the 16th century, the recepissen did not increase the supply of money and had no effect on the price level of other goods and services. The recepissen were money-in-locum; they merely substituted for real money that was stored elsewhere. Both could not circulate at the same time!

Once again, the Wisselbank was not an investment bank and had no right-of-use (Entry 118) to the money deposited by its patrons. This said, the Bank of Amsterdam was not immune to the problems of hierarchy (Images 58, 94, 95, etc.) and distinctions (Images 103, 104, and Image 105) that we have already touched upon several times.

Like the VOC, the Bank of Amsterdam depended on its accounting system to maintain the integrity of the bank. Accordingly, the integrity of the system could never be better than the integrity of those who oversaw it. Moreover, those who oversaw the Amsterdam banking system were the same as those who granted the municipal charter that bequeathed the VOC with its very substantial monopoly power east of the Cape of Good Hope.

The Bank of Amsterdam and the VOC shared another commonality as well — the management team of each was under no obligation to be transparent to its account holders — only to the elected magistrates who oversaw the teams. In effect, the books of the Bank of Amsterdam were no more available for review by their member-account holders than were the transaction and member accounting books of the VOC open for review by the VOC’s member-owners.

Now, the social and market functions of the VOC and Wisselbank were decidedly different, but there was one difference in particular that distinguished itself above all others. Whereas the member-accounts of the Wisselbank catered to all members of Amsterdam society who transacted in amounts equal to, or greater than 600 Guilders, the accounts of the VOC catered only to the VOC’s member-shareholders and those with whom the VOC and its member-owners traded. Whereas the Wisselbank’s success depended on all large trade that passed through the port city of Amsterdam, profits generated from VOC trade in the East Indies and sent back home were merely a large fraction of the total.

As Amsterdam was the most important city in the Province of Holland, the magistrates of Amsterdam wielded considerable power in the political affairs of The Estates. Similarly, the voice of The Estates was disproportionately large in the affairs of the States General of the United Provinces. These relationships and that between the city of Amsterdam and the VOC became more pronounced once William III was appointed Stadtholder of Holland and King of England.

Already by 1669, shortly before the rampjaar, signs of weakness in the bank can be observed. Alas, we can see in retrospect what the citizens of Amsterdam could not see in real time. This was unfortunate, for clearly the Wisselbank had become infected with corruption, but it was still asymptomatic. It had survived much during its 60 years of operation, and was still solid. No one suspected, and even those who did were subject to ridicule. This said, the bank’s decay was already underway, and there were no visible signs of corruption to suggest that this was the case.

In liberty, or not at all,
Roddy A. Stegemann, First Hill, Seattle 98104