Deflation Made Simple (Part II)

The Story of Real Money (Entry 118)

Between 1672 and 1679 the percentage of The Estates’ outstanding debt held in the form of obligatie rose from over half of the total to nearly two thirds. This trend continued monotonically upward for the next ten years until it reached a peak of 68.5 percent in 1689.

During this same period the proportion of both the annuities and losrenten fell. This said, the fall in the proportion of annuities was substantially greater than that of the losrenten. In 1672 — at the height of patriotic fervor — the annuities accounted for some 8.8 percent of the total. By 1689, while Prince William III of Orange was being crowned King of England, their proportion had dropped to only 4.8 percent — a full 46 percent decrease!

In contrast, during this same period the losrenten fell by only 19 percent from their high of 34.8 percent in 1672 to 27.8 percent in 1689.

You may recall that the annuities were automatically renewed and held for the life of their holder, and that the losrenten could —under normal conditions — be redeemed at any time. One may deduce from this combined drop in annuities and losrenten, as well as the resulting discrepancy between the two, that: one, the annuities simply expired with their holder and were not replaced in the absence of demand for new issues; and two, the losrenten were redeemed, but only on the condition that they were replaced with the more readily tradable obligatie.

Although now flourishing on The Exchange, the secondary bond market remained a relatively new phenomenon in Dutch society at large.

Another reason for wanting to hold the non-tradable losrenten may have been the sudden drop in the price of VOC shares at the onset of war in 1672. In July of 1671 VOC shares were selling at over five times their original index price of 100 — namely, 556. One year later their share price had crashed by 49% to 290.

In order to drive home the demand for liquidity among Dutch merchants and foreign others was the sudden run that took place on the Amsterdamsche Wisselbank (Amsterdam Exchange Bank). Within two weeks of the French invasion the deposits held by Dutch and foreign merchants at the Wisselbank dropped from 7.6 million to 5 million Guilders — an astonishing 34% in 14 days!

It should now be absolutely clear that the ability of The Estates, and ultimately the States General, to raise money had been severely hampered.

The more important lesson, however, is that the Bank of Amsterdam (Amsterdamsche Wisselbank) neither closed its doors and declared a bank holiday — à la FDR’s Bank Holiday in 1933 —, nor did it collapse — à la Lehman Brothers in the wake of the Bush-Obama financial crisis in 2008. On the contrary, as soon as everyone in Amsterdam realized that the French advance had been stopped, the bank quickly bounced back! Can you guess the reason why?

If yes, then you have followed along well, and I am happy to have you on board. If not, then please pay better attention. In order for real (sound) money to succeed and perform its economic magic, banks cannot lend money into existence!

You may recall our discussion from Images 18, 20, 23, 27, and 67 in which we distinguished between the warehouse and investment functions of sound banking. The Wisselbank was NOT an investment bank. Unlike the Banco de’ Medici of Firenze (Florence), Italy — not to be confused with Florence, Arizona — the Wisselbank did not borrow in order to lend. Rather, it received money, verified its metal content, and held it on behalf of its depositors. It lent nothing out, because the money was not the bank’s to lend!

The Wisselbank had no right-of-use to the money that it held and earned its income by charging fees for two important services including: one, the safeguard of its members deposits; and two, the opportunity to transfer some or all of one member’s deposits to the account of another member (giro-banking).

So, successful was the bank that in 1683 it issued paper receipts called recepissen that could be traded by members and non-members alike as a substitute for real money. No, this was not the phony counterfeit that the US Treasury peddles as money in the global market place today! For each recepis issued, there was an equal amount of real money on deposit at the bank.

Once in possession of a recepis, you could take it to the bank and receive on demand and equivalent amount of real money! You did not need to be a member with a Wisselbank account to cash in.

Equally important, the recepissen were extremely easy to use. Like the promissory notes of the banks of Seville, they were made of paper and easy to carry around, and because of the reputation of the Wisselbank, they were well-received among all Dutch merchants and far beyond!

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