The Bank of Amsterdam and the Leap to Central Bank Money

Central bank money is the foundation of modern monetary and payment systems. Central bank money defines a unit of account. The price at which this money trades determines “monetary policy.” And most payment systems require the transfer of central bank funds before a transaction is legally final or “settled.” Despite its current ubiquity, the origins of central bank money have remained obscure, and the present-day system involves a remarkable conceptual leap from earlier coin-based systems. In this paper, we recount how the critical innovation—the creation of a unit of account that could be maintained solely through open-market operations—took place in the seventeenth-century Dutch Republic (for a more detailed examination see Quinn and Roberds 2005; Quinn and Roberds 2006). The villain in our story is the incremental debasement that unsettled the quality of new coins and the price of old coins. The protagonists are the Dutch authorities who contended with debasement by regulating the price of coins and by creating “exchange banks,” the Bank of Amsterdam in particular, to assure the quality of coins. The plot is propelled forward because well-intentioned regulatory changes exacerbated the debasement problem. Resolution began when authorities disconnected the Bank of Amsterdam from the price of circulating coins. The solution was conceptually difficult because a coin would have a different price in the Bank of Amsterdam than it had outside. Once this dichotomy was accepted, however, a robust market developed to mediate the relationship between the Bank of Amsterdam and circulating coins, and ledger accounts at the bank become the de facto means of final settlement. In the end, the final step into the world of fiat money—the elimination Monetary SySteMS: tranSitionS and experiMentS