Book IV, Chapter III, 2

Third and last, in some places, such as Amsterdam, Hamburg, and Venice, foreign bills of exchange are paid in what is called bank money; in others, such as London, Lisbon, Antwerp, and Leghorn, they are paid in the country's ordinary currency. Bank money is always worth more than the same nominal sum in ordinary currency. A thousand guilders in the bank of Amsterdam, for example, are worth more than a thousand guilders in Amsterdam currency. The difference is called the bank's agio, which at Amsterdam is generally about five per cent. Suppose the circulating money of two countries is equally close to the standard of each country's mint, but one country pays foreign bills in ordinary currency and the other in bank money. Plainly, the calculated exchange may favor the country paying in bank money even when the real exchange favors the one paying in circulating money. This is the same reason that the calculated exchange may favor a country paying in better money, or money nearer its own standard, even when the real exchange favors one paying in worse money. Before the recent reform of the gold coin, the calculated exchange was generally against London in dealings with Amsterdam, Hamburg, Venice, and, I believe, every other place paying in what is called bank money. It by no means follows, however, that the real exchange was against London. Since the reform of the gold coin, it has favored London even against those places. The calculated exchange has generally favored London in dealings with Lisbon, Antwerp, Leghorn, and, apart from France, I believe most other parts of Europe paying in ordinary currency; and it is not unlikely that the real exchange favored London too.

A Digression on Banks of Deposit, Particularly the Bank of Amsterdam.

The currency of a large state, such as France or England, generally consists almost wholly of its own coin. If that currency should at some point become worn, clipped, or otherwise debased below its standard value, the state can effectively restore it by reforming its coinage. The currency of a small state, such as Genoa or Hamburg, however, can seldom consist entirely of its own coin. Much of it must consist of coins from all the neighboring states with which its inhabitants continually deal. Reforming its own coin, therefore, will not always enable such a state to reform its currency. If foreign bills of exchange are paid in this currency, the uncertain value of any sum in a medium so uncertain by nature must cause the exchange to be greatly against the state: foreign countries will necessarily value its currency at even less than it is worth.

To remedy the inconvenience this unfavorable exchange must have caused their merchants, such small states, when they began to attend to the interests of trade, have often decreed that foreign bills of exchange above a certain value must be paid not in ordinary currency, but by an order on a particular bank, or a transfer in its books. The bank, established on the credit and under the protection of the state, was always obliged to pay in sound money conforming exactly to the state's standard. The banks of Venice, Genoa, Amsterdam, Hamburg, and Nuremberg all seem originally to have been founded for this purpose, though some may later have served other ends. Since the money in these banks was better than the ordinary currency of the country, it necessarily carried an agio, greater or smaller according to how far the currency was thought to have fallen below the state's standard. The agio of the bank of Hamburg, for example, commonly said to be about fourteen per cent., represents the supposed difference between the state's sound standard money and the clipped, worn, and diminished currency flowing in from all its neighbors.

Before 1609, the great quantity of clipped and worn foreign coin brought to Amsterdam from across Europe by its extensive trade had reduced the value of its currency about nine per cent. below that of sound money fresh from the mint. Whenever such fresh coin appeared, it was immediately melted down or carried off, as it always is in these circumstances. Although merchants had plenty of currency, they could not always find enough sound money to pay their bills of exchange. Despite several regulations intended to prevent this, the value of those bills consequently became largely uncertain.

To remedy these inconveniences, a bank was founded in 1609 under the city's guarantee. It accepted both foreign coin and the country's own light and worn coin at their actual intrinsic value measured in the country's sound standard money, deducting only what was needed to meet the cost of coinage and other necessary costs of administration. For the value remaining after this small deduction, it entered a credit in its books. This credit was called bank money. Because it represented money conforming exactly to the mint standard, it always had the same real value and was intrinsically worth more than circulating money. A rule was enacted at the same time requiring every bill drawn on or negotiated at Amsterdam worth 600 guilders or more to be paid in bank money, removing at once all uncertainty about the value of such bills. As a consequence, every merchant had to keep an account at the bank to pay his foreign bills of exchange, creating a necessary demand for bank money.

Besides its intrinsic superiority to currency and the additional value this demand necessarily confers, bank money has other advantages. It is safe from fire, robbery, and other accidents; the city of Amsterdam stands behind it; and it can be paid by a simple transfer, without the trouble of counting it or the risk of carrying it from place to place. Because of these several advantages, it seems to have carried an agio from the outset. It is generally believed that all the money originally deposited at the bank was left there, since no one cared to demand payment of a claim he could sell at a premium in the market. By demanding payment from the bank, the owner of a bank credit would lose that premium. Just as a shilling fresh from the mint buys no more goods in the market than one of our ordinary worn shillings, the sound money taken from the bank's coffers into a private person's, once mixed indiscriminately with the country's ordinary currency, would be worth no more than that currency, from which it could no longer easily be distinguished. So long as it remained in the bank's coffers, its superiority was known and certain. Once it passed into a private person's, establishing its superiority might take more trouble than the difference was worth. Moreover, removing it from the bank's coffers deprived it of all the other advantages of bank money: its security, its easy and safe transfer, and its use in paying foreign bills of exchange. On top of all this, as will shortly appear, it could not be removed from those coffers without first paying for its storage.

Those deposits of coin, which the bank was bound to return in coin, formed its original capital: the entire value represented by what is called bank money. Today they are believed to form only a very small part of it. To facilitate the bullion trade, the bank has for many years given credits in its books against deposits of gold and silver bullion. The credit is generally about five per cent. below the mint price of that bullion. At the same time the bank issues what is called a recipice, or receipt, entitling the depositor or bearer to withdraw the bullion at any time within six months, provided that the holder transfers to the bank as much bank money as was originally credited for the deposit and pays one-fourth per cent. for storage if the deposit was silver, or one-half per cent. if it was gold. The receipt also declares that if these payments are not made by the end of the term, the deposit becomes the bank's property at the price at which it was received, or for which credit was entered in the transfer books. The payment for storing the deposit may be regarded as a kind of warehouse rent. Several explanations have been offered for why this rent should be so much higher for gold than for silver. It has been said that the purity of gold is harder to establish than that of silver; fraud is easier and causes a greater loss with the more precious metal. It has also been said that, since silver is the standard metal, the state wishes to encourage deposits of silver more than deposits of gold.

Bullion is most commonly deposited when its price is somewhat lower than usual and withdrawn when the price rises. In Holland, the market price of bullion is generally above the mint price, for the same reason that it was in England before the recent reform of the gold coin. The difference is said commonly to range from about six to sixteen stivers per mark, or eight ounces of silver consisting of eleven parts fine silver and one part alloy. The bank price, or the credit the bank gives for deposits of such silver (when deposited as foreign coin of known and established purity, such as Mexico dollars), is twenty-two guilders per mark; the mint price is about twenty-three guilders; and the market price ranges from twenty-three guilders six to twenty-three guilders sixteen stivers, or from two to three per cent. above the mint price.

The following are the prices at which the bank of Amsterdam currently [September 1775] receives bullion and coin of different kinds:

SILVER Mexico dollars................. 22 Guilders / mark French crowns.................. 22 English silver coin............. 22 Mexico dollars, new coin........ 21 10 Ducatoons....................... 3 0 Rix-dollars..................... 2 8

Bar silver containing 11-12ths fine silver, 21 Guilders / mark, declining in proportion to 1-4th fine, for which 5 guilders are given. Fine bars,................. 28 Guilders / mark.

GOLD Portugal coin................. 310 Guilders / mark Guineas....................... 310 Louis d’ors, new.............. 310 Ditto old.............. 300 New ducats.................... 4 19 8 per ducat

Bar or ingot gold is received in proportion to its purity as compared with the foreign gold coins listed above. The bank gives 340 per mark for fine bars. Generally, however, it gives somewhat more for coin of known purity than for bars of gold and silver, whose purity can be established only by melting and assaying them.

The relations among the bank price, the mint price, and the market price of gold bullion are much the same. A person can generally sell a receipt for the difference between the mint price and the market price of bullion. A receipt for bullion is therefore almost always worth something, and it is very rare for anyone to let a receipt expire and his bullion pass to the bank at its deposit price, whether by failing to withdraw it before the six months are over or by failing to pay one fourth or one half per cent. for a new receipt lasting another six months. Yet this is said sometimes to happen, though seldom, and more often with gold than with silver because the warehouse rent for the more precious metal is higher.

A person who deposits bullion and receives both a bank credit and a receipt uses the credit to pay his bills of exchange as they fall due; he either sells or retains the receipt according to whether he expects the price of bullion to fall or rise. The receipt and bank credit seldom remain together long, nor is there any need for them to do so. A holder of a receipt who wishes to withdraw bullion can always find ample bank credits, or bank money, to purchase at the usual price; a holder of bank money wishing to withdraw bullion can likewise always find ample receipts.

Third and last, foreign bills of exchange are paid in what people call bank money in some places, including Amsterdam, Hamburg, and Venice. In other places, including London, Lisbon, Antwerp, and Leghorn, they are paid in the country's ordinary currency. Bank money is always worth more than the same stated amount of ordinary currency. For example, a thousand guilders held in the bank of Amsterdam are worth more than a thousand guilders in Amsterdam's ordinary currency. The difference is called the bank's agio. In Amsterdam it is usually about five per cent. Suppose the circulating money of two countries is equally close to each country's mint standard. One pays foreign bills in ordinary currency, while the other pays in bank money. The calculated exchange rate could then favor the country paying in bank money, even if the actual exchange rate favors the country paying in ordinary currency. The same thing happens when the calculated rate favors a country whose money is better, or closer to its mint standard, even though the actual rate favors a country with worse money. Before the recent reform of the gold coin, the calculated exchange rate generally ran against London in its dealings with Amsterdam, Hamburg, Venice, and, I believe, all other places that pay in bank money. That does not mean the actual exchange rate ran against London. Since the gold coin was reformed, the calculated rate has favored London even in dealings with those places. It has generally favored London in dealings with Lisbon, Antwerp, Leghorn, and, apart from France, I believe most other parts of Europe that pay in ordinary currency. It is quite possible that the actual rate also favored London.

A Digression on Deposit Banks, Especially the Bank of Amsterdam.

The circulating money of a large state such as France or England usually consists almost entirely of its own coins. If those coins become worn, clipped, or otherwise worth less than their official standard, the state can restore the value of its currency by reforming its coinage. A small state such as Genoa or Hamburg can rarely circulate only its own coins. Much of its circulating money must be coins from neighboring states with which its people regularly trade. Reforming its own coinage will therefore not always restore the value of all its circulating money. If foreign bills of exchange are paid in that currency, the uncertainty about what any given amount is worth will always push the exchange rate strongly against the small state. Other countries will necessarily value its currency at even less than it is worth.

To spare their merchants the trouble caused by such an unfavorable exchange rate, small states have often acted when they began taking an interest in trade. They required foreign bills of exchange above a certain value to be paid through an order on a particular bank or a transfer in its books, rather than in ordinary currency. The state backed and protected the bank. The bank was always required to pay in sound money matching the state's official standard exactly. The banks of Venice, Genoa, Amsterdam, Hamburg, and Nuremberg all seem to have been founded for this purpose, although some later served other purposes too. The money held in these banks was better than ordinary currency, so it necessarily carried an agio. The more the circulating currency was thought to have fallen below the state's standard, the higher the agio. For example, the agio of the bank of Hamburg is said to be usually about fourteen per cent. That is the estimated gap between the state's sound standard money and the clipped, worn, reduced coins flowing in from all its neighbors.

Before 1609, Amsterdam's extensive trade brought in so many clipped and worn foreign coins from across Europe that its circulating money fell about nine per cent. below the value of sound, newly minted money. Whenever sound money appeared, it was immediately melted down or taken away, as always happens in these conditions. Merchants had plenty of currency, but they could not always find enough sound money to pay their bills of exchange. Despite several regulations intended to prevent this, the value of those bills became quite uncertain.

A bank was established in 1609 under the city's guarantee to solve these problems. It accepted foreign coins and the country's own light and worn coins at their actual metal value, measured in the country's sound standard money. It deducted only what was needed to cover coinage and other necessary operating costs. The bank entered the value remaining after that small deduction as a credit in its books. This credit was called bank money. Because it represented money matching the mint standard exactly, its actual value stayed the same, and it was worth more than circulating money. At the same time, a rule required all bills drawn on or traded in Amsterdam worth 600 guilders or more to be paid in bank money. This immediately removed any uncertainty about their value. Every merchant therefore had to keep a bank account to pay foreign bills of exchange. This created a steady demand for bank money.

Bank money has other advantages besides being worth more than ordinary currency and receiving extra value from this demand. It is safe from fire, robbery, and other accidents. The city of Amsterdam stands behind it. A simple transfer pays it to someone else without counting coins or taking the risk of moving them between places. These advantages seem to have given it an agio from the beginning. People generally believe that all the money originally deposited stayed in the bank. Nobody wanted repayment of a claim that could be sold at a premium in the market. By demanding payment from the bank, an account holder would lose that premium. A newly minted shilling buys no more in the market than an ordinary worn shilling. In the same way, sound money taken from the bank and put into private hands would mix with the ordinary currency and become no more valuable than it. People could no longer easily tell it apart. Its superior quality was known and verified while it remained in the bank. Once it was in private hands, verifying that quality could take more trouble than the difference in value was worth. Taking it out of the bank would also strip it of every other advantage of bank money: security, easy and safe transfers, and use in paying foreign bills of exchange. And, as we will see shortly, it could not be withdrawn without first paying a storage charge.

Deposits of coins that the bank was obliged to repay in coins made up its original capital. They accounted for the full value represented by bank money at first. People now think they make up only a very small part of it. For many years, to make bullion trading easier, the bank has entered credits in its books for deposits of gold and silver bullion. The credit is generally about five per cent. below the mint price of that bullion. The bank also issues what it calls a recipice, or receipt. This allows either the depositor or whoever holds the receipt to withdraw the bullion at any time within six months. To do so, the holder must transfer back to the bank an amount of bank money equal to the credit originally given for the deposit. The holder must also pay a storage charge of one-fourth per cent. for silver or one-half per cent. for gold. If the holder does not make those payments before the six months end, the deposit becomes the bank's property at the price at which the bank accepted it, the amount credited in its books. The storage charge can be thought of as warehouse rent. Several explanations have been offered for why this rent is so much higher for gold than for silver. Some say it is harder to determine the purity of gold than of silver. Fraud is easier and causes a greater loss with the more precious metal. Others say that because silver is the standard metal, the state wants to encourage silver deposits more than gold deposits.

People most often deposit bullion when its price is somewhat below normal, and withdraw it when the price rises. In Holland the market price of bullion is generally above the mint price, for the same reason this was true in England before the recent reform of the gold coin. The difference is said to be usually from about six to sixteen stivers per mark, or eight ounces of silver containing eleven parts fine silver and one part alloy. For deposits of this silver in foreign coins of known, verified purity, such as Mexico dollars, the bank gives credit at twenty-two guilders per mark. The mint price is about twenty-three guilders. The market price ranges from twenty-three guilders six to twenty-three guilders sixteen stivers, or from two to three per cent. above the mint price.

The following are the prices at which the bank of Amsterdam currently [September 1775] accepts bullion and different kinds of coins:

SILVER Mexico dollars................. 22 Guilders / mark French crowns.................. 22 English silver coin............. 22 Mexico dollars, new coin........ 21 10 Ducatoons....................... 3 0 Rix-dollars..................... 2 8

Silver bars containing 11-12ths fine silver: 21 Guilders / mark, decreasing in proportion down to 1-4th fine silver, for which the bank gives 5 guilders. Fine bars,................. 28 Guilders / mark.

GOLD Portugal coin................. 310 Guilders / mark Guineas....................... 310 Louis d’ors, new.............. 310 Ditto old.............. 300 New ducats.................... 4 19 8 per ducat

The bank accepts gold bars or ingots at prices based on their purity relative to the foreign gold coins listed above. It gives 340 per mark for fine bars. In general, though, it pays a little more for coins of known purity than for gold and silver bars. The purity of bars can be determined only by melting and testing them.

The relationship among the bank price, mint price, and market price of gold bullion is much the same. Someone can usually sell a receipt for the difference between bullion's mint price and market price. A bullion receipt is almost always worth something. People therefore very rarely let receipts expire and let the bank acquire their bullion at its original deposit price. They usually either withdraw it within six months or pay one-fourth or one-half per cent. for another six-month receipt. It is said that receipts do sometimes expire, though rarely, and more often for gold than for silver because storing the more precious metal costs more.

Someone who deposits bullion receives both a bank credit and a receipt. The depositor uses the credit to pay bills of exchange as they come due, and sells or keeps the receipt according to whether bullion prices seem likely to rise or fall. The receipt and credit rarely stay together for long, and they do not need to. A receipt holder who wants to withdraw bullion can always buy plenty of bank credits, or bank money, at the normal price. Someone with bank money who wants to withdraw bullion can likewise find plenty of receipts to buy.