Book IV, Chapter III, 3

The owners of bank credits and the holders of receipts are two distinct classes of creditors of the bank. The holder of a receipt cannot withdraw the bullion it covers without transferring back to the bank a sum of bank money equal to the price at which the bullion was deposited. If he has no bank money of his own, he must buy it from someone who does. The owner of bank money cannot withdraw bullion without presenting the bank with receipts covering the quantity he wants. If he has no receipts of his own, he must buy them from someone who does. When the holder of a receipt buys bank money, he buys the power to withdraw bullion whose mint price stands five per cent. above its bank price. Thus the five per cent. agio he commonly pays is paid not for an imaginary value but for a real one. When the owner of bank money buys a receipt, he buys the power to withdraw bullion whose market price is commonly from two to three per cent. above its mint price. The price he pays is likewise paid for a real value. Together the price of the receipt and the price of the bank money make up the bullion's full value or price.

The bank also issues receipts, as well as bank credits, against deposits of coin circulating in the country; but those receipts are frequently worthless and fetch nothing in the market. For ducatoons, for example, which circulate at three guilders three stivers apiece, the bank grants a credit of only three guilders, or five per cent. below their circulating value. It also issues a receipt entitling the bearer to withdraw the number of ducatoons deposited at any point within six months, on payment of one fourth per cent. for storage. This receipt will often fetch nothing in the market. Three guilders in bank money generally sell there for three guilders three stivers, the full value of the ducatoons if withdrawn from the bank; and withdrawal requires a further one-fourth per cent. for storage, an outright loss to the receipt's holder. If the bank's agio should ever fall to three per cent., however, such receipts might fetch a price, and might sell for one and three-fourths per cent. But since the bank's agio is now generally about five per cent., these receipts are frequently allowed to expire, or, as the expression goes, to fall to the bank. Receipts for deposits of gold ducats fall to it still more frequently, because their withdrawal requires the higher warehouse rent of one half per cent. The five per cent. the bank gains when deposits of coin or bullion fall to it may be regarded as warehouse rent for keeping those deposits forever.

The amount of bank money whose receipts have expired must be considerable. It must include all the bank's original capital, which is generally believed to have remained there ever since its first deposit: nobody cared either to renew a receipt or to withdraw a deposit, since, for the reasons already given, either action would entail a loss. Whatever the amount, however, its share of the whole stock of bank money is thought to be very small. For many years the bank of Amsterdam has served as Europe's great warehouse for bullion, and receipts for this bullion are very rarely allowed to expire, or, as they say, to fall to the bank. By far the greater part of bank money, or credits in the bank's books, is thought to have been created for many years by deposits of this kind, which bullion dealers continually make and withdraw.

No claim for payment can be made on the bank except through a recipice or receipt. The smaller body of bank money whose receipts have expired is mingled indistinguishably with the much larger body whose receipts remain valid. Thus, though there may be a considerable sum of bank money for which no receipts exist, no particular sum or part of it is beyond demand by means of a receipt at any time. The bank cannot owe the same thing to two people; and an owner of bank money without a receipt cannot demand payment until he buys one. In ordinary, peaceful times he will have no difficulty buying one at its market price, which generally corresponds to the price at which he can sell the coin or bullion it allows him to withdraw.

Things might be different in a public calamity, such as an invasion like that of the French in 1672. If the owners of bank money all became eager to withdraw it and keep it themselves, demand for receipts might drive their price to an exorbitant level. Their holders might form extravagant expectations and demand, instead of two or three per cent., half the bank money credited for the deposits against which their receipts had been issued. An enemy who knew how the bank was organized might even buy up receipts to prevent the treasure from being carried away. In such emergencies, it is believed, the bank would set aside its ordinary rule of paying only holders of receipts. Holders of receipts without bank money must already have received all but two or three per cent. of the value of the deposits covered by their receipts. The bank, it is therefore said, would have no hesitation in paying the owners of bank money who could obtain no receipts the full value of their book credits, whether in coin or bullion; it would at the same time pay two or three per cent. to holders of receipts without bank money, since that is the entire value that could justly be considered owing to them under these circumstances.

Even in ordinary, peaceful times, holders of receipts have an interest in depressing the agio. They could then buy bank money—and with it withdraw the bullion their receipts entitle them to—more cheaply, or sell their receipts more dearly to owners of bank money who want to withdraw bullion. The price of a receipt generally equals the difference between the market price of bank money and that of the coin or bullion it covers. Owners of bank money, by contrast, have an interest in raising the agio so they can sell their bank money more dearly or buy a receipt more cheaply. To prevent the speculative tricks these opposing interests might sometimes produce, the bank has in recent years decided always to sell bank money for currency at an agio of five per cent. and to buy it back at an agio of four per cent. As a result, the agio can neither rise above five nor fall below four per cent.; and the relation between the market price of bank money and that of circulating money remains very close to the relation between their intrinsic values. Before this decision, the market price of bank money sometimes rose to an agio as high as nine per cent. and sometimes fell as low as par, depending on which interest prevailed in the market.

The bank of Amsterdam declares that it lends out none of its deposits and that for every guilder it credits in its books it keeps the value of a guilder in its vaults, whether in coin or bullion. There is little reason to doubt that its vaults contain all the coin or bullion covered by valid receipts, for which it can be called upon at any time and which is continually being withdrawn and deposited again. It is perhaps less certain whether it does the same with the part of its capital whose receipts expired long ago, for which no demand can be made in ordinary, peaceful times, and which is in fact likely to stay with it forever, or as long as the states of the United Provinces endure. Yet in Amsterdam there is no article of faith more firmly held than this: for every guilder circulating as bank money, a corresponding guilder in gold or silver can be found among the bank's treasures. The city guarantees that this is so. The bank is directed by the four serving burgomasters, who change every year. Each new group visits the treasure, compares it with the books, accepts it under oath, and hands it over with the same solemn gravity to its successors; and in that sober and religious country, oaths have not yet lost their force. Such a rotation seems by itself sufficient protection against practices that could not be openly acknowledged. Through all the revolutions faction has brought about in Amsterdam's government, the victorious party has never accused its predecessors of dishonesty in administering the bank. No charge could have struck more deeply at the reputation and fortunes of a disgraced party; and we may be sure that, had the charge been supportable, it would have been made. In 1672, when the French king reached Utrecht, the bank of Amsterdam paid so promptly that there could be no doubt it had faithfully met its obligations. Some coins then taken from its vaults showed scorching from the fire that had occurred in the town hall soon after the bank was founded. Those coins must therefore have lain there since that time.

The amount of treasure held by the bank has long occupied curious minds. Nothing more than conjecture can be offered. It is generally calculated that about 2000 people have accounts at the bank. If each has, on average, the value of £1500 sterling in his account—a very generous allowance—the total bank money, and therefore the treasure in the bank, comes to about £3,000,000 sterling, or, at eleven guilders to the pound sterling, 33,000,000 guilders. This is a great sum, enough to support a very extensive circulation, but far below the extravagant estimates some have made of this treasure.

The city of Amsterdam earns considerable revenue from the bank. Besides the warehouse rent already mentioned, a person pays ten guilders when first opening an account, three guilders three stivers for every new account, and two stivers for each transfer. If the transfer is for less than 300 guilders, the charge is six stivers, to discourage a multitude of small transactions. Anyone who fails to balance his account twice a year forfeits twenty-five guilders. Anyone ordering a transfer larger than his balance must pay three per cent. on the overdrawn amount, and his order is canceled as well. The bank is also believed to make a considerable profit by selling foreign coin or bullion that comes into its possession when receipts expire, which it always holds until it can sell at an advantage. It likewise profits by selling bank money at an agio of five per cent. and buying it back at four. These various receipts amount to considerably more than the salaries of its officers and the costs of administration. The charges for keeping bullion against receipts alone are thought to yield a net annual revenue of between 150,000 and 200,000 guilders. Public utility, however, not revenue, was the institution's original aim. It was intended to spare merchants the inconvenience of an unfavorable exchange. The revenue it has generated was unforeseen and may be regarded as incidental. But it is time to return from this long digression, into which I have been drawn almost without noticing while trying to explain why exchange between countries that pay in what is called bank money and those that pay in ordinary currency should generally seem to favor the former and disadvantage the latter. The former pay in a kind of money whose intrinsic value is always the same and exactly conforms to their respective mint standards; the latter pay in a kind whose intrinsic value continually varies and is almost always somewhat below that standard.

Owners of bank credits and holders of receipts are two different kinds of people with claims on the bank. A receipt holder cannot withdraw the bullion covered by the receipt without returning to the bank the amount of bank money originally credited for that bullion. If the holder has no bank money, it must be bought from someone who does. A bank-money owner cannot withdraw bullion without showing receipts for the amount wanted. If the owner has none, they must be bought from someone who does. When a receipt holder buys bank money, the purchase brings the right to withdraw bullion whose mint price is five per cent. above its bank price. The five per cent. agio usually paid is therefore payment for real value, not imaginary value. When a bank-money owner buys a receipt, the purchase brings the right to withdraw bullion whose market price is usually from two to three per cent. above its mint price. The price of the receipt also buys real value. Together, the prices of the receipt and the bank money make up the bullion's full price.

The bank also issues receipts as well as bank credits for deposits of the country's circulating coins. But these receipts often have no value and fetch nothing in the market. Consider ducatoons, each worth three guilders three stivers in circulation. The bank credits only three guilders for each, or five per cent. below its circulating value. It also issues a receipt allowing the holder to withdraw the deposited ducatoons at any time within six months, after paying one fourth per cent. for storage. This receipt often fetches nothing in the market. Three guilders in bank money generally sell for three guilders three stivers in the market, the full value of the ducatoons if withdrawn. Withdrawing them would also require paying the one-fourth per cent. storage charge, a pure loss for the receipt holder. If the bank's agio fell to three per cent., however, these receipts might gain a market price and sell for one and three-fourths per cent. But because the agio is now generally about five per cent., such receipts often expire, or, as people say, fall to the bank. Receipts for deposits of gold ducats fall to the bank even more often. Withdrawing them requires a higher warehouse rent, one half per cent. The five per cent. the bank gains when it acquires coin or bullion through expired receipts can be considered warehouse rent for storing those deposits permanently.

The amount of bank money whose receipts have expired must be quite large. It must include the bank's entire original capital. People generally think those original deposits have remained there since they were first made. Nobody wanted to renew a receipt or withdraw a deposit, since either action would cause a loss for the reasons already given. But however large this amount is, it is thought to be a very small share of all bank money. For many years the bank of Amsterdam has been Europe's great bullion warehouse. Receipts for bullion deposits very rarely expire, or fall to the bank. Most of the bank money, meaning the credits recorded in the bank's books, is thought to have been created in recent years through deposits that bullion dealers continually make and withdraw.

Nobody can demand anything from the bank without a recipice, or receipt. The smaller pool of bank money whose receipts have expired is mixed with the much larger pool whose receipts remain valid. So although a substantial amount of bank money has no associated receipts, there is no identifiable portion of it that cannot be demanded with a receipt at any time. The bank cannot owe the same thing to two people. Someone who owns bank money without a receipt cannot demand payment until they buy a receipt. In normal, peaceful times, it is easy to buy one at the market price. That price generally matches the price obtainable by selling the coin or bullion that the receipt permits its holder to withdraw.

Things might be different during a public disaster, such as the French invasion in 1672. If all bank-money owners were eager to withdraw their money and keep it themselves, demand for receipts could drive their prices extremely high. Receipt holders might develop extravagant expectations. Instead of asking two or three per cent., they might ask for half the bank money originally credited for each receipt's deposit. An enemy familiar with the bank's rules might even buy up the receipts to prevent the treasure from being carried away. People assume that in such emergencies the bank would set aside its usual rule of paying only receipt holders. Receipt holders without bank money must already have received within two or three per cent. of their deposits' value. So, it is said, the bank would have no objection to paying bank-money owners unable to get receipts the full value credited to them, in money or bullion. At the same time it would pay receipt holders without bank money two or three per cent., the entire value that could fairly be owed to them under those conditions.

Even in normal, peaceful times, receipt holders benefit when the agio falls. Then they can buy bank money, and therefore withdraw the bullion covered by their receipts, more cheaply. Or they can sell receipts at a higher price to people with bank money who want to withdraw bullion. A receipt's price is generally the difference between the market price of bank money and the market price of the coin or bullion covered by the receipt. Bank-money owners, by contrast, benefit when the agio rises. Then they can sell bank money for more or buy receipts for less. To prevent speculative tricks arising from these opposing interests, the bank has recently decided always to sell bank money for ordinary currency at a five per cent. agio and buy it back at a four per cent. agio. The agio can therefore never rise above five or fall below four per cent. The market prices of bank money and ordinary currency remain very close to the relationship between their actual values. Before the bank made this decision, the market agio on bank money sometimes rose as high as nine per cent. and sometimes fell all the way to par, depending on which group's interests dominated the market.

The bank of Amsterdam says it lends out none of its deposits. It says that for every guilder credited in its books, it keeps the value of a guilder in money or bullion in its vaults. There is little reason to doubt that it keeps all the money or bullion covered by valid receipts. It can be asked for that property at any time, and property is constantly leaving the bank and returning to it. It is less certain whether the bank does the same for the part of its capital whose receipts expired long ago. In normal, peaceful times nobody can claim that part, and it is likely to stay in the bank forever, or at least as long as the states of the United Provinces exist. In Amsterdam, however, nothing is more firmly believed than this: every guilder circulating as bank money is matched by a guilder in gold or silver in the bank's vaults. The city guarantees it. The bank is run by four serving burgomasters, who change every year. Each incoming group inspects the treasure, compares it with the books, accepts responsibility for it under oath, and hands it to its successors under the same solemn oath. In that sober and religious country, people still take oaths seriously. This annual turnover alone seems sufficient protection against dishonest practices. Despite every political upheaval caused by factions in Amsterdam's government, the winning side has never accused its predecessors of mishandling the bank. Such a charge could do the greatest possible harm to the defeated side's reputation and fortune. We can be sure it would have been made if there had been evidence to support it. In 1672, when the French king reached Utrecht, the bank of Amsterdam paid claims so promptly that its fidelity to its obligations was beyond doubt. Some of the coins brought out of its vaults then bore scorch marks from a fire in the town hall soon after the bank's founding. Those coins must have been kept there ever since.

Curious people have long speculated about how much treasure the bank holds. We can only guess. It is usually estimated that about 2000 people have bank accounts. Suppose each holds, on average, £1500 sterling in their account, a very generous estimate. The total bank money, and therefore the bank's treasure, would be about £3,000,000 sterling. At eleven guilders to the pound sterling, that is 33,000,000 guilders. This is a large sum, enough to support very extensive circulation, but far below the extravagant estimates some people make of the treasure.

The city of Amsterdam earns substantial revenue from the bank. Besides the warehouse rent already described, a person pays ten guilders to open a first account and three guilders three stivers for every new account. Each transfer costs two stivers, or six stivers if it is for less than 300 guilders, to discourage too many small transactions. A person who fails to balance an account twice a year forfeits twenty-five guilders. Someone who orders a transfer larger than the account balance must pay three per cent. on the overdraft, and the transfer is canceled as well. The bank is also thought to make a substantial profit by selling foreign coins or bullion acquired when receipts expire. It keeps them until it can sell them profitably. It also profits by selling bank money at a five per cent. agio and buying it back at four. These sources of income bring in much more than the cost of staff salaries and operations. Fees for storing bullion covered by receipts alone are thought to produce net annual revenue of between 150,000 and 200,000 guilders. But the bank was originally created for public benefit, not revenue. Its purpose was to spare merchants the problems caused by an unfavorable exchange rate. The resulting revenue was unexpected and can be considered incidental. It is time to return from this long digression. I was led into it while trying to explain why exchange rates between countries that pay in bank money and countries that pay in ordinary currency generally seem to favor the former and run against the latter. The former pay in money whose metal value is always the same and exactly meets their mint standard. The latter pay in money whose metal value changes continually and is almost always somewhat below that standard.