A History of The Lending and The Banking

A History of The Lending and The Banking

F.N. Heinsius

Author Note: This Article Started in March 2010

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A History of The Lending and The Banking

Abstract

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Introduction. The concept of money, paper, and gold, how confusing this can be.

1. In particular start with the idea of money in Adam Smith in the Wealth of Nat. (p.330):

«Money, on the contrary, is a steady friend, which, though it may travel about from hand

to hand, yet if it can be kept from going out of the country, is not very liable and to be

wasted and consumed. Gold and silver therefore, are, according to Mr. Locke, the movable

wealth of a nation, and to multiply those metals ought, he thinks, upon that account, to be

the great object of its political economy.»

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A History of The Lending and The Banking

1. The outpaid banknote is a wisselbrief paper with instruction “Exchangeable for five guilders”

2. Then talks on the key element in the famous trust the bankers at Amsterdamsche Wisselbank

enjoyed according to Adam Smith (p.374) from the start at 1609 and collapse in 1790:

«At Amsterdam, however, no point of faith is better established than that for every guilder,

circulated as bank money, there is a correspondent guilder in gold or silver to be found in

treasure of the bank. The city is guarantee that it should be so. The bank is under the

[continuing] direction of the four reigning burgomasters…» [and with constant procedures

and oaths the full trust and reputation of the Amsterdamsche Wisselbank was established.

In 1790, the upfront Dutch-English war, the French revolution, the blanco checkbook

product innovation and the bad loans, became the Wisselbank fatal.]

3. Then in more detail on the word “correspondent”. When the foreign merchant arrives at

Amsterdam he brings his own nation coins. So the merchant hands over his foreign coins at

Amsterdam and receives the banknote, with a little administration discount, for, say, 50 guilders.

He loses the foreign coins, doesn’t get the physical guilders, and receives the banknote, only a

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A History of The Lending and The Banking

piece of paper. When ready with shopping and buying, he needs the 50 guilder coins, in change

for his banknote, and pays all sellers in the real guilder coins. When satisfied he returns back home

with no Dutch money left, but he owns a whole lot of satisfactory goods. So the word

“correspondent” guilder in gold or silver is awkward. Why? Because there is this correspondent

guilder banknote nomination and the real life physical guilder, in this case the 50. There is no more

gold or silver needed. Money on three different places isn’t the case. So there is a chance, that the

City Bank keeps the third item, the physical gold or silver, during the stay of the merchant, as for

a short insurance, for the loss of the piece of paper during the travel. The gold isn’t really needed

for the banking. It is only a reserve and for a day or two the insurance for the risk of losing the

paper banknote during the visit. Troubling is the guilder coins exist out of gold or silver in those

days. So the weird thing is also true; keeping the 50 guilders in treasure, means, having gold and

silver there. That’s what happens when banking and insurance aspects are mixed and confusing.

2. Amsterdamsche Wisselbank at the City Building of Amsterdam

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A History of The Lending and The Banking

3. A New Five Guilders by Joost van de Vondel, Bookkeeper at the City Bank of Lending

4. Now the other case, the merchant who leaves Amsterdam instead, and isn’t “collecting” the 50

guilders in Amsterdam, when finished with buying, and owns a loan. On the banking side, the

treasure still owns the 50 guilder coins. They remain there forever. On the insurance side, the gold

reserve, needed for a day or two, the stay of the merchant, cannot be taken away, because the risk

of losing the banknote, during the stay in Amsterdam, is bothering. So, what happens when the

other merchant, who is from, for instance, London, returns the banknote piece of paper back home

in the London exchange kind of banking office. He will lose the piece of paper banknote, and will

receive the 50 guilder coins for buying things in London. The London office actually has to clear

the insurance period back in Amsterdam, the paper is returned in London, so the gold reserve in

Amsterdam isn’t needed anymore. The banknote itself is destroyed when paid. So, what happens

if London and Amsterdam do not communicate on this insurance clearing aspect. The gold reserves

grow and grow every day for every merchant not communicating on the collection back home, the

insurance end. So that’s what happens when the different clearing policies of the banking and the

insurance aspects are confusing and mixed up. So part of the gold reserve was in fact used by

means of an insurance, for the loss of the paper banknote, for the time of the visit. Measurements

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A History of The Lending and The Banking

will reveal the part or percentage of the gold reserve that is actually functioning by insuring

merchant visitors to facilitate commerce and trade in the seventeenth century city of Amsterdam,

the outmost needed goal of the city, otherwise it would become far too dangerous for travelers and

potential buyers with large sums of pocket money.

Time in days T=1 T=2 T = 10 T = 20 T=N

merchant
Deposit + 50 Dutch + 50 50 + 50 50 + 50 50 + 50 50
function goldguilders in
exchange for a t=1 t=2 t=1, t=10 t=1, t=20 t=1, t=n
receipt is the 2, 3, 2,. 2,..
banknote 4,,, t=19 t=
t=9 (1-n)

Exchange - 50 Dutch - 50 - 50 - 50 - 50
function goldguilders in gg. gg. gg. gg.
exchange for
the merchants 16:00 16:00 16:00 16:00
banknote at
16:00 hours
Closing time 0 50 0 50 0 50 0 50 0
Overnight 0 50 0 50 0 50 0 50 0
at the Safe
Exchange Bank
Office Office
No Safe With Safe
Treasure the Goldguilders deposit for t=(n-1) days

5. So knowing all this, what do we have? When new policies of easy money do seem to work very

well in the beginning, no one is eager to annoy the wisselbank governors. But when different

concepts of banking and insurance do become more and more intertwined for all of the travelling,

negotiating, and not succeeding, so leaving merchants, especially in the more complex times when

war, limitations, and protection do make the difference, and there is lack of knowledge on how the

clearing agreements and specialties will do work out. When all of the banking loans, deposits,

guilders, gold and silver do become mixed up because of the different clearing and other

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A History of The Lending and The Banking

obligations this all becomes far too complex, than one needs a backbone to know what is wanted:

the money shortage, the paper banknotes on the other offices or last but not least the gold shortage

surpluses or other reserve. So why have all these things changed compared to the early days?

Because the paper is a little bit a piece of a small-valued material. For a few dollars there seems

no harm, but a couple of cents for a thousand dollar note is really something else. So we need to

back this, and when one travels a lot and is using the notes in the large nominations, this will

become a kind of a risk. So the outstanding amount is in the large nominations only, difficult. In

all other normal practice there is no harm at all. The risk of losing these small banknotes by the

large group is certainly not needed in the physical gold volume. In the small group of large

nomination notes a separate insurance would satisfy the needs of all, there also isn’t needed the

gold stock either.

6. Then the why Keynes wasn’t so happy after all with the gold in doing the business. He thought

of the gold to become more and more the intertwined reserve with all other kind of valuables’.

This worried the economist because it would be more or less the difficulty to be dealt with. Central

Banks would have the unpleasant task of doing the police work there constantly. This means fraud

and not doing the right thing by banks, customers and society. Leaving the gold standard would

do no harm, he has very deeply worked out. So when this all is taken into account for, the physical

gold stock will not be there anymore. Why then bother?

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A History of The Lending and The Banking

4. A New Five Guilders by Joost van den Vondel, Bookkeeper in the City Bank of Lending

7. The recent paper innovations do seem to make a difference. New complex banking products and

plastic money make the world go more and more turning in bits and bytes. When the paper

banknote of a few dollars becomes the price of a bit on the computer, think of it like it is almost

for free. When the physical gold stocks is taken away in our future society, as mentioned, for what

reasons than would we have the gold coins back days for? In fact what happens when there are no

banks at all, what would you do?

5. A New Five Euros Greece, Head of the European Bank of Lending

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A History of The Lending and The Banking

Illustration material:

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A History of The Lending and The Banking

Where did this come from? Recent talks with the chairman Mr. Gerald van Leiden, a member of

the so called “Commissie De Wit” investigating on behalf of the Dutch parliament the Dutch Credit

Crunch Reasons and Implications and also very needed by the second club of Senators in the Dutch

Second Room the so called Tweede Kamer of the Netherlands, and wanting the authors ABN

AMRO Bank and also the National Accounts experience when keep in mind that key players

should preferably do not investigate themselves. So, history does repeat itself, but it is hard to see,

again and again and so on and so on.

Literature:

• M. Blaug, Economic Theory in Retrospect, Cambridge University Press, Cambridge, 1985

• R.B. Ekelund jr. and R.F. Hébert, A History of Economic Theory and Method, McGraw-Hill

International Book Comp., Auckland, 1985

• M. Friedman, Have Monetary Policies Failed? The American Review, May 1972, Vol. LXII,

nr.2

• R.F. Harrod, The Life of John Maynard Keynes, MacMillan & Co. Ltd., London, 1963

• J.R. Hicks, Causality in Economics, Basil Blackwell, Oxford, 1979

• S. Hollander, The Economics of Adam Smith, David Ricardo and John Stuart Mill, var.

• T.W. Hutchison, The Politics and Philosophy of Economics, Basil Blackwell, Oxford, 1981

• J.M. Keynes, The General Theory of Employment, Interest and Money, MacMillan and Co.

Ltd., London, 1936

• S. Kuznets, Modern Economic Growth, Rate, Structure and Spread, Yale University Press,

New Haven, 1966

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A History of The Lending and The Banking

• A. Leijonhufvud, On Keynesian Economics and the Economics of Keynes, Oxford University

Press, New York, 1968

• A. Marshall, Principles of Economics, Mac Millan and Co. London, 1947

• J.W. McGuire, Theories of Business Behaviour, Prentice-Hall, Englewood Cliffs, New

Jersey, 1964

• J. St. Mill, Principles of Political Economy, Parker, Son and Bourn, Westrand, London, 1862

• W.J. Samuels, The Methodology of Economic Thought, Critical Papers from the Journal of

Economic Thought, Transaction Books, London

• J.A. Schumpeter, History of Economic Analysis, George Allen & Unwin Ltd., London, 1954

• H.W. Spiegel, The Growth of Economic Thought, Duke University Press, Durham North

Carolina, 1983

• G.J. Stigler, Essays in the History of Economics, The University of Chicago Press, Chicago,

1965

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