Tuesday, August 21, 2007

Demand Deposit (4) - Bank of Amsterdam

The bank of Amsterdam operated in this way for more than 150 years from 1609 to 1779. Very few banks have remained sound for this length of time. The integrity of this bank was noted by David Hume and Adam Smith. The latter made the following comments.

The Bank of Amsterdam professes to lend out no part of what is deposited with it, but, for every guilder for which it gives credit in its books, to keep in its repositories the value of a guilder either in money or bullion. That it keeps in its repositories all the money or bullion for which there are receipts in force, for which it is at all times liable to be called upon, and which, in reality, is continually going from it and returning to it again, cannot well be doubted...... 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 the treasure of the bank..... The bank is under the direction of the four reigning burgomasters who are changed every year. Each new set of burgomasters visits the treasure, compares it with the books, receives it upon oath, and delivers it over, with the same awful solemnity, to the set which succeeds; and in that sober and religious country oaths are not yet disregarded.

In 1672, when the French king was at Utrecht, the Bank of Amsterdam paid so readily as left no doubt of the fidelity with which it had observed its engagements. Some of the pieces which were then brought from its repositories appeared to have been scorched with the fire which happened in the town-house soon after the bank was established. Those pieces, therefore, must have lain there from that time.......

The bank cannot be debtor to two persons for the same thing.

(An Inquiry into the Nature And Causes of the Wealth of Nations, 1776).

The last sentence is the key to the longevity of the Bank of Amsterdam.

Unfortunuately, during the 1780s, the bank began to violate this principle, when the city of Amsterdam demanded that surplus deposits be loaned to the city. This marked the end of the bank's success.

1 comment:

Ted M. Gossard said...

Would that there would be more integrity in our financial institutions as well as care about the customers beyond the institution's own financial gain.