BIS on Bank of Amsterdam: Pot calling the kettle black
Jon Frost, Hyun Song Shin and Peter Wierts at the Bank for International Settlements wrote a paper last month An early stablecoin? The Bank of Amsterdam and the governance of money which disparages past models of (proto) central banking and new incipient forms of central banking to conclude that the modern central bank is the only worthwhile model. They criticize the Bank of Amsterdam (1609–1820) for its flawed governance that led to its eventual failure, and extrapolate from that to dismiss newly emerging stablecoins which (according to Frost, Shin and Wierts) share the same governance problems. The authors think that, by contrast, modern central banks have the right governance structures and right fiscal backstops.
My biggest grouse with this paper is that if we want to criticize an institution that thrived for 170 years and survived for two centuries, we must compare it against an institution that has been successful for even longer. Unfortunately, I am not aware of even one major central bank today that has been successful for the last 100 years let alone 170 years:
- A large number (perhaps the majority) of modern central banks are less than a century old.
- Most older central banks failed in the 1930s when they abandoned the gold standard and defaulted on their convertibility promises.
- Some old central banks that were not directly on the gold standard (but were pegged to the dollar or the pound) failed when they suspended the peg in the 1930s or during or after the Second World War and did not return to the pre-war parities.
It appears to me to be the height of hubris for an association of failed central banks and central banks that are too young to have experienced failure to point fingers at the Bank of Amsterdam whose track record for 170 years was far better than that of any of these banks. In fact, I think that the Bank of Amsterdam’s track record even at the point of failure was better than the stated goal of most central banks today. The best central banks currently target an annual inflation rate of 2%. Over a period of 200 years, this inflation rate will lead to a 98% loss of purchasing power: 200 years from now, a dollar would be worth only 2¢ in today’s money (1.02 − 200 ≈ 0.02). By contrast, at the point when the French revolutionary armies invaded the Netherlands in 1795, and the true state of the balance sheet of the Bank of Amsterdam was revealed, the money issued by the Bank of Amsterdam fell to a 30% discount to gold (Frost, Shin and Wierts, page 24). In other words, over the two centuries of its existence, the money issued by the Bank of Amsterdam lost only 30% of its value for an annual depreciation of less than 0.2% (1.0021609 − 1795 ≈ 0.7). At the point of failure, the performance of the Bank of Amsterdam was equivalent to an annual inflation rate one-tenth that of what the best central banks promise today.
If modern central bankers think that they are better than the Bank of Amsterdam (either in its heyday, or on average over its entire life including the point of failure), they need to introspect long and hard whether they suffer from excessive over confidence or amnesia.
Posted at 6:20 pm IST on Thu, 17 Dec 2020 permanent link
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