Evolution of central banking? De Nederlandsche Bank 1814-1852

Abstract

Nowadays the role of central bank is unquestioned and nearly ubiquitous. But was this always the case? This thesis analyses how De Nederlandsche Bank (DNB) developed into a central bank during the first four decades of its existence. Its establishment in 1814 was the result of a combination of both the need to address problems in the payment system, i.e. ‘scarcity of money’ (with its deflationary effects) and government’s desire to create access to cheap finance. DNB’s Charter was largely based on a proposal drafted in 1798 which aimed to establish a bank that could act as ‘lender of last resort’. Resistance to this ‘public bank’ could only be overcome by Willem I with his autocratic powers in 1814. The King adjusted the original proposal to serve his personal intention to use DNB to support government finance (‘the fiscal theory’). This motive was important in the establishment of DNB, but in practice not much came of it since DNB was a private company, which effectively safeguarded it from government interference. DNB did not lend to the Government until 1834 and even then it remained limited. The Government respected DNB’s independence, as it was well aware of the impact of overt interference on DNB’s reputation and effectiveness. Initially, the circulation of DNB banknotes grew only slowly. Acceptance depended on voluntary uptake in the market and it took a long time to build up confidence. Certainly up until about 1840, the market looked upon DNB with suspicion because of its close relationship to government. Besides, there was an alternative means of payment available provided by the cashiers with their current account facilities and mutual clearing process. With the renewal of the Bank’s Charter in 1839 DNB entered into competition with the cashiers and drove them out of business. This was not just the result of ‘natural’ market forces at work, but clearly initiated by the change in the Charter as proposed by the Government. DNB’s scale was decisive. From 1840 onwards, DNB was effectively, although not de jure, the monopoly issuer of fiduciary money in the Netherlands. DNB’s definitive accession to the centre of the money market came with the currency overhaul that began in 1847. After this, DNB’s reputation for being a reliable issuer was established once and for all and banknote circulation grew rapidly from then on. By 1852, DNB’s activities clearly distinguished it from other financial institutions. It deliberately started to stockpile reserves of specie and bullion by buying silver priced at such a level that it was more attractive to sell to DNB than to have the silver minted. Its banknotes started to be used by other financial institutions as their own liquidity reserve. By 1852 DNB was firmly positioned as the central player in the nation’s money market. No longer was it just a large complementary body to the market; it was set to become trusted key player. Until then its credit policy had been very conservative, as DNB had no control over the market.