Will Roberds and Steve Quinn on the Original Central Bank: the Bank of Amsterdam

Will Roberds is an economist emeritus of the research department of the Federal Reserve Bank of Atlanta. Steve Quinn is a professor of economics at Texas Christian University. In Will and Steve’s first appearance on the show they discuss the historical significance of the Bank of Amsterdam, The use of ledger at the Bank of Amsterdam, It’s use of repo and open market operations, it’s connection to central banking today, and much more.  

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This episode was recorded on September 23rd, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Our guests today are Steve Quinn and Will Roberds. Steve is a full professor of economics at Texas Christian University, and Will is an economist emeritus of the research department of the Federal Reserve Bank of Atlanta. Steve and Will join us today to discuss their recent and riveting book titled How a Ledger Became a Central Bank: A Monetary History of the Bank of Amsterdam. Steve and Will, welcome to the program.

Will Roberds: Thank you.

Steve Quinn: Thank you. Delighted to be here.

Bank of Amsterdam

Beckworth: It’s great to have you on, and when I say riveting, I mean it. The title might lead one to think ledger, central bank, it’s almost an accounting textbook, but it’s a really interesting history of how the Bank of Amsterdam emerged and became an important central bank in early history. Maybe start with this question. How did you two guys stumble on this project, meet each other, and get into it?

Roberds: When I describe this project, I have an analogy I like to use, given that the Bank of Amsterdam, if you will, was our grandparent, predecessor to the Bank of England, which is predecessor to the Federal Reserve. The ledgers of the Bank of Amsterdam, one can compare to Fedwire today, or TARGET2, or whatever large-value central bank payment system you want to name.

To describe our project, just imagine that next week or two, it’s not a forecast, the Federal Reserve went bust and was replaced by a more forward-looking institution. Nobody cared about the Fed anymore, but some very smart person at the wholesale product office in New York said, “Well, I think I’m just going to put all of the Fedwire tape since 1918 on a disk drive, and I’m going to give it to the New York Public Library.”

There, it sits for 250 years, a few little odd historians look at it. Then come along two guys from Tanzania and say, “Well, we’ve heard about this disk drive and we think it may have some relevance for central banking today.” They go to the disk drive and they can’t figure out the format and so on and so forth. Then they fumble around for 20 years, and finally they manage to decode about 1% to 2% of the disk drive. That 1% to 2% are the master account transactions, the SOMA, if you will, of the time. This was our crazy project. It started in—what was the year?

Quinn: 1995, 1998.

Roberds: Yes, it was around 2000. We got to talking at a conference, and we wrote some airy-fairy theoretical papers about the bank, and finally Steve said, “Well, let’s just go over and have a look at the archive.” Then we went through a learning process. There’s, I don’t know, 600 yards worth of ledgers sitting there in the Amsterdam City archive. Thank you, the Netherlands, and thank you, city of Amsterdam, for preserving them.

There’s no user’s manual. We didn’t speak much Dutch. We got a lot of help from our Dutch colleagues and gradually learned a lot of things about what the bank was up to. The more we learned, the more 21st century the institution seemed to become. Let me stop there.

Quinn: That’s what kept it going, right? This has been a very slow road. You start with the secondary literature. This seems interesting, and then you start getting into the actual archives and you realize, oh, wait, there’s a lot more going on because for a long time, no one had Excel, much less the ability to take all these photos and decode it all, and then eventually do stuff with it. But I want to come back to Will’s point about there’s no guide or owner’s manual.

It’s just these records. You’re figuring out what was the system that was creating this? How did it work? You start realizing there’s all this other stuff going on. As you begin to decode it, you start to realize, oh, this is actually fantastic, but none of it is obvious at first. You really got to dig in.

Beckworth: Yes, you did the Lord’s work going through the archives. As you note in your book, you processed 172,000 master account records. As you said earlier, only 1% of the total. Any grad students, any funders out there, you would be willing to take them on and go back to Amsterdam and do some more work, right?

Roberds: Amsterdam’s a fun city to visit. For the record, I’ll just state that we never entered a coffeehouse during our visits.

Beckworth: Okay, good to hear. Now, this bank is very important. We’re going to get to some of the specifics, but I just want to maybe put it in historical context. You make the case that this was, in a sense, the original central bank, I believe. How does that relate to the Riksbank, because some will say that’s the original central bank? How would you rate the two historically?

Roberds: The Riksbank was inspired by the Bank of Amsterdam. I don’t have the exact starting date of the Riksbank. It’s the oldest one still in existence. Bank of Amsterdam was chartered in 1609. I have another little spiel where I describe what was the meaning of the bank, I like to go back to the year 1491, where we had Europe on one side of Eurasia wanting to buy a lot of stuff from Asia, having basically only one commodity that Asia really wanted from Europe, and that was silver. You had people running around every mountain range in Europe with divining rods trying to find the stuff that the Asians wanted that could be taken to the Middle East or even far Asia. People would come back with spices and Asian supercrafts, silk, cotton, pottery, blah, blah, blah.

That world changed not so much in 1492. In 1545, there was a chance discovery of the largest silver lode in the history of mankind in what’s now Bolivia. It’s called Potosi. Pretty quickly, world production of silver tripled, most of it in the form of various names. They’re really called pesos, pieces of eight Spanish dollars. Once those showed up in Europe, Europe had, if you will, its 90-day Treasury bill.

These could be shipped to Asia, sort of like what happens now, and lots of stuff could come back from Asia and people in Europe. Something very similar happened in Brazil toward the end of the 17th century. There were spectacular finds of gold, and so large amounts of gold were coined and sloshed around Europe, and found their way in. Then this gave Europe its, if you will, 10-year Treasury note. What was missing was a central bank, a Federal Reserve to connect these two.

Silver was very safe, gold was not quite as safe, but the values could change around. They could have various degrees of specialness depending on time and space, just like Treasury securities today. 1683, by accident, the Bank of Amsterdam, which was a financial market utility, went to an amazing system of fiat money oriented around what we would now call a standing repo facility. This made the little Dutch Republic, 2 million people, if you will, the center of the global metals trade.

Beckworth: That's so fascinating that they were the predecessors of what we do today. That's a key point in your book. The safe asset were the metals, and they were the financial intermediary that connected them all, as you alluded to. It's like the New York Fed is to treasuries and storehouse and reserves for all these foreign entities. 

That is so fascinating, a standing repo facility centuries ago, long before we had this at the Fed and other central banks. In some ways, full circle, we’re coming back to what this entity was. We’ll get into it, it was ledger money. They did not issue any notes unlike the Swedish National Bank. Again, I want to just go back because I will admit my ignorance until I met you two in your book, I wasn’t aware that this was the initial central bank.

Quinn: If I can jump in on that, we very much don’t want to get into an argument about what was the first central bank, because as you well know, it requires defining what’s a central bank. We could go on all day about just that. We really want to focus on the modern part. You were picking up, and Will was just picking up a fiat, account-based, repo facility is your primary way of managing it. That’s very modern.

That’s like the Fed right now, much more than say the Bank of England in its heyday or something like that. The Fed now, it’s about the reserves, it’s about interacting with that through overnight repo, overnight reverse repo, all this stuff. That’s the toolkit now. That’s what got us excited was realizing what the Fed is moving toward, it’s what this institute is doing with a switch from Treasuries into gold and silver coins.

Bank of Amsterdam’s Ledger

Beckworth: Yes, so fascinating. Nothing new under the sun in this regard. Let’s talk about some of the features of this bank. We’ll come back to its history. You do a great job in your first chapter outlining these parallels. You just alluded to them, but number one, in 1685, it started issuing fiat money. You call it bank money. Just to be clear, spell this out for us. They didn’t actually issue notes, but it was a ledger account. Maybe talk about that a little bit.

Roberds: Just for the record, they did try issuing notes, and those were an abysmal failure due to insider fraud. That happened several times in the history of the Riksbank, too. I’m just going to say, if you look at the early history of note issue by central banks, it’s not a pretty history. What was maybe different in Amsterdam was that they said, this is such a sleazy business, we’re just going to stay out of it.

There were these other entities in Amsterdam called—they were really little deposit banks, but they were not called banks. They were called cashiers who did some note issue and said, “We’re just going to leave that business to them.” Why they went to fiat money was everyone had always puzzled, but it wasn’t until Steve broke the code of the ledgers that this was a very effective way to deter insider fraud and other kinds of fraud by virtue of the fact that if you had money in your account at the Bank of Amsterdam, and any merchant of sufficient standing in Amsterdam could have an account there, that did not confer any withdrawal right.

To be able to withdraw, you had to provide evidence in the form of a receipt that you or someone else you had bought the receipt from had actually deposited X coin on X date. Then you brought it in, you paid a fee, which was equivalent to a policy rate, and then you could withdraw the coin. Any other kind of withdrawal, forget about it. It’s not as if there was some big announcement, oh, now we’re going to fiat money, but it’s like we are going to clean up our books and we are never going to have any fraud at the bank again, ever.

It was, in the terminology of Ulrich Bindseil, prominent person at the European Central Bank, it was a very blue-collar thing that they did. Blue-collar central banking being running the plumbing that makes everything work. Eventually, it transformed the bank from a financial market utility into something looking like a modern central bank. It became very white-collar over time.

Beckworth: Ulrich Bindseil is a former podcast guest as well. I’ll put that plug in. What you’re saying then is that fiat money emerged organically as a response to a problem. There’s many critiques of fiat money. Some people will say, “Get away from fiat money,” but fiat money was actually a solution to a problem.

Quinn: The goal wasn’t to create a fiat money, of course. It was simply to lock down how collateral could be moving. What could possibly explain this? I expect if New York Fed has this problem today, I know that Bank of Amsterdam had this problem where you just got all these written records. How do you know something after the fact was fraudulent or not? You got to control that space. Otherwise, you’re going to have fraud problems.

Since the quality of your ledger is your money, it is your status in the whole system, you got to get this under control. What they figured out was if they, like Will just said, if they said, you can only take stuff out under very limited situations. It’s like you’re trying to solve a Sudoku puzzle, and it’s a 10 by 10 to begin with. We’re going to get rid of four or five of these potential columns. Then it just can’t happen anymore. Now we’re just down to about a three-by-three or four-by-four. That’s a lot easier to solve, a lot easier to track, a lot easier to control.

That’s what we see in the bank’s books. They literally are able to start tracking the Spanish dollars, the gold ducats, just the things that matter, and how those connect exactly to the creation and destruction of the bank’s money and the ledgers, and they can lock it all down. Fiat isn’t the goal, it’s simply a tool to solve this problem. Then later on, they start realizing, hey, it’s got some virtues. As Adam Smith goes on about this in The Wealth of Nations, this is kind of cool.

Beckworth: You normally don’t hear this angle on fiat money. Usually there’s a critique of fiat money. It’s abused. It creates hyperinflations in extreme cases. This is actually a time where it was beneficial. It was useful. It was a utility.

Roberds: It was a very practical adaptation by very practical merchants. Part of it was that the mindset in Amsterdam was very different from most places in Europe. This is the golden age of mercantilism. We want to accumulate bullion in our country, and this is our true wealth. I don’t think anyone in Amsterdam ever thought that for a minute. The attitude was, we want precious metal to flow in. We want precious metal to flow out. We need it to flow out.

We need to go to Gdansk every year to buy enough grain to feed our population. We want to ship a lot of silver over to Asia with the East India Company to buy these luxury goods. We want to do all of this stuff. How can we attract these safe assets? Here’s this great way. We’re going to create a new type of safe asset, which is going to be this central bank ledger money, which became fiat money. We’re going to connect it to these other two safe assets in a way that will suck in this stuff from—different from the Fed.

The Fed has the Treasury down the street. You know where the safe assets are coming from. Amsterdam at the time was maybe more comparable to, let’s say, London in the 1960s. The safe assets were coming from Spain, where the Dutch were. It was a little bit of a problem getting them into the country. Something had to exist to bring the safe assets to this little swampy country. It was anti-mercantilism and this superior way of trading safe assets that brought it there.

Beckworth: I want to come back to the structure in just a minute because it’s so fascinating. It’s like all the stars aligned for this to emerge, anti-mercantilism, the Dutch Republic itself was the center of international trade, a lot of things. I want to come back to that. Just to spell out, again, the features that make it very much like a modern central bank. Fiat money. It had real-time gross settlement. It was an international currency. It was used widely. It had QE, quantitative easing-like operations. There’s these two parts to the bank. We’ll talk about that. Then the repo activities. Then another element that I think is important is the ledger money itself. It’s very similar to where we’re going today. Now, in the US, CBDC is off the table, but we have stablecoins. Other central banks, CBDC, that’s just pure ledger. We talk about public ledgers where it’s crypto trade.

It’s so fascinating that we see this blueprint centuries ago that’s now coming to fruition, and they were ahead of their times. Let’s go back to Amsterdam because this is so important in the historical context. This was a city bank or a municipal bank. It wasn’t like a nation bank. Tell us why that was important.

Roberds: That was the norm at the time. Then let me give credit where credit is due, the first of this type of bank in Europe was actually Barcelona. I think the year was 1401, very shortly followed by Casa di San Giorgio in Genoa, I think 1404 or something like that. I’m not a real historian. Early 1400s. This was the norm. A lot of the commerce in Europe was not really international commerce in a modern sense. It was intercity between commercial cities.

When finally, Amsterdam said, we want to get one of these institutions, they could go to models in Venice and Genoa and so on and so forth and say, well, we’re going to try this in northern Europe. That part was not so unusual. What became unusual was over time, they developed an open market in this ledger money. Then they went to the fiat system, then they went to standing repo, then they went to QE and QT, and so on and so forth. It wasn’t as if they woke up one day and said, “This will be our business model.” It was something that was developed over decades.

Quinn: A key to making the fiat acceptable as money, was that, as you mentioned with the central bank digital currency idea, everybody could have access to it if you were wealthy enough. You could just bring your collateral in and use it.

It was very reliable, they kept the price stable, they kept the interest rate very low and stable. You can get in and get out. It’s like an overnight repo facility that pretty much anybody could jump into. Who needs old-fashioned conversion when you’ve got this far superior facility is what it comes down to. That was key to holding it all together.

Beckworth: All together. You outline in your book all these things, these key developments. You mentioned the big discovery of silver. Silver is flowing in. You need some intermediary to handle that, but also, the municipal feature, I think, is important because you outline in your book that when you go to regular central banks like Bank of England, they’re more concerned about seigniorage, where the city is concerned about stability, sound money, stable money exchange.

The incentive structure is different from the get-go. That’s also a reason. You outline in your book, or maybe it was in the footnote, that the price level was like 0.2% over some 50-year period. It was practically flat. They had price stability for a long period of time because they weren’t trying to play the seigniorage game. That was an amazing element. Talk about that.

Quinn: It took a while to sort out. In the 1600s, they had some problems. By the 1700s, they got their coinage, the nation in total got the coinage under control. They stopped debasing and stuff like that. That let the bank right on top of that. Then the flows of silver in were matching sufficiently, while the flows out, there wasn’t monetary pressure for long-term price changes.

I think for the 1700s, there was basically no inflation over the century. The bank didn’t upset that, but I don’t think it was entirely causing it either. I think it was a combination of its interaction with the Dutch who got their coins very reliable.

Beckworth: You got, again, the urban, the municipal founding, which has a different incentive structure. They want sound money or stable money versus seigniorage, but you also alluded to this earlier; they were anti-mercantilist. They believed in trade, which again, that’s another star you’ve got to align because you can imagine a different setting if you didn’t have that.

You note in your book, the only reason they did this was profit motive. I take that back. They were Dutch Reformed Christians, so maybe they had some high moral view of trade. I don’t know, but you suggest it was just a profit motive. Is that fair?

Roberds: I think you have to look at their problem. The Dutch have no natural sources of silver or gold. They need to get the stuff in the country. How did they do it? Let me just mention a little bit about the mechanics of the facility, which I think is critical to how it works. The way it worked is you would bring a bag of pieces of eight to the bank. You would sell it at a predetermined price.

You got credit on your account for the bank money. Then you got a receipt, which was an American call option on the coin. You could exercise that option anytime within six months and pay a slight fee, which was described in contemporary sources as interest, or you could sell the option. It was fully negotiable. Or you could just let go of the option, in which case the bank retained the collateral.

What was a great advantage of structuring the facility this way was that you had lots of even little guys in Amsterdam with connections all over Europe. They could buy precious metal in London or somewhere in Iberia or France by drawing a bill of exchange from maybe some big counterparty in Amsterdam, bring the precious metal into Amsterdam, sell it to the bank, pay off the bill of exchange, but they would still retain a levered position in the collateral.

Since it was an option, there would never be a cash call. You never have to post margin or whatever. It was a very safe form of leverage for even the little guys. Lots of people wanted to play that game. It was an attractive game to play. There would be these surges of demand that you knew would come. There would be the ships sailing for Asia, the ships sailing for Poland, basically.

There would be wars where rulers all of a sudden needed large amounts of silver and gold to finance the war. You would be there with your receipt, and you could sell it to whoever wanted to get those coins to where they needed to go. It was a very slick system in terms of attracting the collateral, the safe asset collateral.

Quinn: If I can add onto that, it’s super practical. These bags of coins were little 50-pound bags of silver coins, and they had dozens of them in these transactions. Who wants to actually buy and sell on the spot market this way, right? You just put it in the bank, it gives you a little piece of paper that says, this is good for those 50 bags or whatever, and you just move the sheet of paper. That’s all you have to do.

At a fraction of the cost of all the collateral, because you’re just only buying the option. Just 2%, 3% of the total value is the market price of the option. The market literally moves from moving sacks of silver around to just moving these pieces of paper. Then when you want the stuff, you just go back to the bank and pull it out because it’s owned by the city, it’s super safe, and they’re very careful. You know you can always get it back. This is crazy popular.

If I can add one more point to that, every time someone’s bringing this stuff into the bank, it’s creating bank money. What do they do with it? They use it then in the credit market. They go to the money market, and they lend it out. It’s not just the place where all the silver and gold moves, it’s also where all the credit is.

If you want to get trade credit or something like that, you go to Amsterdam. Even if it’s between the Baltic and London, you go to Amsterdam. You’ve got these giant merchant houses that are making that credit part go. It’s interacting with and synergistic with the metal moving. The bank is connecting the two flows and getting them to work in concert.

Beckworth: The metals were the safe assets of the period. There’s really two banks within the bank, or two parts to the bank. There’s this coin part. The coins flow in, they get the receipts, the repo facility of sorts. That’s the passive part. Then there’s the active part where the bank itself would go out and buy and sell coins separately.

Both of those activities would affect the total amount of bank money on the ledger. The bank money was the universal, the global medium of exchange, unit of account, and so that was important to have that. You noted they effectively stabilized it. If a bunch of coins flowed in, they might do open market operations on the other side.

Quinn: Everything you just said, we didn’t know until we reconstructed everything. What we had been talking about, the popularity of Amsterdam, the movement of metal in general, the movement of credit, people knew that. Adam Smith tells you about that, but what was going on behind the scenes to make all this work, no one knew. 

When we reconstruct it, we find out the first thing you just said, there’s a lot of metal moving through this bank and creating a lot of credit. 15% or so of all the silver, we think, coming out of the New World over that century, passed through the city hall in Amsterdam. At least, might have been higher, but we think that’s a floor, a guestimate. It’s a huge amount of stuff going through. One of the big points we come up with in the book is how the popularity’s great, love that part of it, but it’s volatile.

From year to year, you can get giant swings on how much is moving through. If you’re the Bank of Amsterdam, you’re seeing the total amount of your bank money, because you’re letting the public do this, go up and down and up and down. Instead of seeing this some after COVID with the overnight reverse repo, these are getting to be some big numbers. They were big numbers from the bank’s perspective.

Then that picks up the second part of it was, we also found out when we did the reconstruction, was that not only was the bank engaging in open market operations, they’d buy and sell metal without a receipt, by the way, just in their own account, buy it and sell it. When you actually reconstruct it all over decades, you find out it was counteractive. They were counterbalancing these customer-driven flows with their own control to keep the total pretty level. None of that, as far as we know, was public knowledge.

Beckworth: Did they figure this out again out of necessity? Like, oh my goodness, the coin flows are up and down, and we want to stabilize the bank money, so we’re going to go do our own trading in the coin market?

Roberds: I think they were doing, I’m going to use some central bank jargon, outright from the very beginning to the ledgers that still exists. Those start about 1666. Part of the reason, in addition to the whole fraud thing, they went to the receipt quasi-repo system was they were having to do too many outrights. Nobody really wanted to bring metal into the bank, but people liked to withdraw it. What was the solution?

The bank would go out and do these massive purchases of metal, coin it into the kinds of coins that people wanted, and then allow them to withdraw those coins for a fee. It was a huge amount of work. The receipt system did away with most of that within a few years. It wasn’t as if they just set up the receipt system and the bank ran itself.

There was this decades-long learning curve where, okay, well, end of the 17th century, a lot of gold shows up, and there’s the war of Spanish succession, and so on and so forth, and coin reforms in France, and eventually there’s these surges of gold in Amsterdam. How do we handle those? Maybe we’ll do some special kinds of receipt deals on the side with big players in the market. It’s fair to say that didn’t work that well. Eventually, I guess it would be fair to call it a blow-up in the gold side of the receipt window. They seem to have learned from that, and by 1720—

Quinn: Yes, ’26 or so.

Roberds: —mid-’26 or so, they developed this system whereby if we have a big movement in receipts, basically repo credit, we’re going to sterilize those without rights.

Beckworth: That’s interesting. You said 1720, they learned the art of open market operations. If you go back to the Fed’s history, early on, it was just discount. I think it was the 1920s—

Quinn: That’s right.

Beckworth: —they begin to discover, “Oh, we can do open market.” 200 years earlier, the Bank of Amsterdam had already figured this out?

Quinn: Yes, like the early Fed realized that these things were interacting. The early Fed found out that discount lending and the open market operations would interact with each other, so if they did open market operations, the discount went down. They couldn’t just work either in isolation. They discovered they talked to each other. We think that the bank discovered something similar in the 1700s. Yes.

Motivations

Beckworth: We have to rediscover knowledge sometimes, how this works. It’s so fascinating. Again, going back to the price stability they had, what motivated that desire? Why keep the bank money stable? Is it their Dutch reform nature? Are they conservative? How did they understand this?

Roberds: It was good for business.

Beckworth: Good for business.

Roberds: We should be a little careful to distinguish. There was the republic, the Dutch Republic. The Netherlands was a republic at this time, and then there was the city of Amsterdam. This was, at all times, a city operation. This was a city that was dominated by pretty small, pretty rich commercial oligarchy, if you will, and they thought stable currency was in their best interest.

Beckworth: It was profit motive, which then, in turn, enabled them to have price stability?

Quinn: The city was happy to take some profits from the bank, and they did, but it wasn’t essential. The city was, by itself, pretty prosperous. It wasn’t leaning on the bank as an important pillar of how we’re going to fund the war. The wars got funded by the provinces instead. In that sense, the city wasn’t under great seigniorage pressure leaning on the bank. Also, the other point, there was no modern macro concept of we have to keep aggregate demand stable or nominal GDP or anything like that. They weren’t doing that.

Beckworth: Fair point. I’m reading my own views back into their history. They were just trying to get by, survive, keep the bank functional.

Quinn: I think they wanted to keep that system popular. Their money had to be popular, and they had to be a popular place for the gold and the silver to come, for the credit to all work. All this, keeping it stable, keeping it reliable, kept the business of Amsterdam working well.

Beckworth: Again, it’s fascinating. They got a repo facility. They got open market operations. Now, stepping back from that technical discussion, you also note in your book, though, that the big decisions were made by the city council. There were levels of decision-making, but the big ones, the council people on the cities, I think, was it one-year terms?

You rotated through a lot of people. That’s where the Dutch reform, I think, becomes important because they have to be Dutch Reformed, good standing, and wealthy, as you mentioned. Talk about that. The city itself governed this bank.

Roberds: I think it was probably the real decisions were made among a small group of very rich, very prominent merchants. The people on the governing board of the bank tended to be younger sons of those families. We are not Dutch, and we don’t know enough of the subtleties of the politics, but they had a very firm idea of what was in their best interest.

They were very conservative during, for example, a crisis at the end of 1772 going into 1773, there were proposals that the bank should maybe set up a discount window. That didn’t happen. Too risky. There was a city discount window set up, and they said, “We’re going to take any kind of collateral in the world except for bills of exchange. We are Dutch, and we don’t believe in any kind of monkey business like that.” It was just a very conservative system on the whole.

Even though it was Reformed people, we did say there was a lot of ethnic diversity in Amsterdam at the time. The people running a lot of the metals trade tended to be German Jewish people who had connections all over Europe to be able to bring metal in from wherever it was in surplus into Amsterdam. A lot of these were smaller traders and they were able to use the receipt system to build these profitable leverage positions with very small amounts of capital. That activity was seen by everyone as totally advantageous to the city.

Seven Years’ War

Beckworth: Now, you mentioned in your book that a lot of international activity was based around this bank. You start the book off, if I recall correctly, with Frederick of Prussia taking advantage of this relationship to help fund his war efforts. It was the last large-scale debasing of coins. Did I read that correctly? And it was facilitated by the bank?

Quinn: Very much so. Go ahead, Will.

Roberds: I don’t want to say the last but it was certainly one of the last, and again, it was an experience for us. We kind of grew up in the modern world where you want to run an inflation, you run the printing press. In pre-Napoleonic Europe, that’s not how you ran an inflation. You ran an inflation by debasing coins but to do that, you actually had to come up with enough silver to create credible coins. It might have been lighter weight than what was available before but they couldn’t be just raw copper. Frederick the Great ran a massive debasement during the Seven Years’ War, and I think he really thought he would be in the war for seven years but he just kept going. Where do you buy lots and lots of silver? It turns out Amsterdam was a great place to do it.

Beckworth: That ruling elite who set the big decisions, they’re the ones that said, “We’re going to work with Frederick the Great.”

Quinn: He just used the market. He just went in and bought the silver. The great thing was, from his perspective also he could do it on credit because Amsterdam also had this really deep credit market. He didn’t have credit but he worked with people who had credit so they borrowed the money to buy the silver to get it to Prussia to debase coins, to fight the war and then have to extract out good silver. They literally would take these bad coins and get them circulated and swapped out for better coins in eastern Europe during the war. Then, they’d have to get that silver to pay off the bills and try to get the whole thing floating long enough to run the whole cycle.

Beckworth: Do you think it’s fair to say that the Bank of Amsterdam financed Prussia’s war effort during the Seven Years’ War?

Roberds: It certainly contributed to it in a major way.

Beckworth: Just reminder to our listeners, how consequential was the Seven Years’ War? How important was it to the rest of European history?

Roberds: Again, we’re not heavy-duty historians but it was an existential war for Prussia. Prussia was a country of about 4 million at the time. Seven Years’ War started in 1756. It was a raid against France, population of 20, 25 million. Austria something like—what was the figure?—I’m going to guess around 8 million. Russia also and a number of other assailants. No one thought that Frederick would survive very long, which is why he could not have gone to merchant banks in Amsterdam and floated a bond issue or anything like that but what he could do was use the markets in Amsterdam to keep creating waves of debased coinage that allowed him to finance his war and survive for seven years. That changed the history of Europe and Prussia emerged as a major power in Europe.

Beckworth: Modern Germany today can trace some of its history back to the Bank of Amsterdam.

Quinn: United Germany, again, we’re not historians but united Germany would have been very different if it hadn’t been Prussian-led.

Roberds: Very different. A safer way to say that.

Beckworth: That’s consequential. The bank has a long-lasting legacy beyond its cool—

Quinn: We suspect there’s lots of other stories like that in these ledgers. We just haven’t gotten to them yet but we’re hopeful young scholars will.

The Repo Versus the Open Market

Beckworth: Folks listening to this podcast, again, funders or researchers, you can join the party. We can provide your contact information in the transcript. Again, going back to the technical side. Now, a lot of interesting history there. It’s in the book. The technical side. You note there’s two parts to the bank. There’s the repo. There’s the open market operations. There’s also, again, I think it’s really fascinating, it’s pure ledger money. Back then, you had bank notes, you had coins, but actual ledger money, which is what we’re going toward today. Those two parts: the repo, the open market. You also framed them in terms of active versus passive. Spell that out for us. Why call something active versus passive?

Quinn: I’ll take the simple version. We’ll take the more sophisticated version. Simple version is when you’re teaching this stuff to undergrads like I do, you start to realize when you’re designing or talking about how central banks operate, who is deciding when and how much something’s going to happen. With repo, like the standing facilities the Fed has today, the Fed’s basically telling money market funds or whoever, you decide when and how much. Then, they start to set the quantity and then the Fed goes along with that. With open market operations, the Fed decides when and how much this is going to happen. They’re making it go.

That’s the basic distinction from the bank’s perspective between our phrasing passive and active. Where passive is when they set up a standing facility like the repo and say, bring it. That can be very volatile. Then the active side is when they step in and do what they want to do, which is often some form of stabilization. The stabilizing quantity in the 1700s, stabilizing prices and nominal GDP today. That’s the purpose of that. The two interacting is what we discovered then and we think is going on now.

Beckworth: Do you want to add anything to that, Will?

Roberds: There was a standing facility and there were these backroom outrights going on in a way that I don’t think before Steve decoded the ledgers, anybody knew about it.

Beckworth: I want to take that framing and apply it to the present. You have a separate paper with Charles Kahn that applies this thinking to the Federal Reserve today. Since 2008, we’ve thought a lot about the active side, QE, or large-scale asset purchases, but we’ve increasingly more begun to think about repo facilities, both at the bottom and at the top. You mentioned the overnight reverse repo. We also have the standing repo facility. The discount window is also a passive instrument at the top. Do you see this framing as important going forward? Secondly, do you need both? Can you have a system that just relies on passive or do you always need some of the active?

Roberds: Let me throw around a couple of or at least one more, central banking buzzwords. What made the system go was and, again, we’re not 18th-century Dutch legal scholars, so apologies if any of them are listening. The option feature of the second leg of this transaction, we believe, basically gave the bank a unique privilege as a creditor, which now we call safe harbor. Somebody didn’t exercise the option, they didn’t exercise it and we’ve got the collateral and nobody can sue us to get that collateral. 

There was collateralized lending in Amsterdam at the time but the private creditors they would, through bankruptcy, get their collateral back but did not have something approaching, we believe—Dutch scholars can correct us—this safe harbor privilege. Fast forward to the modern world, private actors can do entirely private repo transactions with safe harbor. We’ve got this whole massive, how many trillion repo market out there? That the Fed is only kind of a small player in. Do we need, for the Fed to have a larger footprint in that market? That’s the I don’t know how many trillion-dollar question.

Beckworth: That’s the question.

Roberds: You go back to what Amsterdam was doing, one criticism of the Fed potentially having a big footprint in repo is that this is going to encourage excessive leverage. It wasn’t a problem in Amsterdam because it leverages us. We want leverage. This is the way we get the safe assets here. The question would be now, if you’re encouraging levered investment in US Treasuries, is this a good thing or is it a bad thing? I would leave that to Daryl Duffie or some higher authority. Something I think the history teaches us, if you go into the later chapters of the book, there are these episodes where the system blows up.

There are these tail scenarios where the system of balancing the active and passive parts are working, and then Seven Years’ War comes along and the passive overwhelms the active. At the end of the Seven Years’ War, there’s a classic financial, currency, collateral, everything crisis. The bank has to become not really a lender of last resort but a dealer of last resort to use Mehrling’s term. Then there’s some other bad things that happen. I would say maybe the lesson from that is if maybe the Fed is going to have this big footprint, again, you want to have Daryl Duffie thinking through the tail scenario.

Beckworth: We’ll call Daryl Duffie up. I see two potential big footprints. The point you’re raising is if it has a huge footprint in the repo market but you could also argue its huge balance sheet is also a big footprint. I will cynically say this as a non-Fed person. The Fed is effectively the largest fixed-income hedge fund in the world. It funds short and invests long in Treasuries. One could argue that shouldn’t be the job of the Fed. I know the Fed’s not trying to make money doing that. It’s trying to stabilize the economy but you could argue that’s a big footprint. You’re saying the flip side; if you give that up and you go passive, you could have a massive footprint in a repo. There’s some tradeoff here.

What about the movement—I think you guys know some of my interest in this—the movement overseas, at least, central banks, the ECB, Bank of England, Reserve Bank of Australia are probably the most forward on this, and to a lesser extent, the Bank of Canada, they’re moving to what some of them call demand-driven systems, which is, I believe, the more passive. In my version of this, I would call it a demand-driven ceiling system. You shrink the balance sheet and you get to the place where the ceiling facilities, whether it’s a discount window or a repo facility are attractive. There’s no stigma. Banks, their demand determines the amount of liquidity and reserves in this system. Any insights from this period or any thoughts you would have on going down that path?

Roberds: Let me, again, say I am retired from the Federal Reserve so maybe I can be a little freer in my answer than I would have been a couple of years ago. It’s going to be a different ballgame with the Fed just because of the ever-increasing size and centrality of the US Treasury market, first of all. Then it seems like the question you want to dig into is, how critical is levered finance to sustaining the liquidity of the Treasury market. Then the next question you ask is, would a big standing repo facility of the Fed increase or decrease the functionality of this levered finance? Both in normal times and in these Daryl Duffie tail scenarios. Sorry, I just don’t know the answers to these really tough questions.

People like Anil Kashyap have said, the Fed should be thinking about really extreme—Anil Kashyap and co-authors—extreme interventions where the Fed takes over not only cash collateral but positions in the Treasury futures market. I don’t know the answer to whether that’s a good idea or not. It seems like if the Fed is going to have this big standing facility ceiling system type of footprint, somebody should be thinking about those questions.

Quinn: What history might suggest is that if you set it up in a way that’s attractive, you can get some serious volume. You’ve got to get your five-point harness tucked in. Then what are you going to do about that? Are you going to ride it? Are you really going to say, yes, if the public wants to double the money supply, we’ll do that. Or you can say, we’re going to let you do that but we’re going to maybe try to counteract it to some degree, some sterilization. That’s where the bank would say, this demand-driven ceiling can be really popular. People will love it. You’re going to get the collateral. People are going to be using your money for all this stuff. That’s great.

Beckworth: There’s no doubt it’s uncharted territory in some sense. It’s interesting. I’ve had Bill Nelson on a number of times. He’s mentioned to me that in the late ’90s, early 2000s, when we were running budget surpluses, there was this, “What’s the safe asset going to be on the balance sheet?” They were talking about more lending, bank loans being the asset as collateral. Now, that’s a very different world, obviously. We don’t have that problem today.

Quinn: We got to go back to how the Fed was originally designed. The original Fed was supposed to be discount lending. That’s how the notes were going to get out there. That was going to be driving most of that creation. That was going to be a passive demand-driven story. Banks would come to the Fed. At the end of the ’20s, that was pretty much, “We’re not going to be doing that.”

Beckworth: I think the takeaway from your book, at least for me, is even if you were to go to that, in crisis, the active part needs to be at least held ready to go in a crisis even if you don’t want to use it all the time. The other thing, I looked at the ECB, and I’m like, “Man, you guys have this amazing main repo financing operation so it’s easy for you to go to more of a ceiling,” but they’re also a very different financial system. They’re largely bank-focused. We have a lot of nonbank finance in the US. Even if we did aspire to my ideal, we’d have to find ways for nonbanks to access the Fed’s balance sheet at the ceiling, which would be sending a repo facility, maybe a central clearing but then you get leverage, moral hazard questions and so it’s a big mess. Whether the Fed has a footprint through its balance sheet or through these repo facilities at the ceiling, it’s not clear, I guess, what the ideal world is.

Roberds: I would say that if I had to give a 30-second meta message of the book, I would say going to standing repo will not be just a blue-collar thing. It can prove transformative for the institution that offers it at the highest level.

Beckworth: That would be important in this day and age of populism and how things are perceived, even if the best intentions are behind it.

Quinn: It’s not necessarily a bad thing. Just complicated.

Beckworth: Be aware of what it is. We are nearing the end of our show here. This is an amazing bank, amazing history. How does it end?

Roberds: Through lending to a GSE. The GSE in question was the Dutch East India Company, which was organized into six divisions spread out over different cities. There was an Amsterdam division, which was connected to city finances ultimately. A source of profit to the bank was, in addition to its trading operations, doing loans to the Dutch East India Company. These were originally conceived as loans. There was a yearly rhythm of the boats going to Asia and boats coming back. This would be a loan against cargoes that were in transit from Asia. Then, do you want to give the gory details?

Quinn: The war breaks out between the English and the Dutch. This is 1782. The English just knock around the Dutch fleet, seize a bunch of stuff, and start taking away the Dutch spice control in Asia. All of a sudden, the Dutch East India Company is massively insolvent. They’ve got all this debt. They aren’t going to be able to pay it off. The bank turns out to be a giant holder of it. People just sniff it out of the air like, “Oh, this isn’t good.” They run. All the receipts get pulled out. Doesn’t empty the bank because, of course, it’s fiat. Only money got destroyed that was a receipt. The city, at the same time, leans on the bank to lend a great deal more to the company.

Everyone’s like, “Really now the city cares. The wars, whatever.” The Dutch East India Company was a city-connected thing. The city wants the bank to help out. The bank just loses credibility. People just don’t believe that it’s solvent and it’s going to give back its gold and silver like it used to. The value of its money falls in foreign exchange. It’s basically done as a leading central bank kind of thing. It’s stumbling along, and then finally, the French army arrives in 1795 and then that’s it. 

Beckworth: That’s it. That’s the end. With that, our time is up. Our guests today have been Steve Quinn and Will Roberds. Their book is titled How a Ledger Became a Central Bank, A Monetary History of the Bank of Amsterdam. Be sure to get your copy. They’re hot off the press. Thank you, gentlemen, for joining us.

Roberds: Our pleasure.

Quinn: It’s been great, David. Thank you.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.