Evolution of Central Banking? : De Nederlandsche Bank 1814 -1852

The book analyses the establishment of De Nederlandsche Bank and its early development as a case study to test competing theories on the historical development of central banking. It is shown that the establishment of DNB can be explained by both the fiscal theory and the financial stability theory. Later development makes clear that the financial stability role of DNB prevailed. DNB ́s bank notes were not forced onto the public and competition was fierce. A prudent and independent stance was necessary to be able to play its intended role. This meant that DNB played a modest role in the Amsterdam money market until 1852. By 1852 it had established itself to become the central bank. By then its bank notes had become generally accepted and it could start to operate as a reserve bank. Also the market context had changed dramatically, its competitors had been driven out of the market and several credit institutions had become customers of DNB. "On the occasion of the Nederlandsche Bank's 200th Anniversary, it is good to have a new, and an extremely good, history of its founding and first fifty years of operation. The only previous account of this period of the DNB's history was legalistic and did not sufficiently place the Bank ́s development in its wider context. Uittenbogaard's book provides a much broader, and better, story of the personnel, economics, and finance of the DNB at this juncture." - Charles Goodhart, LSE. Foreword 8 Preface 10 A Note on Sources and Historical Statistics 12 DNB Sources 12 Statistics 13 Contents 14 Chapter 1: Introduction 17 1.1 De Nederlandsche Bank, Two Hundred Years on 17 1.2 Central Question 20 1.3 Focus on DNB and the First Half of the Nineteenth Century 23 1.4 Structure of This Thesis 25 References 25 Chapter 2: Theories on the Emergence and Development of Central Banking 27 2.1 Introduction 27 2.2 The Free Banking Explanation for the Development of Central Banks 28 2.3 Goodhart ́s Emphasis on Systemic Risk and Last Resort Lending 31 2.4 The Fiscal Theory: Glorious Revolution or Monetary Finance? 34 2.5 Political Economy of Establishment and Development of Central Banks 36 Conclusion and Structure of the Rest of the Study 42 References 44 Chapter 3: Dutch Economy and State 1800-1860 46 3.1 Introduction 46 3.2 The Political Dimension 46 3.2.1 Political Unification (1795-1813) 47 3.2.2 The Rule of King Willem I 1814-1840 49 3.2.3 1840-1860 The Liberal Decades 52 3.3 Economic Growth from 1800 to 1860: Transitional Growth 55 3.3.1 Heritage from the Eighteenth Century 56 3.3.2 The Nature of Transitional Growth 1814-1860 57 3.3.3 Sectoral Developments 58 Conclusion 60 References 61 Chapter 4: Establishment of De Nederlandsche Bank in 1814 62 4.1 Introduction 62 4.2 Dutch Historiography on the Establishment of DNB 63 4.3 The Proposal of and Debate on a National Bank in the Netherlands 64 4.3.1 Gogel ́s Plan for a General Batavian Lending, Discount and Deposit Bank 65 4.3.2 Opposition to the National Bank 70 4.4 The DNB Charter 73 4.5 International Comparative Perspective 76 Conclusion 80 References 81 Chapter 5: Corporate Governance of DNB 83 5.1 Introduction 83 5.2 Formal Arrangements 1814-1864 84 5.3 Shareholders ́ Interest in Practice 88 5.4 Management 92 Conclusion 95 References 96 Chapter 6: Relationship to the Government 97 6.1 Introduction 97 6.2 Instruments for Government 98 6.2.1 Government as Shareholder 98 6.2.2 Appointment of Board Members 99 6.2.3 Financial Dependence 99 6.2.4 Legislation 100 6.3 Government as a Client to DNB 102 6.3.1 Cashier to Government 102 6.3.2 DNB ́s Lending to the Government 103 6.4 DNB ́s Refusal to Branch Out 107 6.5 Operational and Advisory Role in Currency Issues 111 Conclusion 114 References 115 Chapter 7: DNB ́s Role in the Payment System (1814-1852) 116 7.1 Introduction 116 7.2 The Amsterdam Payment System 117 7.3 Cashiers 118 7.4 DNB ́s Payment Services 121 7.4.1 Current Account Balances 122 7.4.2 Banknote Acceptance 123 7.5 International Comparison 125 7.6 Explaining the Development of Banknote Circulation 126 7.6.1 Explaining the Slow Growth of the Banknote Circulation 126 7.6.2 The Marginalisation of the Cashiers 127 7.6.3 Explaining the Rapid Expansion of the Banknote Circulation After 1848 132 Conclusion 132 References 134 Chapter 8: DNB ́s Credit Policy (1814-1870) 136 8.1 Introduction 136 8.2 DNB ́s Lending 137 8.2.1 Advances on Collateral (Lombarding) 138 8.2.2 Discounting 139 8.3 Credit Management: Rationing and Rate Setting 141 8.3.1 Rationing 141 8.3.2 The Bank Rate 143 8.4 Objectives of DNB According to the Qualitative Sources 146 8.5 Quantitative Evidence 150 8.5.1 Keeping the Rate Low and Stable 150 8.5.2 Maintaining Convertibility 151 8.5.3 Market Conditions 154 8.6 Did DNB Do What It Said? 154 Conclusion 158 References 159 Chapter 9: Summary and Conclusion 161 Annex 1: Granger Causality Test, Market Rate & Bank Rate 169 1814-1870/2 Lags 169 Annex 2: Ordered-Probit Regressions 170 Whole Period 1814-1870 171 Factors Explaining Lowering the Rate (Entire Period) 172 Factors Explaining Raising the Rate (Entire Period) 173 Subperiod 1: 1814-1848 174 Factors Explaining Lowering the Rate (1814-1848) 175 Factors Explaining Raising the Rate (1814-1848) 176 Subperiod 2: 1848-1870 177 Factors Explaining Lowering the Rate (1848-1870) 178 Factors Explaining Raising the Rate (1848-1870) 178 Annex 3: A Monetary Policy Reaction Function for DNB 1814-1870I am grateful to Bastiaan Overvest (ACM) for his help in this ex... 180 The book analyses the establishment of De Nederlandsche Bank and its early development as a case study to test competing theories on the historical development of central banking. It is shown that the establishment of DNB can be explained by both the fiscal theory and the financial stability theory. Later development makes clear that the financial stability role of DNB prevailed. DNB℗þs bank notes were not forced onto the public and competition was fierce. A prudent and independent stance was necessary to be able to play its intended role. This meant that DNB played a modest role in the Amsterdam money market until 1852. By 1852 it had established itself to become the central bank. By then its bank notes had become generally accepted and it could start to operate as a reserve bank. Also the market context had changed dramatically, its competitors had been driven out of the market and several credit institutions had become customers of DNB. "On the occasion of the Nederlandsche Bank's 200th Anniversary, it is good to have a new, and an extremely good, history of its founding and first fifty years of operation. The only previous account of this period of the DNB's history was legalistic and did not sufficiently place the Bank℗þs development in its wider context. Uittenbogaard's book provides a much broader, and better, story of the personnel, economics, and finance of the DNB at this juncture." - Charles Goodhart, LSE Front Matter....Pages i-xv Introduction....Pages 1-10 Theories on the Emergence and Development of Central Banking....Pages 11-29 Dutch Economy and State 1800–1860....Pages 31-46 Establishment of De Nederlandsche Bank in 1814....Pages 47-67 Corporate Governance of DNB....Pages 69-82 Relationship to the Government....Pages 83-101 DNB’s Role in the Payment System (1814–1852)....Pages 103-122 DNB’s Credit Policy (1814–1870)....Pages 123-147 Summary and Conclusion....Pages 149-156 Back Matter....Pages 157-170