Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

106 Money, Bank Credit, and Economic CyclesIn addition, Adam Smith refers to other sources of incomewe have already mentioned, such as the exchange of moneyand the sale of gold and silver bars.Unfortunately, in the 1780s the Bank of Amsterdam beganto systematically violate the legal principles on which it hadbeen founded, and evidence shows that from the time of thefourth Anglo-Dutch war, the reserve ratio decreased drastically,because the city of Amsterdam demanded the bank loanit a large portion of its deposits to cover growing public expenditures.Hence, deposits at that time amounted to twenty millionflorins, while there were only four million florins’ worth ofprecious metals in the vaults; which indicates that, not only didthe bank violate the essential principle of safekeeping onwhich it had been founded and its existence based for over onehundred seventy years, but the reserve ratio had been cut from100 percent to less than 25 percent. This meant the final loss ofthe Bank of Amsterdam’s long-standing reputation: depositsbegan to gradually decrease at that point, and in 1820 they haddwindled to less than one hundred forty thousand florins. 113The Bank of Amsterdam was the last bank in history to maintaina 100-percent reserve ratio, and its disappearance markedthe end of the last attempts to found banks upon general legalprinciples. The financial predominance of Amsterdam wasreplaced by the financial system of the United Kingdom, amuch less stable and less solvent system based on the expansionof credit, deposits and paper currency.THE BANKS OF SWEDEN AND ENGLANDThe Bank of Amsterdam was a forerunner of the Bank ofStockholm (Riksbank), which began operating in 1656 andwas divided into two departments: one responsible for thesafekeeping of deposits (using a 100-percent reserve ratio) andmodeled after the Bank of Amsterdam; and another devotedto loans. Although the departments supposedly functioned113 Vilar, A History of Gold and Money, 1450–1920, p. 208. On the operationof the Bank of Amsterdam see also Wicksell, Lectures on Political Economyvol. 2, pp. 75–76.