This chapter covers the Bank’s introduction of its receipt (quasi-repo) facility in 1683 and its simultaneous transition to a fiat-money standard. Data extracted from the Bank’s ledgers (which survive from 1666) show that before the introduction of receipts, the Bank routinely executed large purchases of silver in order to maintain the size of its balance sheet and to ensure an adequate stock of metallic assets. These data also show that the Bank’s open market purchases were curtailed after the introduction of the receipt system, which created greater incentives for Bank customers to deposit trade coins into the Bank. With the introduction of receipts, Bank ledger balances unaccompanied by a receipt lost their rights to redemption in coin—Bank money became fiat money. The archival data suggest that the transition to fiat money was chiefly motivated by a desire to improve Bank accounting, via a reduction in the set of feasible transactions involving precious metal. The chapter shows how the transition to fiat money also stabilized the market value of Bank money. An appendix to this chapter presents a methodology for classifying Bank transactions from entries in its ledgers.

This introductory chapter describes salient features of the Bank of Amsterdam and proposes that these were sufficiently advanced to qualify the Bank as a modern central bank. Sophisticated central banking, however, was not the Bank’s original mission, which instead was to apply contemporaneous information technology (double-entry accounting) within a limited-purpose institution to facilitate the movement of safe assets (trade coins) through Amsterdam. By the eighteenth century, the Bank had moved well beyond its original design and evolved into a de facto fusion of two banks, active and passive, linked by a common liability — fiat ledger money. This chapter outlines this evolution, which is explored in greater detail in subsequent chapters.

This final chapter discusses the role of the Bank within a selective history of central banking. “Exchange bank” institutions such as the Bank became obsolete by the end of the eighteenth century. The new model for central banks was the Bank of England, which incorporated features such as private equity capital, large holdings of sovereign debt, a discount window, and the issue of circulating banknotes. It is argued that the Bank of England nonetheless gravitated to a two-bank structure following the 1844 passage of Peel’s Act, with many similarities to the eighteenth-century Bank of Amsterdam. Peel’s Act split the Bank of England into two banks, a passive bank (“Issue Department”) that issued notes against gold deposits and paid out gold coins, and an active bank (“Banking Department”) used its ledger money to commercial paper and engage in various types of open market operations. A concluding section argues that the active—passive dichotomy bears some relevance for modern financial markets, with active liquidity arising from traditional central bank open market operations, and passive liquidity arising from arrangements such as repo transactions. It is argued that recent crisis events have revealed the interconnectedness of these two forms of liquidity.

Chapter 8 is a case study focusing on Paul Samuelson’s essay, An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money, critical responses, and some of the discussion and applications it spawned. This case study illustrates the claims concerning the structure and strategy of economics presented in chapter 7, and it is of special interest because of the way in which normative issues intrude into what purports to be a positive investigation.

Money is created by the banking system issuing liabilities against itself. Under a fiat money system, nothing of intrinsic value backs the money supply. Viability of the system depends on shared faith. Central banks issue liabilities in the form of currency and deposits held by commercial banks in exchange for acquiring assets in the form of domestic government securities, foreign securities, or loans to commercial banks. These central bank liabilities constitute the monetary base. Commercial banks issue liabilities in the form of demand deposits held by the public in exchange for making loans. Commercial banks are constrained in money creation by the need to hold reserves with the central bank at a required ratio relative to demand deposits. The central bank must manage growth in the monetary base to maintain economic balance: too slow keeps the economy from performing at its potential while too fast causes inflation to rear up. To keep the economy on an even course, the monetarist school, led by Milton Friedman, advocates steady growth in the money supply. A pattern of inflation falling with slowing money growth shows up for Emerging East Asia between the 1990s and the 2000s.

The invention of money was one of the major factor that allowed governments, corporations, and individuals to consolidate power. This chapter reviews the history of money and its various forms. The globalized economy depends on the free flow of money, and trade is an enormous source of wealth and power. Trading economies have proven to be stronger and more flexible across history, and is the source of various power centers throughout history: the Mediterranean Middle East, the European West, modern China, etc. have all been made powerful through trade, whereas isolationists have found themselves at strong disadvantages. The pursuit of trading wealth has been the source of wars and social conflicts, as well as the spread of colonialism and chattel slavery. Disparities of power and wealth due to the economic power of the global economy continue to this day. However, globalization has also created enormous benefits for many populations around the world. Worldwide, literacy has increased and longer lifespans are the result of access to modern medicines and health care.