The emergence of the first central bank 

Was the Dutch guilder the first stablecoin? From Wisselbank to Devconnect, let’s dive into the origins of central banking before embarking onto our DeFi journey… 

In the beginning of the 17th century, many currencies of different value started circulating in European trade centers, resulting in compromised fluidity of monetary transactions. Dutch civic administrators sought a way to stabilize the chaotic monetary conditions infiltrating the commercial markets of Amsterdam. 

In an effort to mitigate currency debasement, in 1609, the City of Amsterdam opened Amsterdamsche Wisselbank, a public exchange bank with the purpose of withdrawing debased coins and distributing standardized, good-quality ones. The Dutch currency at the time was the Guilder, also known as Florin.

The Wisselbank secured foreign merchants by settling debts through the bank and by offering account holders its own currency of stable value. This stability was achieved because of the requirement that the bank had to maintain its reserves of coins and precious metals equal to nearly 100 percent of its deposits. 

In contrast to private banks whose sole purpose was to seek profit, the objective of the public Wisselbank was to stabilize the monetary and banking system with the prospect of strengthening Amsterdam as a center for foreign trade. The firm purchasing power of the Dutch Guilder was a result of the reflexive integrity of the bank and its minting of high quality coins. Wisselbank’s high creditworthiness and liquidity created much confidence, and as a result boosted Dutch imperial prospects and innovation. 

Because of Amsterdam’s dominance in foreign trade, and its condition that all transactions above a certain amount were to be settled through the Wisselbank, the bank’s clearing and settlement system quickly rose to prominence in international payment systems. By the end of the 17th century, the Wisselbank became one of the most influential commercial banks in history, and its notes were accepted as valid tender everywhere. 

The Wisselbank did not make loans to the public; it primarily operated as an exchange service to merchants trading in different currencies. Its resistance to lending allowed the bank to keep reserves that fully backed its circulating currency. Because of this, the bank remained unaffected even during the invasion of the Netherlands by France in 1672, under King Louis XIV.

In 1700, the Wisselbank decided to grant the Dutch East India Trading Company (VOC) a line of credit. The well-known Dutch East India Trading Company is recognized as the world's first official publicly traded joint-stock company. Three out of the four individuals running the Wisselbank were also shareholders of the VOC, so it was in their interest to extend the company a line of credit. 

The downfall of the Wisselbank began when economic pressure prompted by a new war with the English in the late 1770s caused the bank to start engaging in more sustained lending on a larger scale, and in a non-transparent way. The turning point was the impact of the Fourth Anglo-Dutch war (1780–84) which took place through many bouts of conflict between the Dutch and English in European, West Indian, and Asian waters. These naval confrontations resulted in an economic blow because of the strain experienced by the VOC, who was the main borrower of the Wisselbank. Shipments by the VOC dramatically decreased, and sales of traded goods in the Netherlands fell from 20.9 million guilders in 1780 to a staggering 5.9 million in 1781.  

The Wisselbank started granting the VOC massive overdrafts. Then, in May 1782, bank authorities started swapping the VOC’s suspended loans into longer-term bonds. By 1783 71% of the Wisselbank’s assets were in credit. In order to continue to finance lending, the Wisselbank started minting money to buy more coins in the open market, which resulted in the bank’s assets being backed by only 40% of their value. In the first decade of the 1800s, as the Netherlands became a territory of Napoleonic troops, the Wisselbank was shut down and the privately owned Nederlandsche Bank was opened in its place.

Central banks as we know them today are usually thought of as institutions that print money, allow other institutions to borrow large sums of money, and issue government securities. But central banking developed from earlier forms of exchange banks that dealt with commercial transactions, and as seen with the Wisselbank, central banking’s provenance came from a desire to provide stable-valued money to strengthen trade. Conveniently, this monetary mode of governance enabled the Netherlands to be the financial capital of the world for over a century. 

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