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2015 | OriginalPaper | Chapter

8. DNB’s Credit Policy (1814–1870)

Author : Roland Uittenbogaard

Published in: Evolution of Central Banking?

Publisher: Springer International Publishing

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Abstract

To finish the analysis of the development of business of DNB in the first decades of its existence, this chapter looks at the asset side of the balance sheet of DNB. In the previous chapter I argued that DNB after 1840 became de facto a monopolist in issuing banknotes and became the reserve bank of the Amsterdam money market. This chapter analyses what guided DNB’s credit policy in the first decades. What agenda can be inferred from its lending business?

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previous chapter DNB’s Role in the Payment System (1814–1852)

next chapter Summary and Conclusion

This is probably due to gold price changes that created profit opportunities.

The literature remains relatively unclear about the reasons for this structural change. It is probably a combination of a relative decline of the importance of the stock market compared to ‘real trade’. This is sometimes attributed to the restoration of government finance under Van Hall and the subsequent decline of the interest rate differentials between Amsterdam and money markets abroad, reducing arbitrage opportunities. See Jonker (1996), pp. 109ff.

Jonker (1996), p. 90. This ‘surplus’ value of the collateral had to be maintained in case of a price decline of the asset.

Jonker (1996), pp. 96 and 97.

Jonker (1996), p. 91. As the Dutch money market was centralised in Amsterdam and the Exchange, savings and investment funds were brought together in that market. This disintermediated structure was unique for the Netherlands.

De Jong I-1, 88 and 89.

Under the renewed Charter after 1839 the involvement of a notary was no longer obligatory, but it still happened. DNB developed an alternative registration procedure to comply with civil law that required (for debts over fl 100) a dated and signed deed of pledge. DNB’s procedure was considered inconvenient. De Jong I-1, 224 and Jonker (1996), p. 257.

Jonker (1996), p. 269.

Until 1889 DNB was not allowed to discount bills of exchange in foreign currencies. Underlying this restriction was the idea that the Bank should facilitate domestic trade and industry, and discounting foreign bills would only facilitate capital export.

There were different categories of promissory notes.

National Archive (NA), Den Haag, Secretariearchief, archieven van afdelingen van de hoofdbank en archieven van de bankkantoren van De Nederlandsche Bank NV, entry 2.25.68, inv.nr. 759–800 (for the years 1814–1815–1855–1856) and inv. Nrs. 1101–1114 (for 1856–1857 until 1869–1870). Hereafter abbreviated as AR and the year of publication. This quote comes from Annual Report (AR) 1851–1852 (inv.nr. 796): “Although the losses on unpaid promissory notes were substantial, the higher rate contains a sufficient premium, which even in this exceptionally bad year makes discounting promissory notes as profitable as discounting bills of exchange.” A similar statement can be found in AR 1854–1855).

Kymmell (1992), p. 97. Jonker (1996), p. 259ff.

Nationaal Archief (NA), Den Haag, Secretariearchief, archieven van afdelingen van de hoofdbank en archieven van de bankkantoren van De Nederlandsche Bank NV, entry 2.25.68, inv. nr. 2031–2040, d.d. 11-11-1857; Hereafter the reference to the Minutes is ‘MB’ and the date of the meeting.

The preference of DNB for discounting ‘real bills’ is expressed repeatedly. From the literature on the Bank of England the ‘real bills doctrine’ is well-known (see for instance: Fetter 1965, pp. 40–43 where different (contemporary) criticisms are discussed). The real bills doctrine assumes that a credit policy based on only accepting ‘real bills’ could never lead to over-expansion of credit. This doctrine is fallacious because it overlooks the possibility of price increases: even though the volume of transactions may be limited, the value of ‘real bills’ could increase because of price increases, as argued by Humphrey (1982), pp. 3–13.

AR: 1859–1860.

AR 1861–1862.

MB 2-2-1824.

‘Advice of member of the Supervisory Board J.H. van Reenen against the proposed doubling of the capital of the Bank. Submitted in the joint meeting d.d. 10-3-1819.’ In: De Jong I-2, doc. 21.

Charter 1814, art. 24.

MB 14-10 and 11-11-1857.

Only seldom was the lombard rate lower than the discount rate. This happened in 1857 (and 1873) when the discount rate rose so high as to leave the lombard rate behind.

Note that lombarding on specie/bullion and commodities is not discussed here. This business was much less important in terms of both volume and profits. Interestingly, however, the lombarding rate on commodities was generally kept stable, because that was considered to be the most favourable to the commodity trade.

Homer and Sylla also point to the low bank rate in the late 1820s as a possible indication of policy.

In order to test on the basis of the market rate and bank rate whether there was causality I tested for Granger causality between the bank rate and the market rate. For the bank rate, the month-end discount rate for good bills was used. For the market rate we used the prolongation rate quoted on the last day of the month. See Appendix 1 for the results of the Granger causality tests.

From 1814 to 1821 there are two series of minutes of Board meetings: secret and normal minutes. The secret minutes do no longer exist after 1821. The normal minutes cover the entire period and can be found in National Archive (NA), Den Haag, Secretariearchief, archieven van afdelingen van de hoofdbank en archieven van de bankkantoren van De Nederlandsche Bank NV, entry 2.25.68, inv. nr. 2031–2040. The Secret Minutes have inv. nrs. 2060–2062. Below the reference to the minutes will be MB and the date of the meeting.

AR, 1827–1828.

AR 1828–1829.

AR 1848–1849.

MB 31-10-1863.

That this motive was not in the minutes, is perhaps less surprising, than that is not explicitly in the annual reports which were supposed to inform shareholders who obviously would have an interest in profit.

For instance, MB 3-7-48: “The continuing decline of the volume of discounts and advances makes us lower the rate again. We do not expect this change to increase our business, as the market rate is still one and a half per cent below the bank rate. There have been many redemptions because of that, and the main aim of lowering is to maintain the level of outstanding advances.”

Perhaps profit became more important after the period I analyse. MB 1-3-1870: “The advances have not diminished rapidly, but having reached a more normal figure, could no longer impede lowering the rate” MB 15-2-1871: “According to the bank’s balance sheet, lowering the rate can no longer be postponed.”

AR 1827–1828.

MB: 26-1-1829.

MB: 26-1-1829. It was unusual that the Bank faced rising demand in January, because normally the market would be liquid enough after interest payments on the National Debt. Customers coming to the Bank in those times apparently were attracted by the low rate. Why this was considered damaging was not explained any further, but the Bank probably thought it dangerous to lend so cheaply because it could potentially facilitate business with very low profit expectations (taking a high risk of failure into account). The Bank probably regarded such business as ‘speculative’ and damaging.

See, for instance, AR 1838–1839. This ‘go with the flow’ argument was later repeated regularly in the annual reports in order to explain rate changes.

AR 1827–1828.

AR 1836–1837. When the interest payment took place, the cashiers increasingly demanded specie from DNB.

MB 21-11-1823.

MB 28-11-1823.

MB 28-11-1823. The main concern was that the low rate led to increasing demand for speculative investments among foreigners. It is unclear how DNB knew for what purpose money was demanded. But clearly, if DNB facilitated ‘speculation and foreigners’, this would not make the King very happy.

de Kat (1916), p. 200: gives this definition.

DNB cover ratios seem to have been high in comparison with other national issuing banks as well.

Before 1847, there was no legal minimum reserve requirement. We assume it to be 50 %. Since the BMS calculated on the basis of the legal cover ratio never came even close to zero (although the rate was sometimes even higher than 5 %), the assumed prudent cover ratio of 50 % for the period before 1847 is probably too high.

The ambition to regain a position in the world bullion trade had lingered on for a long time in Amsterdam. Until the 1830s plans were developed to establish a giro bank like the defunct Bank of Exchange. But Amsterdam had to acknowledge that the world had changed, that the Netherlands was no longer by any means the centre of world trade and that the bullion trade was complementary to Amsterdam’s role as a trading centre rather than the root cause.

Jonker (1996), pp. 124 and 125.

See pp. 124 and 125 above. The Bank did not want to resort to rationing in face of high demand, but could also not raise its rate over the level of 5 % as laid down in the Usury Law of 1807. For this purpose the Usury Law was abolished.

I follow the procedure as set out by Davutyan and Parke (1995), pp. 1099–1112 and Eichengreen et al. (1985).

The marginal effects of variables explaining the situation that the rate remained unchanged in a given month were not significant.

Orphanides (2003), pp. 983–1022.

Taylor (1993), pp. 195–214.

Orphanides (2001), pp. 964–985 argues that estimating monetary policy rules on ex post data, which were not available to policymakers in real-time, can lead to a very distorted picture of the historical conduct of monetary policy.

Meijer (1842), pp. 67–75.

In Appendix 1 the data and the methodology are more elaborately discussed. I used the historical data as much as possible and did not make the methodology more complex than OLS regression, so that the results should be seen as a first quantitative exploration.

I have not analysed the macroeconomic implications or effects of DNB. This was not my purpose.

Davutyan, N., & Parke, W. R. (1995). Operations of the Bank of England 1890–1908 a dynamic probit approach. Journal of Money, Credit and Banking., 27(4), 1099–1112.CrossRef

de Kat, O. B. W. (1916). Effectenbeheer: rechtskundig, economisch en administratief handboek. Haarlem: Bohn.

Eichengreen, B., Watson, M., & Grossman, R. S. (1985). Bank rate policy under the interwar gold standard: A dynamic probit model. Economic Journal, 95, 725–745.CrossRef

Fetter, F. W. (1965). Development of British Monetary Orthodoxy, 1797–1875. Fairfield: Augustus Kelley.

Humphrey, T. (1982). The real bills doctrine. Federal Reserve Bank of Richmond Economic Review, 68(5), 3–13.

Jonker, J. P. B. (1996). Merchants, bankers, middlemen, the Amsterdam money market during the first half of the nineteenth century. Amsterdam: NEHA.

Kymmell, J. (1992). Geschiedenis van de algemene banken in Nederland 1860–1914 (Vol. I). Amsterdam: NIBE.

Meijer, J. (1842). Conditiën en usantiën bij den in- en verkoop van goederen, wissels en effecten met bijvoeging van het tarief van regten op den in-, uit- en doorvoer van alle in het Koningrijk der Nederlanden in den handel voorkomende goederen, benevens verhoudings-tafelen der vreemde munten, maten en gewigten. Amsterdam: E.H. Meijer.

Orphanides, A. (2001). Monetary policy rules based on real-time data. American Economic Review, 91(4), 964–985.CrossRef

Orphanides, A. (2003). Historical monetary policy analysis and the Taylor rule. Journal of Monetary Economics, 50(5), 983–1022.CrossRef

Taylor, J. B. (1993). Discretion versus policy rules in practice. Carnegie Rochester Conference series on Public Policy, 39, 195–214.CrossRef

Title: DNB’s Credit Policy (1814–1870)
Author: Roland Uittenbogaard
Publisher: Springer International Publishing
Book: Evolution of Central Banking?
Print ISBN: 978-3-319-10616-8

Electronic ISBN: 978-3-319-10617-5

Copyright Year: 2015
DOI: https://doi.org/10.1007/978-3-319-10617-5_8