How did the Netherlands fare during the gold standard?

How did the Netherlands fare during the gold standard?

In the Previous piece In the series on monetary history, we described the fiery discussion about the backing of money. For example, the principle of freedom, which wanted to give banks more freedom to create money, was opposed to the principle of regulation, which wanted strict rules for the Dutch Central Bank (DNB). Eventually, the world switched to the gold standard and that also had consequences for the Netherlands. How did our country fare during the period before the First World War? 

From double to gold standard.

In another piece, we wrote that DNB could actually live with a Double Standard, as our country knew for a large part of the nineteenth century. If a single standard was chosen, then silver preferred. In England, a gold standard was already in place early in the nineteenth century. In 1871, Germany decided to withdraw all silver money from circulation and sell the silver on the open market. As a result, the silver price fell rapidly. The guilder, which previously could be freely minted by anyone, quickly lost its intrinsic value. Although the government abruptly put an end to the free currency system, the House of Representatives wanted to hold on to silver. 

The Netherlands eventually switched to a so-called limping standard, as Wim Vanthoor puts it in his book 'De Nederlandsche Bank' Describes. This system provided for the introduction of a gold ten-guilder coin with 6,048 gram gold per guilder. In addition, the free minting of silver coins was discontinued, but they remained legal tender and could only be minted on behalf of the state. As a result, this form was not a pure application of the gold standard.

Although full-fledged gold coins were minted, it must be said that most people did not really pay with gold coins. The money consisted largely of low-grade money that sufficed for most transactions. As a result, there was a lot of fiat money in circulation, money whose nominal value is higher than its intrinsic value. This included the Coins and banknotes which we wrote about earlier. Only larger denominations, such as the golden tenner, actually contained gold. These gold coins were mainly used for international trade purposes. Because gold coins facilitated international payments, the period of the Gold Standard is known as 'La Belle Epoque', a period of peace and economic prosperity.

DNB's policy

Due to the widespread presence of fiat money, the Gold Standard was in fact a gold core standard, as can be read in the book 'Money' by Wim Boonstra. The gold was stored in the vaults of the Dutch Central Bank to cover the money and to maintain the exchange rate. If a country's gold supply were to fall, the money supply had to fall as well, according to the rules of the gold standard. As a result, the price level fell, but the value of the money remained safeguarded. Maintaining the value of the guilder was one of DNB's top priorities and took precedence over employment and price stability.

There were strict rules for the issuance of the paper money. Up to a certain threshold, banknotes had to be 40 percent backed by gold. Banknotes issued above the threshold were subject to full coverage. DNB insisted that a large part of the gold that was present in the Netherlands also ended up in DNB's vaults. For example, the bank offered two guilders more for foreign gold coins than the Mint, which would also melt down foreign coins for a certain price and have them minted into guilders.

Due to DNB's policy, the guilder was one of the most stable currencies during the Gold Standard. Other national banks tried to boost their gold reserves. For example, the pound sterling depreciated from time to time, as the Bank of England exchanged pounds for gold. DNB rejected these kinds of tactics. According to the book 'A Financial History of the Netherlands' The preservation of the value of the guilder was of paramount importance and thus the guilder distinguished itself from other currencies.

Interest rate policy 

Wim Vantoor's book also gives a good insight into the interest rate policy of the time. The Dutch Central Bank (DNB) aligned its interest rate policy mainly with the policy of the Bank of England, as London was the beacon of the Gold Standard. Nevertheless, interest rates in the Netherlands were less volatile than the English equivalent. Whereas between 1875 and 1914 DNB adjusted the interest rate twice a year on average, the Bank of England  This is done seven times a year. At the time, the interest rate of the banks fluctuated between 2.5 and 6 percent.

England was the banker of the world at the time. Contrary to popular belief, the Gold Standard was not a period of great stability, but there was regular turmoil, which translated into turmoil in the London money market. Therefore, interest rates in England showed higher volatility. The Commission also Bank of England preferred a stable gold supply, which she managed by means of the interest rate instrument. The Netherlands, on the other hand, had a smaller gold reserve in the early years, so they sometimes did not lower interest rates here, for fear that they would take up gold. When DNB's gold reserves were more extensive, interest rates were adjusted more frequently.

Crises and turmoil

As has just been pointed out, the Gold Standard was not a period of financial stability. An example of a crisis that raged at the time is the Childbirth crisis. During this crisis, a British investment bank called Barings Brothers after it had suffered significant losses on investments. Extensive support came from France and Russia and a large amount of gold was lent to the Bank of England. Without this support, this would have had severe consequences, comparable to the economic damage after the collapse of Lehman Brothers in 2008. Between 1826 and 1920, there were ten such crises where the Bank of England needed the help of other central banks to calm the matter. Banking crises are therefore not a recent phenomenon.

The Gold Standard would eventually remain in place until 1914. Shortly after the centenary of the Dutch Central Bank, the First World War broke out, after which many countries interrupted the gold standard. However, it can be said that in those hundred years DNB had grown from a predominantly Amsterdam credit institution into a national institution that guarded the value of the guilder. Eventually, DNB would increasingly conform to the central bank it is today. The following section looks at the Netherlands during the First World War and the interwar period.