The Bank of Amsterdam and the limits of fiat money

BIS Working Papers  |  No 1065  | 
19 January 2023



Fiat money is issued by decree, or "by fiat". Trust in fiat money is ensured through sound institutions, in particular central banks. Central banks work to maintain the value of the currency, often through measures on their own balance sheets. But what happens in the case of large losses? It is well known that central banks can operate with negative equity for a time, and many have done so in recent history. Yet there are limits, beyond which trust in fiat money falls away.


We draw on the failure of the Bank of Amsterdam (1609–1820), a public deposit bank and an early precursor to modern central banks, to shed light on the limits of fiat money. The Bank started by fully backing its liabilities with metal coins, but over time took on functions of a modern central bank, issuing fiat money and maintaining a target exchange rate through open market operations. However, unlike a modern central bank, the Bank of Amsterdam did not have fiscal backing. We build a global games model, with network effects enhancing the coordination value of money, in which merchants choose whether to hold (fiat) Bank guilders or metal coins. With this, we solve for the unique "break point" where fiat money becomes worthless.


We find that trust in fiat money is more likely to evaporate when central bank equity is more deeply negative, assets are more illiquid and when economic fundamentals are weaker. Moreover, as the fundamental uncertainty among investors dissipates, the relationship between the state of the economy and trust in fiat money approaches a step function: there is a "jump" at the break point below which fiat money loses its value. This is particularly relevant when fiscal backing of the central bank is absent or in doubt. In the current context of above-target inflation and losses on central bank portfolios, this analysis suggests that fiscal backing remains critical.


Central banks can operate with negative equity, and many have done so in history without undermining trust in fiat money. However, there are limits. How negative can central bank equity be before fiat money loses credibility? We address this question using a global games approach motivated by the fall of the Bank of Amsterdam (1609–1820). We solve for the unique break point where negative equity and asset illiquidity renders fiat money worthless. We draw lessons on the role of fiscal support and central bank capital in sustaining trust in fiat money.

JEL classification: E42, E58, N13

Keywords: central banks, negative equity, fiat money, trust