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Journal of Political Economy Vol. 132 No. 12 2024

The Bank of Amsterdam and the Limits of Fiat Money

Wilko Bolt1,2,3; Jon Frost1,2,3; Hyun Song Shin1,2,3; Peter Wierts1,2,3

1 Bank for International Settlements · 2 Vrije Universiteit Amsterdam · 3 De Nederlandsche Bank

open access

Abstract

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 game 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 render fiat money worthless. We draw lessons on the role of fiscal support and central bank capital in sustaining trust in fiat money.

DOI
10.1086/732524
Volume
132
Issue
12
Pages
3919-3941
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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