This article is Volume 2 of a series about the history of international banking crises and the unfortunate, recurring breakdown in trust. [Check out Volume 1 here]
In 1763, following the Seven Years War, northern Europe was in a financial crisis.
Many of the banks based in Amsterdam were over-leveraged and interlinked by complex financial instruments, making them vulnerable to a sudden tightening of credit availability.
One of those instruments was a bill of exchange: a contract to pay a fixed sum of money at a future date. The bank of De Neufville—named after its owners, the De Neufville brothers—was one of the fastest-growing merchant banks, growing to nearly half the size of the Bank of Amsterdam. They speculated in depreciating currencies and endorsed a large number of bills of exchange. Recognizing their success and trusting in the De Neufvilles’ potential, other merchant bankers followed suit. They believed their balance sheet growth and leverage were hedged and insured through offsetting claims and liabilities.
But prices of grain and other commodities fell sharply and the supply of credit dried up due to the decreased value of collateral goods. Merchants were forced to sell assets to meet liabilities, incurring big losses!
The actions of distressed parties attempting to reduce the size of their balance sheets had an impact on the value of others’
assets. Weakened balance sheets generated more fire sales, creating a vicious cycle of losses and bankruptcies.
In the end, the extent of the crisis was mitigated by the provision of extra liquidity by the Bank of Amsterdam, the Dutch central bank. But the damage was done: Trust between larger and smaller financial institutions was shot.
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Sources: Wikipedia.org; historytoday.com; bis.org; jhna.org
Painting: Pieter Saenredam’s The Old Town Hall of Amsterdam (1657)