The simmering conflict between the rising British and the declining Dutch had escalated after the Dutch traded
arms with the colonies during the American Revolution.19 In retaliation the English delivered a massive blow to
the Dutch in the Caribbean and ended up controlling Dutch territory in the East and West Indies.20 The war
required heavy expenditure by the Dutch to rebuild their dilapidated navy: the Dutch East India Company lost half
its ships21 and access to its key trade routes while heavily borrowing from the Bank of Amsterdam to stay alive.
And the war forced the Dutch to accumulate large debts beyond these.22
The main reason the Dutch lost the war was that they let their navy become much weaker than Britain’s because of
disinvestment into military capacity in order to spend on domestic indulgences.23 In other words, they tried to
finance both guns and butter with their reserve currency, didn’t have enough buying power to support the guns
despite their great ability to borrow due to their having the leading reserve currency, and became financially and
militarily defeated by the British who were stronger in both respects.
Most importantly, this war destroyed the profitability and balance sheet of the Dutch East India Company.24 While
it was already in decline due to its reduced competitiveness, it ran into a liquidity crisis after a collapse in trade
caused by British blockades on the Dutch coast and in the Dutch East Indies.25 As shown below, it suffered heavy
losses during the Fourth Anglo-Dutch War and began borrowing aggressively from the Bank of Amsterdam
because it was too systemically important for the Dutch government.
26
As shown in the chart below the Dutch East India Company, which was essentially the Dutch economy and
military wrapped into a company, started to make losses in 1780, which became enormous during the Fourth
Anglo-Dutch War.
As deposit holders at the Bank of Amsterdam realized the bank was “lending” freshly printed guilders to
save the Dutch East India Company, there was a run on the Bank of Amsterdam.27 As investors pulled back
and borrowing needs increased, gold was preferred to paper money, those with paper money exchanged it
for gold at the Bank of Amsterdam, and it became clear that there wouldn’t be enough gold. The run on the
bank and the run on the guilder accelerated throughout the war, as it became increasingly apparent that the Dutch
would lose and depositors could anticipate that the bank would print more money and have to devalue the
guilder.28 Guilders were backed by precious metals, but as the supply of guilders rose and investors could see
what was happening they turned their guilders in for gold and silver so the ratio of claims on gold and silver rose,

which caused more of the same until the Bank of Amsterdam was wiped out of its precious metal holdings. The
supply of guilders continued to soar while demand for them fell.
The Bank of Amsterdam had no choice since the company was too important to allow to fail both because of
its significance to the economy and its outstanding debt in the Dutch financial system, so the Bank of
Amsterdam began “lending” large sums of newly printed guilders to the company. During the war, policy
makers also used the bank to lend to the government.29 The chart below shows this explosion of loans on the
bank’s balance sheet through the Fourth Anglo-Dutch War (note: there was about 20 million bank guilder
outstanding at the start of the war).30
31
Interest rates rose and the Bank of Amsterdam had to devalue, undermining the credibility of the guilder as
a storehold of value.32 Over the years, and at this moment of crisis, the bank had created many more “paper
money” claims on the hard money in the bank than could be met so that led to a classic run on the Bank of
Amsterdam, which led to the collapse of the Dutch guilder.33 It also led to the British pound clearly replacing the
Dutch guilder as the leading reserve currency.
What happened to the Dutch was classic as described in both Chapter 1’s very brief summary of why empires rise
and fall and in Chapter 2’s description of how money, credit, and debt work. As for the money, credit, and debt
cycle, the Bank of Amsterdam started with a Type 1 monetary system that morphed into a Type 2 monetary
system. It started with just coins that led to the bank having a 1:1 backing of paper money by metal, so the bank
provided a more convenient form of hard money. The claims on money were then allowed to rise relative to the
hard money to increasingly become a Type 2 monetary system, in which paper money seems to acquire a value
itself as well as a claim on hard money (coins), though the money wasn’t fully backed. This transition usually
happens at times of financial stress and military conflict. And it is risky because the transition decreases trust in the
currency and adds to the risk of a bank-run-like dynamic. While we won’t go deeply into the specifics of the war,
the steps taken by policy makers during the period led to the loss of Dutch financial power so are worth describing
because they are so archetypical when there is a clear shift in power and the losing country has a bad income
statement and balance sheet. This period was like that and ended with the guilder supplanted by the pound as the
world’s reserve currency and London succeeding Amsterdam as the world’s financial center.
Deposits (i.e., holdings of short-term debt) of the Bank of Amsterdam, which had been a reliable storehold of
wealth for nearly two centuries, began to trade at large discounts to guilder coins (which were made of gold and