The bank that invented
the banknote and did not survive it
On 16 July 1661, a private bank in Stockholm put Europe's first banknotes into circulation. Seven years later it was wound up, its founder sentenced to death, and the world inherited its first central bank.
A currency you had to move by cart
Seventeenth-century Sweden was rich in copper and poor in silver. Its everyday money therefore took the form of stamped copper plates whose worth tracked the metal: the heaviest, struck at Avesta in 1644, weighed 19.7 kilograms. Settling a large sum called for a team of horses. In 1657 Johan Palmstruch obtained from the king the privilege of opening a bank, Stockholms Banco, on condition that its profits be shared with the Crown.
In 1660 the Crown made its new plates lighter. Depositors at once demanded their old coins back, heavier and so more valuable; the bank, having lent them out, could not keep up. Palmstruch answered with an invention: on 16 July 1661 he issued kreditivsedlar, credit notes printed in fixed denominations of 5, 25, 100 and 1,000 copper daler, signed by hand by himself and his clerks. Light and transferable, they caught on within months.
These notes promised no interest, only metal on demand. But nothing obliged Palmstruch to print no more of them than he held copper. He printed more. When the holders came back, the bank was wound up in 1667. In 1668 Palmstruch was sentenced to death for his management of it, then reprieved; he stayed in prison until 1670 and died the following year.
The banknote and the central bank were born of the same failure
That same year, 1668, the estates of the realm took over the ruins of Stockholms Banco and founded the Riksens Ständers Bank, placed under parliament rather than the king, and at first denied the right to issue notes at all. It still exists: renamed Sveriges Riksbank in 1866, it is the oldest central bank in the world still operating. It was born not of a plan but of a bankruptcy.
The lesson reaches beyond Sweden. The banknote is an enormous gain in efficiency: it carries value without carrying metal. But it shifts the constraint from the vault to the will of whoever does the printing, and that will does not restrain itself. The whole later architecture of money, central bank independence, reserve requirements, the separation of issue from credit, answers the question already posed in 1661: who limits the issuer, and in whose name?
A banknote is never worth more than the discipline of the hand that prints it.