The Sveriges Riksbank, the central bank of Sweden, is one of the oldest banks in the world but it was not an entirely novel creation. Rather, it took up the responsibilities of another bank that had recently failed, the Stockholms Banco. That firm was the victim of adjustments to the coinage that interrupted the monetary stability essential to all banks. Nonetheless, the Stockholms Banco bore some responsibility for its own demise and the Sveriges Riksbank was structured to be more resilient against such instability. This no doubt helps explain how it survived to today.
The predecessor to the oldest central bank still in operation was the Stockholms Banco founded by Johan Palmstruch. The son of a wealthy Dutch merchant, Palmstruch was born in Riga, today the capital of Latvia. His father was Dutch, his mother Lithuanian, and his life traces the connectedness of the North Sea and Baltic worlds. He left Riga for Amsterdam where he was later imprisoned for failure to repay debts; he left Holland upon his release and eventually ended up in Stockholm.
After being appointed a commissioner at the Swedish Board of Trade, the Kommerskollegium, in 1654, he petitioned the government to open a bank in 1656. This was a project he’d been pitching for years but he was successful this time around. A charter granted that year would establish the first bank in Sweden and Palmstruch would serve as its president.
King Karl X Gustav issued the bank charter to Palmstruch from across the sea, at military headquarters in Marienburg, Poland. Sweden was in the midst of war with Poland at the time. Banking operations started the following year, 1657. The Stockholms Banco was technically a private bank but partners included the chancellor of the Swedish Empire, the president of the Kommerskollegium, and other prominent men in government.
The bank was given a thirty-year monopoly under its charter which also regulated its activities. Loan terms were capped at one year and six weeks and were required to be backed by property or guarantees at no more than a two-thirds loan-to-value ratio. Despite this security, the bank could not seize collateral so long as borrowers paid their interest, even if the maximum loan term was exceeded. Interest ranged from 6% to just over 10% per year. The King appointed an inspector to ensure compliance.
Palmstruch’s bank was to be a deposit-taking bank and it grew quickly, from 200,000 dalers in deposits in 1658 to 600,000 in 1660 and it counted the major trading houses of Stockholm among its clients. Demand for loans was also strong, particularly from the nobility, though loan demand from merchants was light, notable since the bank was aimed at serving that particular group. Regardless, this overall success benefited more than Palmstruch alone. Profits were to be split with the government, which took half, and the city of Stockholm, which took one-fourth. The bank’s other shareholders were allowed to keep just one-quarter of any profits for themselves.
In its early years, the bank had to navigate monetary changes then underway in Sweden. The government reduced the metal content of new copper coins starting from 1660. This had repercussions to those who borrowed or lent, and that meant the Stockholms Banco was particularly effected. Following the devaluation, the value of older copper coins rose and the bank saw demand for redemptions from depositors wanting to protect their wealth. Depositors of the bank were entitled to receive the value of their coins in terms of their actual value at the time of deposit rather than in newly debased coins. In response to the withdrawals, the bank reduced lending sharply.
Curtailed lending was not enough to meet the demand for withdrawals so the bank came up with a creative solution. It would pay depositors with notes, called kreditivsedlar, starting in 1661. These paper notes, though still linked to copper coins, are believed to have been the first banknotes in Europe that weren’t merely receipts of a bank deposit but a separate liability of the issuing bank.
Palmstruch was said to have come across the idea outside the financial community altogether, having observed how a mining company gave workers receipts for the copper they mined and recalled how these receipts were used as a means of payment. Banknotes provided more than just a financial expedient to the bank. The notes also avoided a problem with physical coins, namely that there were many different variations of the latter and the bank was required under its charter to repay depositors with the exact type of coins they deposited. Banknotes were less cumbersome.
The first of these problematic periods for the bank was quickly put to rest. The Stockholms Banco was able to restart its lending on the basis of banknote issuance instead of deposits. Under this new method of funding its growth, the bank lent more liberally than ever before, including to the government which approved the use of banknotes to begin with, perhaps seeing the benefits which would accrue to it in the form of larger loans.
However, this creation became the source of a new problem. Issuance of the notes soon began to exceed the value of coins kept by the bank. The bank did not keep its ‘bank of issue’ separate from its lending bank, as was the model in the Netherlands, at least officially. Rather, the deposits of customers were used to meet demands for redemption by noteholders and the reserves of the note issuing department of the bank were used for lending. This presented a vulnerability; should the bank see more noteholders requesting redemption than normal it could be faced with another shortage of coins. This is exactly what happened to the bank in the mid-1660s.
The public lost faith in the kreditivsedlar notes as the Stockholms Banco appeared to have difficulty redeeming them. With its clients skittish, demands for banknote redemption grew. The paper money also began to trade at a discount to coins; exasperating the trouble. Speculators would buy the notes in the market at a discount and would demand redemption at the bank, pocketing the difference. Of course, they were taking the risk that the bank failed in the meantime. This risk materialized when the Stockholms Banco suspended convertibility of the notes into coins in 1664. Adding to the financial panic, the government demanded that the bank’s loans be called in to repay depositors and noteholders. This contracted the availability of credit that had been so great in prior years.
The panic ended when the Swedish government took over the bank, which lost its charter, and investigated its difficulties. Initially, Palmstruch’s reputation remained intact; many blamed the bank’s difficulties on the monetary decisions of the state rather than his own control of the firm but this soon changed. Palmstruch was blamed for mismanagement. He was tried and sentenced to death if he failed to repay amounts proven missing from the bank, a sentence later commuted to life imprisonment by the government which found the court’s decision unreasonable. After all, the state was at least partially to blame and had been one of the beneficiaries of the bank’s earlier success.
The Stockholms Banco was closed, liquidated, and its operations put under state control by Sweden’s Estates General. It’s successor, what is today the Sveriges Riksbank, was founded in 1668 as the Riksens Ständers Bank (“Bank of the Estates of the Realm”). What became Sweden’s central bank, and the oldest central bank in the world by some classifications, operated along similar lines to the Stockholms Banco. It took deposits and made short-term secured loans subject to tight state regulation. However, it only assumed authority to print banknotes, this time called transportsedlar, in 1701.
Crucially, the Riksbank kept its lending bank and bank of issue separate and the latter was required to keep a 100% reserve ratio except for temporary lending to the lending bank. This structure was intended to avoid the problems of the Stockholms Banco. The world wasn’t yet ready for banknote financed lending. Further, the Riksbank was also barred from lending to the government. The bank went on to be well regarded and its notes traded at a premium rather than a discount.
Sweden had an eventful financial history in the 17th century but it was not alone. Several countries saw meaningful financial development in the Enlightenment era, especially in Northern Europe. In the Netherlands, the Bank of Amsterdam made bank deposits a true substitute for currency and in Britain, the Bank of England reorganized the public finances. In Sweden, the Riksbank restored monetary stability after one of the earliest European experiments with paper banknotes, those of the Stockholms Banco.
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1. Flux, Alfred William. The Swedish Banking System – National Monetary Commission. Government Printing Office, 1910.
2. Fregert, Klas. “Sveriges Riksbank: 350 Years in the Making.” Sveriges Riksbank and the History of Central Banking, pp. 90–142.
3. Sumner, William Graham, et al. A History of Banking in All the Leading Nations. Vol. 4, Journal of Commerce and Commercial Bulletin, 1896.
4. Wetterberg, Gunnar. “Stockholm Banco.” Money and Power – the History of Sveriges Riksbank, Atlantis, pp. 25–45.