Written by prof. Sven Fritz
On 30 November 1656 in Marienburg (now Malbork) near the Baltic coast, in the second year of his Polish campaign, Karl X Gustav signed the first two charters in the history of Swedish banking, one for an "exchange bank" and the other for a "loans bank". The former was to accept, for a fee, no-interest deposits in giro accounts from which the account-owner could either withdraw money or write "cheques". The latter was to provide loans - financed from capital contributed by the owners - against pledges in the form of fixed or movable property.
The project was modelled mainly on the large banks that had been founded earlier in the 17th century in Amsterdam and Hamburg. The charters envisaged that the loans bank would prevent usury and exchange bank would help to stabilise Sweden's currency and facilitate payments, which were a problem primarily due to the use of two standards, silver and copper. Since the metal in a 1 daler copper coin had to be worth the same amount as the metal in a 1 daler silver coin, the copper coins took the form of large, heavy plates. And as the silver coins tended to be hoarded, being nevertheless worth more than the copper coins, the latter were often the only available kind of.
The man behind the proposal, who also became the banks` director, was Johan Palmstruch (Wittmacher before he was ennobled), born in Riga and a burgher of Amsterdam who had arrived in Sweden in 1647 and become a commissioner in the National Board of Trade, which was then fairly new. He head already submitted proposals for banking institutions on two occasions in the 1650s without success. It is not known why the king found the third attempt acceptable; perhaps it was because half of the profits would accrue to the Crown.
Stockholms Banco was to be a private company with a 30-year monopoly of banking operations in the Swedish realm. In practice, however, a regular company was never established. In order to acquire patrons, Palmstruch recruited influential persons as part-owners; their reward was 1/8 of the profit without being required to contribute any capital or take any responsibility for the bank (Palmstruch was also to have 1/8, the city of Stockholm 1/1 and the Crown, as mentioned, the rest). The bank turned out to be a state institution directed by functionaries appointed by the government.
The giro department of the bank opened in July 1657 and the lending operations, financed from the giro-account deposits in the exchange bank, at the beginning of 1659. Guarded by soldiers, the bank was housed in a centrally located building in Västerlånggatan - the authorities were clearly rather worried about the safety of the novel monetary institute in the new great power's rapidly expanding capital.
The bank management does not seem to have realised that using short-term giro deposits to finance long-term loans secured mostly with real estate posed a problem but this soon became acute. When the copper content of the principal coins was lowered 17 per cent by the state in 1660, the depositors demanded the return of the copper plates (now worth more as metal than as coins) they had handed in earlier. This, however, was not possible because the money had been paid out as loans. To solve the liquidity problem, Palmstruch made out "credit notes" backed by a promise of future payment in metal; freely transferable and denominated in round sums, these were Europe's first bank notes.
The credit notes soon became highly popular, both because the older copper-plate coins disappeared from circulation before a sufficiently large new supply was available, leading to a lack of money, an because for large payments the notes were a convenient alternative to metal coins. Money could be transferred by despatching the notes in an envelope instead of freighting heavy coins by horse and cart or sledge. At the same time, the bank's lending operations ceased to be dependent on the relatively small amounts deposited in giro accounts. The bank was in a position to create its own means of payment on a seemingly unlimited scale.
After a cautious start, lending rose rapidly in 1663. By the autumn, partly as a result of large credits to the Crown, loans and note issues had already reached such levels that the value of the notes began to fall relative to that of copper coins. When people ran to the bank to have their credit notes honoured, the bank did not have sufficient liquid reserves of metal. From October onwards it was obliged to refuse to redeem notes to a growing extent and in 1664 its operations ceased entirely. A successive reduction of outstanding loans and redemption of circulating notes was decided by the government and the Riksdag. The liquidation was completed in 1667.
Stockholms Banco was an imitation, of debatable importance for the credit market and payment system in those days. But the bank notes were an innovation, albeit short-lived on their first appearance. And as a state institution the bank was the forerunner of Sveriges Riksbank, the oldest still existing central bank in the world. The fate of its instigator and director was less fortunate. In 1668 the Svea court of appeal sentenced him to loss of his title, loss of the banking privilege, eternal exile and loss of life if he failed to make good the established shortage of cash. Most of the charges against him are considered to have been of no consequence. His guilt lay in two matters: Irresponsible book-keeping and control, and some shortage of cash on account of miscalculation and book-keeping omissions. The government reprieved the death penalty but Palmstruch remained in prison until 1670 and died the following year at the age of 60.
References
Brisman, S., Den Palmstruchska banken och Riksens Ständers Bank under den karolinska tiden (The Palmstruch Bank and the Bank of the Estate of the Real in the Caroline era), in Sveriges Riksbank 1668-1918. 1. P.A. Norstedt & Söner, Stockholm. 1918
Fritz, S., "Palmstruch, Johan", in Svenskt biografiskt lexicon 28 (Swedish dictionary of Biography), with extensive source references and bibliography. 1992 - 94.
Nygren, I., Från Stockholms Banco till Citibank. Svensk kreditmarknad under 325 år (From Stockholm Banco to Citibank. The Swedish credit market over 325 years). 1985.