When banking could be a capital offense

The inventor of paper money in Europe was sentenced to death, in part for issuing too much paper money.

Johan Palmstruch in 1656 founded Sweden’s first bank, Stockholms Banco, to solve a basic economic problem: Paying for everything in copper was extremely inconvenient. The copper coins commonly used in Sweden were almost a hundred times heavier than the equivalent value in silver coins (which also circulated, but were always in short supply).

This made Sweden’s primary means of exchange — the copper daler —  impractical for anything that involved moving large sums of money. Like tax collection, for example.

Or quick getaways. A Riksbank history of central banking notes that when thieves attempted to steal just 170 daler worth of coins in Åbo, Sweden, they could not lift their prize higher than knee level. 

But Sweden was the largest producer of copper in Europe at the time. And it had a lot of bills to pay (Sweden was also the most militaristic country in Europe at the time). So the government decided to issue a means of exchange that used even more of the heavy metal: In 1644, the government introduced large copper plates that represented high denominations of the Swedish daler.

The 10-daler plate — pictured above — weighed about 43 pounds.

Somehow, the plates were circulated widely enough that their sheer inconvenience created an opportunity for Palmstruch: starting a bank that would pay negative interest on deposits.

Stockholms Banco began as a deposit bank that charged a fee for storing its depositors’ copper money. 

It was a popular service. In 1658, the bank took in 200,000 copper daler, a huge sum at the time.

In 1659, the bank began using those deposits to make loans.

This proved to be an even more popular service: The bank was besieged by crowds of borrowers who “had to be kept away from the doors of the exchange bank with a double guard of the Crown’s and the City’s troops,” Palmstruch later said.

It was a reverse bank run: Instead of depositors rushing to withdraw money, borrowers were rushing to deposit assets (in return for loans).

The trouble began just a year later. In 1660, the government decreed that a new issue of copper plates would have the same nominal value as the old plates, but contain less copper.

This triggered a conventional bank run, with customers rushing to withdraw the old plates before the bank could meet withdrawals with the new, less valuable ones. The bank’s reserve of old copper plates was quickly depleted, forcing it to start calling in loans.

Its customers, perhaps because bank loans had only just been invented, were unprepared.

Palmstruch wrote in a letter that the bank was besieged by distressed borrowers, 

The bank tried to stem its outflows by paying depositors instead of charging them, but to no avail. It also considered minting more copper money, but would take far too long to help in a crisis.

So Palmstruch was forced to get creative. As a bank commissioner later explained: “Not long afterwards, credit notes became a supplement invented by Herr Director for the shortage of money.”

This was Palmstruch’s innovation: notes that were backed only by the bank’s promise to redeem them for copper coins on demand. (Aka, fractional reserve banking.)

This proved popular, too.

Customers eagerly exchanged their coins for “credit notes.” The notes were accepted at banks across Europe (where they were “recognised and held in great esteem,” Palmtruch said). And the government accepted the notes as payment for taxes and other levies (which made Stockholms Banco the de facto central bank of Sweden). 

Another reverse bank run ensued.

Demand for paper money was so high that the bank struggled to keep up. The notes, a bank manager said, were “asked for with such an appetite and cry that as often as not the Bank has had difficulty in calming and thereby meeting them.”

The result was that, for the first time, a bank in Europe could issue loans far in excess of its deposits. 

Which, of course, it did.

“After a tentative start,” the Riksbank history says, “the flood gates were opened during 1663. The Crown borrowed 500,000 d km, Chancellor De la Gardie took a total of 255,000 d km for himself, the tar company borrowed 200,000 d km. More and more loans were unsecured.” 

There are no prizes for guessing what happened next.

Just a few months later, redemptions had reduced the bank’s reserves to just 4,000 copper daler.

In September, a single depositor asked to withdraw 10,000.

The bank continued to redeem its notes at face value, but only when it had cash on hand, which was less and less often the case. This caused the notes to circulate at a discount of as much as 10% — meaning that, in practice, everything got 10% more expensive.

The Riksbank describes this as Sweden’s “first bout of monetary inflation.”

“Everything one buys must now be bought for more than before, so that everyone suffers unduly,” a contemporary lamented.

Soon, there were crowds outside the banks’ branches waiting to redeem their credit notes for copper as soon as it was available. 

To understand why, the government launched an inquiry into the management of the bank. It concluded that credit notes were not such a good idea after all and that all of the bank’s loans should be recalled. 

This crashed the Swedish economy, of course, and Palmstruch got the blame. In 1668, he was tried and convicted of 1) mismanaging the bank’s accounts and 2) issuing more money than the bank could redeem.

For this, the court sentenced Palmstruch to life in prison, and ordered that he personally reimburse the bank’s creditors. If he couldn’t pay up within six months, he would be executed. 

Palmstruch had no hope of paying — especially from prison! — so this was effectively a death sentence.

A year later, however, the court reconsidered and reduced his sentence to life in prison. A year after that, the court reconsidered again and Palmstruch was freed.

A year after that, he died.

— Byron Gilliam

_{Brought to you by:}

JLTXX, our second tokenized money market fund, brings a registered government money market fund structure to public Ethereum for eligible qualified investors.

Backed by our initial $100MM investment, JLTXX is designed to invest in a manner that supports stablecoin issuers under the GENIUS Act.

All of finance is coming onchain and the institutional heavyweights are headed to DAS London this November 10-11.

Grab your tickets for unmatched access to the leaders bringing institutional finance onchain.