Johan Palmstrüch, a Copper Money Doctor: Stockholm Banco and the Emergence of Banknotes in Seventeenth Century Sweden

Palmstrüch’s vision was to establish a bank to facilitate payments and credits. He was granted the right to establish the Stockholm Banco in 1656. He presented a view of banking, money and payments that reflected the Real Bills Doctrine, mentioned banknotes and included the idea of allowing deposits to be used for lending. Faced with an outflow of deposits when the fixed exchange rate between copper and silver was changed in 1661, Palmstrüch replaced the cumbersome copper coins with bank notes, i.e. notes issued by the bank with printed and round denominations that could be transferred to third parties. These notes worked well and the bank's credit increased until 1663, when the fixed exchange rate between copper and silver again caused difficulties. Demands to redeem the notes had to be met with copper coins, so Palmstrüch bought copper at a loss and minted it to meet demand. Instead of supporting Palmstrüch the Crown in 1664 issued a decree that banned the banknotes. As a consequence the Bank failed and the money and credit market broke down. Palmstrüch was scapegoated and the bank was turned into what is today the Riksbank, the Swedish central bank, owned and run by the parliament.