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April 5, 2013

Historical Echoes: Central Bank and Paper Money Innovator Given Death Sentence for His Efforts

Amy Farber

In 1668, Johan Palmstruch, the head of Stockholm Banco, the
precursor to the oldest central bank still operating today—the
Swedish Riksbank—was
charged and sentenced to death, according to Wikipedia and the

His crime? It began with a financial innovation. In 1661, Palmstruch (also Palmstruck) introduced notes of credit to simplify money transactions. These notes did not earn interest, and they were issued for fixed sums, backed by money deposited in the bank. The notes were very successful, but the bank began lending more than it could afford in relation to the underlying value of the bank’s deposits—leading to the bank’s collapse.

Palmstruch’s sentence was later commuted to life
imprisonment. And to think that this poor fellow, in addition to having a role
in the emergence of the first still-existing central bank, was also credited
with introducing
paper money to Europe

A detailed account of the formation of the bank and the
mishaps of Johan Palmstruch can be found in Alfred William Flux’s The Swedish Banking System (1905) in
the first chapter, Early History of the Riksbank (p. 15).
However, Flux does not mention the death sentence, only the life imprisonment:

Some of the writers on the subject are of opinion that, contrary to the stipulations of the charter, the
Government, or some of the members of the group which owned the bank, had
obtained advances without putting up the required security. The position, at
any rate, was such in the year 1664 that the Government was desirous of
rendering assistance to the bank, and, with that in view, an investigation of
its condition was made. The Government undertook the settlement of all the
bank’s business, including the redemption of the outstanding notes, within a
year, a time limit which was repeatedly prolonged. Meanwhile the notes were
required to be accepted at their face value, both in private transactions and
in official payments.

Palmstruch was proceeded against,
but the records of the trial were not made public. The total loss was stated at
200,000 dalers specie, but how far this resulted from fraud, how far from
losses on loans, is not known. In 1668 Palmstruch was condemned to the loss of
the charter privileges and ordered to make good the losses resulting from his
conduct of the business. Failing in this, he was condemned to imprisonment for
life, but was pardoned and set free in 1670, and died the following year. His
associates escaped all punishment, and, in the face of the secrecy maintained
in regard to the matter, the conclusion which has suggested itself to writers
discussing the matter is that Palmstruch did not act without the knowledge or
authority of others in the matters the blame for which was made to rest upon
him alone.

A picture
of Johan Palmstruch
as a “flawed genius,” along with a detailed account of
his role in the introduction of paper money, has been posted by an economics
professor at the University at Albany, State University of New York.  He explains:

In the 17th century, as before and for a long
time after, many deals and debts, if not settled in coin, were paid in kind, in
goods or labour. Could a piece of paper represent value? It would be flimsy
testament indeed. But it would be convenient—if it would work.

Palmstruch thought it would. In 1656 he had
founded the Stockholm Banco, a private company that intended to issue paper
money, enjoying royal privileges in return for a royal cut. After sustained
lobbying and a public-relations effort that would be impressive today, an issue
of bank notes followed in 1661. Here was Europe’s first paper currency (China’s
first version had appeared in 1024), one that would still be recognizable as
such amidst today’s state-issued confetti.

If you’re easily amused by translation errors, read the machine translation
from German to English of the Wikipedia entry for Johan Palmstruch. Possibly
due to the “Rik” in “Riksbank,” an interesting ad occasionally pops up on the
page. The translation generates advertising content referring to New York
City’s prison complex Rikers Island, possibly due to the “Rik” in “Riksbank.”
Unfortunately for Palmstruch, this random reference isn’t too far afield (since
he was actually in prison).

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Amy Farber is a research librarian in the Federal Reserve
Bank of New York’s Research and Statistics Group.

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