Johan Palmstruch had in 1657 founded Stockholms …

Years: 1661 - 1661

Johan Palmstruch had in 1657 founded Stockholms Banco, a predecessor of the Bank of Sweden.

Palmstruch's first major innovation in combining the exchange bank and the loans bank was to use the money deposited by account holders to finance the loans rather than requiring capital to be provided by himself or the other bank owners.

This soon became a problem, however, as deposits were usually short-term and the loans long-term, meaning that deposited money was unavailable to be withdrawn by account holders.

This problem had been rendered more acute when the copper content of the coins was lowered seventeen percent in 1660 as account holders demanded the return of the copper daler they had deposited since they were now worth more as metal than as coins.

It was impossible for the bank to fulfill these requests as the money had been paid out as loans.

Palmstruch's second major innovation is the introduction of paper banknotes as a solution to the bank's problems balancing deposits and loans.

To cover the amounts requested by the account holders, in 1661 he begins to make out credit notes (Kreditivsedlar) in round denominations which are freely transferable and backed by the promise of future payment in metal.

These, the first European banknotes, become very popular very quickly simply because they are much easier to carry than the large copper daler, especially for making large payments (a note could be sent in an envelope—previously the large coins had to be transported by horse and cart).

A further reason is that when the amount of copper in the coins was reduced the old coins were taken out of circulation faster than new ones could be minted, meaning that there was a shortage of money which could only be solved by replacing the coins with banknotes.

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