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It was on this day in 1661 that the first banknotes in Europe were issued. They were wildly popular for a while then they flopped. The notes were issued by Stockholms Banco, a Swedish bank. The bank had been started a few years earlier by a Dutchman named Johan Palmstruch. The Swedish king hoped that this bank would stabilize the Swedish currency. He was also in for a fifty percent cut of the bank's profits.
Sweden at the time had two types of coins called daler, one silver, the other copper. The law stated that the copper coins had to be equal in value to the silver, which caused the copper coins to grow to the size of large plates. As silver grew more valuable, people hoarded the silver coins so that only the copper coins were available for transactions.
Palmstruch came up with a couple of innovative ideas. Instead of making loans with the bank's capital, he used the money of the depositors to make loans. Back then, depositors paid the bank to hold their money and received no interest. The depositors were businessmen who wanted the ability to write checks in different parts of Europe.
The problem with Palmstruch's idea was that with the bank's deposits out on long-term loans, he didn't have cash on hand to meet requests for withdrawals. So he came up with his second idea: paper banknotes. People liked this idea because instead of needing a cart and horse to haul their money around, they could put a pile of banknotes in a satchel.
Palmstruch quickly realized there was nothing to stop him from printing all the banknotes he wanted. Since there was nothing backing up the notes, they began dropping in value. After three years in the banknote business the bank had to close and the government took over its liquidation.
Palmstruch was charged with irresponsible bookkeeping and was sentenced to death, but this was commuted to imprisonment. He only sat in prison for two years, but died a year after his release at age 60. The collapse of Palmstruch's bank led to the founding of the Sveirges Riksbank, Sweden's Central bank, which is the oldest surviving central bank in the world.
The Swedish government was badly burned having to pay off Palmstruch's customers, and forbade the issuing of banknotes for the rest of the 17th century. The British meanwhile needed money for a war with France and began printing banknotes with restrictions to prevent a Swedish bubble. One of their economists summed up the whole matter succinctly: "Money is an imaginary value made by a law for the convenience of exchange." Bitcoin, anyone?
I got some help in this post
from Isla 💕
and Nash ❤️
Who are visiting Wannaska this week.
Money is an imaginary value made by a law for the convenience of exchange
ReplyDeleteI've been saying this for decades, but nobody listens. They just keep on spending and getting stuff for their effort. Who's putting the tail on whose donkey!? Or whose ass is being kicked? Or whose ox is being gored? Yep. It makes just about that much sense!