Conceived in Disgrace: The 350th Anniversary of the Creation of the Bank of Sweden
The world’s oldest central bank, the Bank of Sweden (or Sveriges Riksbank), today celebrates its 350th anniversary by organizing a conference on the theme “The role of central banks then, now, and in the future.” While the bank is probably best known for sponsoring the faux Nobel Prize in economics (it’s not one of the prizes in Alfred Nobel’s will), how it came about is a story that is as enlightening as it is embarrassing. As is its legacy.
The Riksbank’s predecessor came into existence in 1656 and was intended as two separate bank entities: one an exchange bank (similar to a Rothbardian deposit bank) and the other a loan bank. The banks were sanctioned by separate royal charters, but in reality the separation did not last long. Combined, the banks were run by Johan Palmstruch as Stockholms Banco, which is credited for introducing Europe’s first paper banknotes. While the bank’s charters stated that its objective was to, among other things, “preserve the purchasing power of the currency”1 as a formally private bank, the King appointed its chairman and received half of its profits making it more of a state institution.2
Sweden at the time had a bimetallist currency – the daler – with denominations in both copper plate money and silver coins. The silver coins soon became more valuable than their daler worth, partly because of Sweden’s great copper deposits and mining industry, and the silver dalers were consequently hoarded while the much (and increasingly) larger copper plate money was kept in circulation (as Gresham’s Law suggests).
Arising out of Bad Economics
The Stockholms Banco’s exchange bank was supposed to maintain clients’ deposits by providing withdrawals in the same type of daler (silver or copper) as the original deposit. Even so, the inspector in chief appointed by the King, when visiting Stockholms Banco, is reported to have exclaimed that “I see in the exchange bank an ample supply of money, and it seems to me best to make use of this in the loan bank.”3
As instructed by the government, Palmstruch began using the money deposited to the exchange bank to finance loans offered by the loan bank. Thereby the bank could lend out more money than initially available to the loan bank. As the bank earned interest revenue from lending funds, it soon abandoned the regular fee for deposits made to the exchange bank and instead – to attract increased deposits – offered interest payments on funds deposited in the loan bank.
When the King died in 1660, the governing council decided to reduce the copper-content of new plate dalers by 20%, causing Sweden’s first proper bank runs, as the old coins supposedly kept by the exchange bank still contained a higher amount of copper. In order to cover the increased demand for withdrawals, Palmstruch started offering credit notes in 1661. These notes were freely transferable and backed by nothing but the Crown’s acceptance in tax payments and the promise of future payment in metal – Europe’s first banknotes not tied to a specific deposit.4 Due to this tacit government approval, and the fact that credit notes were much easier to use than the copper plate money (offered in several denominations, with the 1643 10-daler coin measuring 13 by 27 inches and weighing 43 pounds), people started using the notes as money.
With Stockholms Banco’s innovative expansion of credit Sweden soon experienced, as Austrians would expect, a boom, which lasted about two years before the bank’s specie reserve was completely drained and it suspended payments. The notes consequently fell to at least 10% below par in specie payments, and the bank called in its loans in 1664.5 At this point, the government liquidated the bank and called in all outstanding loans and notes, finally completing the liquidation in early 1668. As a result of these events, the booming Swedish economy grinded to a halt.
While blaming Palmstruch and eventually imprisoning him, the government realized the benefits of controlling a bank. The Swedish parliament thus instigated a new bank with similar privileges – Bank of the Nation’s Estates (or Rikets Ständers Bank) – on September 17, 1668 (which should be the real anniversary). The bank formally changed its name to the Riksbank (the Nation’s Bank) in 1867.6
To avoid the problems caused by Palmstruch’s innovative banking, this new bank was originally prohibited from lending to the crown and could not issue notes. The latter lasted until 1701, when the bank was granted permission to issue so-called credit notes (although ways to circumvent the note-issuing ban had been in place for decades)7. As significant volumes of counterfeit notes started appearing in the mid-18th century, government responded as governments do: increased control. The government thus instigated a government papermill to secure the production of paper for banknotes. Tumba Bruk, founded in 1755 on the outskirts of Stockholm, which was owned and run by the central bank until it was sold to Crane in 2002. (The company has reported that they’re closing Tumba Bruk and hoping to move banknote production to Malta.)
The Riksbank’s Recent Legacy
Born out of Palmstruch’s credit expansion debacle and picking up where the founder of Stockholms Banco left off, the Riksbank has a long history of active intervention in the Swedish economy.8 While formal political influence has shifted over the years, decades, and centuries, the bank remains Sweden’s central bank – despite formal independence from the government since 1999.
Over the recent decades, the bank has become known for being involved in extraordinary monetary policy. In the 1970s and 1980s, the Riksbank played a central role in devaluing the Swedish currency to “boost” exports and take Sweden out of economic crisis. The Swedish krona was then devalued three times in 1976-1977 by a total of 20% and then twice more in 1981-1982 by a total of 28%.
In the early 1990s, the Swedish krona was pegged to the European Currency Unit at a level that markets considered too high. After setting interest rates at 500% in defense of the fixed exchange rate in late 1992, the Riksbank finally lost control and the krona became free-floating. This resulted in a rather immediate drop of over 30% of its previous exchange value.
More recently, the Riksbank has been leading the central banking charge on the “zero lower bound” by setting the interest rate to negative 0.10% in February 2015. It has been negative ever since, hitting negative 0.50% in February 2016 where it remains to this day, in addition to extensive asset-purchases (more aggressively than the Fed, now holding almost 40% of the outstanding Swedish government debt).
Needless to say, the Riksbank heeds its legacy as the world’s oldest still-existing central bank. Symptomatically, it was born out of banking failure, was soon granted privileges to commit major errors of its own, and throughout its history it has all but impoverished Sweden. The bank has consistently made extraordinary interventions to benefit government at the expense of the people and economy.
In other words, we don’t need a conference to tell us about the “then” and “now,” and considering the bank’s legacy we know all too well what to expect from “the future.” In a just world, this anniversary would instead be an opportunity to end this monstrous experiment. But we’re not holding our breaths.
A similar article was published in Swedish at Ludwig Von Mises-Institutet
Capie, F., Goodhard, C. and Schnadt, N. ‘The development of central banking’ in Capie, F.; Fischer, S., Goodhart, C. and Schnadt, N. (eds), The future of central banking: the tercentenary symposium of the Bank of England (Cambridge, U.K.: Cambridge University Press, 1994), pp. 1-261.
Heckscher, E.F., ‘The Bank of Sweden in its connection with the bank of Amsterdam’ in J.G. van Dillen (ed), History of the principal public banks (London: Frank Cass & Co, 1934), pp. 161-200.
Wetterberg, G. Pengarna och makten: boken om Riksbankens historia (Stockholm: Atlantis, 2009).
Ögren, A. ‘Modernization of the National Bank of Sweden: The Riksbank’ in Ögren, A. (ed) The Swedish Financial Revolution (Basinstoke, U.K: Palgrave macmillan, 2010), pp. 79-94.
Ögren, A., ‘From parliamentary institution to a modern central bank’, in Feiertag, O. and Margairaz, M. (eds), Les Bankques centrales et l’État-nation (Paris: Presses de Sciences Po Academique, 2016), pp. 49-72.
- 1. Wetterberg 2009: 26.
- 2. Most modern central banks remit all of their profits to the general treasury, Capie et al. 1994: 57.
- 3. Wetterberg 2009: 36.
- 4. Ögren 2016: 50-51; Heckscher 1934: 169.
- 5. Wetterberg 2009: 40; Heckscher 1936: 171.
- 6. Ögren 2016: 70.
- 7. Wetterberg 2009: 56-7.
- 8. Ögren 2010: 84; Heckscher 1936: 175-180.