Invention

Central Bank

Sweden created the first central bank because its copper coins were too heavy to carry.

Sweden · 1668

In the mid-seventeenth century, Sweden's currency was based on copper. The largest copper coins weighed over nineteen kilograms. Merchants needed carts to transport payment. Johan Palmstruch, a Latvian-born entrepreneur, convinced the Swedish government to charter a bank that would issue paper notes backed by copper deposits. The bank, called Stockholms Banco, opened in 1657.1

Palmstruch issued too many notes, the bank collapsed, and he was sentenced to death, later commuted to prison. The Swedish Riksdag responded by creating the Riksens Ständers Bank in 1668, placing it under parliamentary control. It was the first institution in Europe with the authority to issue banknotes as a function of government rather than private enterprise.2

The Bank of England followed in 1694, chartered to raise money for King William III's war against France. In exchange for a loan of 1.2 million pounds, a group of merchants received the right to incorporate as a bank and issue notes.3 The pattern repeated across Europe. Central banks began as wartime financing tools, not as guardians of monetary stability.

The United States resisted the concept longer than most industrialized nations. Alexander Hamilton's First Bank of the United States, chartered in 1791, lost its charter in 1811. A Second Bank, chartered in 1816, was dismantled by Andrew Jackson in 1836. The Federal Reserve was not established until 1913, after the Panic of 1907 exposed the absence of a lender of last resort.4

19 kg

The weight of the largest Swedish copper coins in the mid-seventeenth century, the logistical problem that led to Europe's first central bank.

Today, over 170 countries have central banks. The European Central Bank, established in 1998, manages monetary policy for the eurozone. The People's Bank of China, founded in 1948, oversees the currency of the world's most populous nation.5

The original purpose of central banking, financing a government's immediate needs, has evolved into a complex mandate involving price stability, employment, and financial regulation. The institution Johan Palmstruch created to replace heavy copper coins now manages trillions in assets across the global financial system.6

Timeline

1668

The Swedish Riksdag establishes the Riksens Ständers Bank, the first government-controlled central bank in Europe.

1694

The Bank of England is chartered to finance King William III's war against France.

1913

The United States establishes the Federal Reserve System after the Panic of 1907.

1998

The European Central Bank is established to manage monetary policy for the eurozone.

Endnotes

1 Rodney Edvinsson, Tor Jacobson, and Daniel Waldenström, eds., Historical Monetary and Financial Statistics for Sweden (Stockholm: Sveriges Riksbank, 2010).

2 Sveriges Riksbank, The Riksbank's History (riksbank.se).

3 John Clapham, The Bank of England: A History (Cambridge: Cambridge University Press, 1944).

4 Roger Lowenstein, America's Bank: The Epic Struggle to Create the Federal Reserve (New York: Penguin Press, 2015).

5 Bank for International Settlements, Central Banks and Monetary Authorities (bis.org).

6 Forrest Capie, Charles Goodhart, and Norbert Schnadt, "The Development of Central Banking," The Future of Central Banking (Cambridge: Cambridge University Press, 1994).