The world’s first central bank and the invention of banknotes

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Annika Hotze, Bundesbank Museum

The Bank of England was founded over 330 years ago, which sounds pretty old, right? But despite the longevity of the Bank of England, it is the second oldest central bank in the world. So, which central bank came first?

The answer to that question is clear: the Swedish Riksbank is the first and oldest central bank of the world, founded over 350 years ago. 

Initially, the Swedish Chancellor Axel Oxenstierna proposed setting up a bank in every town to fix the shortage of money in the Swedish economy and increase trade. The only issue? Neither the Crown nor the residents supported the bank, so Oxenstierna's proposal never came to be. 

The beginnings of the first central bank weren’t far behind. In 1624 Sweden introduced the copper standard, since copper was Sweden’s most desired export of the time. But because copper is worth less than silver, large plates of copper were needed to replace even small silver coins. The largest copper coin weighed almost 20 kilograms, making it impractical to carry around! 

A few decades later, in 1660, the government started to mint new, lighter coins. Many customers wanted their old copper plates back for their metal value, but since they all came knocking at the same time, a run on the bank ensued.

This desperate time called for a revolutionary idea, and it was financier Johan Palmstruch who came up with an ingenious solution. To counteract the impending bank run, his bank ‘Stockholms Banco’ started to issue deposit certificates called ‘Credityf.’ These paper certificates entitled the holder to the value in coins if redeemed but also meant the bank could lend money without necessarily having it deposited. Credityf became the first European banknotes.

The new banknotes became very popular in a short time, so Stockholms Banco printed more and more banknotes but - unsurprisingly - that didn’t end well. The increased quantity of money in circulation meant that inflation rose, the value of banknotes decreased, and the public lost confidence in the bank. In a panic, many people tried to redeem their notes at once, leading to exactly the type of bank run Palmstruchs had tried to avoid, and the bank’s eventual failure.

In 1668, the Swedish government stepped in following the collapse of the Stockholms Banco, deciding that the loans would be repaid, and the credit notes withdrawn. In this way, Riksens Ständers Bank, today Sveriges Riksbank, was founded from the ruins of Stockholms Banco, and the world's oldest central bank was born.

Less than 30 years after the creation of Sveriges Riksbank, the Bank of England was founded and became the second oldest central bank in the world. It has been issuing paper money since it was founded in 1694. The Bank of England was established for different reasons, namely, to lend to the government and fund an ongoing war. Nevertheless, the creation of the first two central banks so closely together illustrates how ideas of credit and finance transformed the economy in the 17^th century.