Here's Why The World's First Central Banker Got The Death Penalty
With the help of a passage from Neil Irwin's new book, "The Alchemists," here's a summary of the story:
In 1656, Sweden's King Karl X Gustav deputized a Latvian-born entrepreneur named Johan Palmstruch to found a bank to help modernize Sweden's finances.
At the time, the country's principal currency was enormous copper plates, called dalers.
Palmstruch began holding them at this new institution, called the Stockholms Banco, and providing customers receipts — basically, proofs of credit.
The system proved extremely popular, and a lot of dalers began piling up at the bank.
So naturally, Palmstruch began making loans.
For six years, things went great, Irwin writes.
But then King Gustav died, and Sweden's ruling council decided to strike new copper plates that were worth less than the old ones.
So naturally, Swedes immediately began lining up at the Banco to claim their old dalers, whose value had suddenly gone up.
But Palmstruch had lent out too much. So he thought of a quick solution: Start printing out even more paper that anyone could redeem at will.
And again, he was able to buy some time — Irwin says the script proved quite popular in Europe.
But the amount of paper money floating in the market soon vastly outpaced the Banco's actual daler holdings.
One day, a man showed up wanting to withdraw 10,000 dalers.
That wasn't going to happen. Word spread, and a bank run was ignited.
The government panicked, ordering Palmstruch to start calling in loans. This actually backfired, Irwin says:
Businesses that had become accustomed to operating using borrowed funds couldn't do so. Money, which had been all too readily available just two years earlier, became very hard to get, and a deep economic downturn followed. It was the first recession caused by a contraction of the money supply.
For putting the kingdom through all this, Palmstruch was sentenced to death, though he was later pardoned.
But the Banco lived on to become the West's first Central Bank, now called the Riksbank. And Palmstruch is now credited with having invented the West's first modern paper currency (the Chinese had been doing it for centuries).
Cashin jokes that this event may mean Ben Bernanke "should see a lawyer."
But remember, Palmstruch was only reacting to fiscal policy.
So for us, the episode shows that most of the time, Central Banks are just trying to do the best they can, in response to what non-bankers inflict on their country's economy.