Tuesday, 13 November 2007

Paper Money History: The First European Banknotes

From Japan we move to Europe, where the next evidence of paper money now becomes evident. The interesting point to note in all of this is that there is no evidence of one country influencing the other, but mankind seems to have evolved into the conclusion that the use of paper money was the next step forward for them without any outside interferences.

Thus the Stockholms Banco, (predecessor of the Bank of Sweden) was founded in 1656, and was authorized to accept deposits, grant loans and mortgages as well as issue bills of credit. It was the brain child of Johan Palmstruch who became the General Manager and approved of by King Charles X Gustav the then King of Sweden.The bank was modeled on the successful banks of Amsterdam and Hamburg founded earlier on in 17th Century. The goal was to hopefully help stabilized the Swedish currency as it had been suffering from the fact that both copper and silver were used to produce same value coins. Both metal had differing values and when copper became more valuable as a metal than the face value of the coin itself things just turned from bad to worse.

Charles X Gustav The King of Sweden (1622-1660)

To compound issues the bank had been using depositors money to finance loans and mortgages. When costumers started to demand for their money back as the value of copper metal rose it became increasingly difficult to meet up with the demand, and so in 1661 Stockholms Banco became the first chartered bank in Europe to issue banknotes.

The banknotes solved the problem of meeting the demands of depositors trying to collect their coins which had become increasingly difficult as the old coins had also been withdrawn at a faster rate than they were able to produce the new lighter coins. Also its important to remember that the notes were much lighter than the coins which had to be carted around by a horse when large payments needed to be made.

This must have been a nightmare for merchants and I can fully relate. In Ghana and Nigeria the Cedi and Naira in recent years has lost its value and in order to make payments for even small items like a bag of rice you need thousand of cedis and naira's. Paying your rent or making a deposit for your house would entail carrying big bags of money about. You become a target for thieves. So you can imagine how the merchants must have felt when banknotes gave them the freedom of just slipping the paper credit in an envelope and sending it off as payment.

Europe's first paper money
From http://www.moneymuseum.com/

The only problem was that things went terribly wrong for Johan Palmstruch he had miscalculated, to put it very politely, and printed more banknotes than he had coins to redeem them. (This reminds me of what's happening right now in America with mortgages and bad loans, when are we ever going to learn?) Anyway things came to a head when the bank was taken over by the Swedish Parliament in 1664 and Palmstruch was taken to court, charged and found guilty of mismanagement. He was imprisoned, and spent most of the rest of his life in jail.

Paper money appeared in other European countries and their colonies in the 17th Century so we shall continue to explore these events for the rest of the week.

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