Sweden – Oldest Central Bank in the World

A central bank’s role is to provide a stable currency and banking system for its country. A central bank normally oversees monetary policy, commercial banking and its currency. Many think that a central bank is more of a modern idea, but there has been a central bank in existence for hundreds of years.

Stockholm’s Banco was founded in 1656, when it was initiated as an exchange bank. The bank went on to issue Europe’s first banknotes. The bank was very successful with the novelty of issuing banknotes in exchange for coinage because Sweden had previously been issuing very heavy coins (some of which weigh nearly 20 kilograms)!

The bank continued to issue more notes than it could guarantee, ultimately contributing to its demise. Sweden’s government decided to repay the loans that the bank could not repay and banned the use of the still circulating Stokholm’s Banco notes. The government of Sweden saw that the bank had influenced the stability of its government and its currency, which led Sweden to establish a quasi-central bank.

In 1668, Riksens Ständers Bank, which translates to Bank of the Estates of the Realm, took on the role of providing stability in the economy and to maintain the "right and fair value” of coinage in Sweden. The bank initially did not issue notes but oversaw government practices for currency and the economy. The bank did eventually issue notes in 1701. The bank’s first currency was known as a Transport Bill. The bills worked by having the person in possession of the note sign over the note to the other person in the transaction. These sufficed for a period, but forgeries were prevalent.

Tumba Bruk or the Tumba Paper Mill, was established in 1755 to have Sweden produce its own high-quality paper to help fight counterfeits. The first notes made of this high-quality paper came in 1759.

Later on, in 1789, the Swedish National Debt office was created to help fund its war against Russia. The office was created because at the time, all notes in Sweden issued by the Riksens Ständers Bank had to be backed by silver, but Sweden was dealing with a shortage of silver secondary to the war. The debt office allowed for Sweden to produce promissory notes with no backing and the notes quickly lost their value but allowed Sweden to fund its war. Eventually, these notes were able to be exchanged for one another, but the Riksens Ständers issue traded with a higher value.

Sweden, Rikes Ständers Bank, Pick# A123c, 1840-58, 32 Skillingar Banco, front. graded PMG 30 Very Fine. Click image to enlarge.

In 1834, the Banking Act was passed, which made it legal for private banks to issue notes and pegged Sweden’s currency to the silver international standard. Private banking became popular in Sweden due to Scotland’s success with its private banking. Sweden promoted free banking after Scotland’s example.

Another reason private banking became successful in Sweden was that the Swedes had become accustomed to using banknotes due to the lack of coins through its history. Unlike other countries in which coinage was preferred, the Swedes seemingly welcomed private banknote issues. Possibly fueling their trust of private banknotes was the pre-existing distrust from the government’s promissory notes. The Riksens Ständers bank operated along with the private banks providing holding reserves, providing credit and was given government subsidies in order to help stimulate the economy when needed.

In 1867, Riksens Ständers Bank changed its name to Sveriges Riksbank, which translates to Sweden’s Realm’s Bank. The change came with the restructuring of Sweden’s government and, in turn, the structure of the bank was changed.

One key distinction between the private banking and Riksbank was the government subsidies. The government had set up the private banks in which there would be no way for the government to provide support directly to them if they got in trouble. The Riksbank was the only bank to be allowed subsidies in case of emergency. The government started to take steps of shrinking the control of the private banks, possibly in part due to seeing the effect of the multiple bank panics of the 1890s on its economy and others around the world. The right for issuing notes was revoked from the private banks in 1897 by Sweden and fully implemented in 1904.

Sweden's control over note-issuing privileges provided the tools to maintain the “right and fair value” of its currency going forward. The Riksbank went on to deal with World Wars and inflation that would have undoubtedly left the country worse off if the central bank had not been in full control of its currency. As of 2018, the Riksbank celebrated its 350th year of operation, making it the oldest central bank in the world.

Sources:

• Google Books – Designing Central Banks
• Sveriges Riksbank – Age of Liberty
• Sveriges Riksbank – Historical Timeline
• The Quarterly Journal of Austrian Economics
• Tumba Bruksmuseum
• Wikipedia – Central Bank
• Wikipedia – Sveriges Riksbank
• Wikipedia – Swedish National Debt Office
• Wikipedia – Swedish Riksdaler