The Growing Pains of New Money, Part 4: Europe’s Expensive Lessons

Every new form of money in history has gone through growing pains: counterfeits, broken promises, lost value, and hard-won fixes. This series tells those stories from the primary sources, because the pattern is easier to see from a distance, and because knowing the pattern is the best preparation for living through it.

The series so far has followed new money from shells to stamps to the first paper notes in China. Now the experiment reaches Europe, and Europe learns everything China learned, the hard way, in about 60 years.

The bank that printed too many promises

Sweden in the 1660s had the heaviest money in European history. Its copper plate money came in slabs weighing up to 40 pounds. Carrying serious value meant carting it. Johan Palmstruch, founder of Stockholms Banco, offered the obvious mercy: leave the copper at the bank and carry a paper credit note instead. In 1661 his bank issued the first true banknotes in Europe, printed forms promising the bearer payment in coin, signed by the bank’s officers and secured with seals, like the 1666 note pictured above. People loved them, for exactly the reason Sichuan’s merchants had loved their receipts six centuries earlier.

Then Palmstruch did what nearly every issuer of new money in this series has done. He issued more notes than the bank held copper. When holders noticed and came to redeem, the bank could not pay. Europe’s first banknotes had produced Europe’s first banknote run, and the bank collapsed in 1668. Sweden’s answer survives to this day: the Riksbank, founded that same year under the supervision of parliament, now the oldest central bank in the world. The fix, once again, was an institution built directly on top of the break. Palmstruch himself was tried and sentenced to death, later commuted to imprisonment. The father of the European banknote died in disgrace for running the experiment 250 years before the safeguards existed.

A king defaults, a nation learns

England’s early paper money grew out of the goldsmith bankers, who held deposits of coin and issued notes and receipts that circulated in trade. Much of their money was lent to the Crown. In 1672 Charles II simply stopped repaying. The Stop of the Exchequer ruined several of the great goldsmith houses, and behind them the ordinary depositors whose coin they had lent. The creditors’ long fight for repayment produced one of the era’s landmark legal battles, the Bankers’ Case, and taught English finance a lesson it never forgot: even a king’s promise needs an institution around it. When the Bank of England was founded in 1694, its structure reflected a generation’s worth of that distrust.

The system of Mr. Law

The largest European lesson came in France. John Law, a brilliant Scottish gambler and economic theorist, understood money more clearly than almost anyone alive. “Money is not the value for which goods are exchanged, but the value by which they are exchanged,” he wrote in his 1705 book Money and Trade Considered. He also grasped what more money in circulation could do for a depressed economy: “Domestic trade depends upon money. A greater quantity employs more people than a lesser quantity.” These were genuine insights, and France, drowning in royal debt, gave Law the chance to build a system on them.

By 1719 his Banque Royale issued paper money, and his Mississippi Company shares soared in the frenzy of the Rue Quincampoix, where fortunes were made in the street, and the word millionaire entered common use. In 1720 the confidence broke. Holders rushed to convert paper to coin, the crowds in the street turned dangerous, and the system fell apart. Law fled France and died poor in Venice. The country’s trust in paper money and in the very word banque was wrecked for the better part of a century. The satirical engravings that flooded Europe afterward, collected in the great Dutch volume Het Groote Tafereel der Dwaasheid, The Great Mirror of Folly, show how completely the episode entered the continent’s imagination.

The pattern so far

Sweden, England, and France ran three versions of the same experiment, and all three broke at the same joint: a redemption promise that could not survive everyone testing it at once. Seen from inside, each collapse felt like proof that the new money had been a mistake. Seen from a distance, they look like what they were: the stage of growing up in which a young money’s weakest point gets found, publicly and painfully, so that something stronger can be built there. Sweden’s answer became the oldest central bank in the world. England’s became the Bank of England. Even France’s disaster taught lessons the whole world eventually used. The next post follows the paper experiment to America, where an entire war was paid for in promises.

Works cited

Het Groote Tafereel der Dwaasheid (The Great Mirror of Folly). Amsterdam, 1720. Satirical engravings of the Mississippi and South Sea bubbles.

Law, John. Money and Trade Considered, with a Proposal for Supplying the Nation with Money. Edinburgh, 1705.

Proclamation of the Stop of the Exchequer, January 1672, and records of the Bankers’ Case, 1690s.

Sveriges Riksbank. Archival records of Stockholms Banco, its credit notes of 1661 to 1666, and the trial of Johan Palmstruch.