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first time something so closely resembling modern money was used in Europe. Unlike earlier notes issued by European banks over the centuries, these weren’t tied to a specific account or deposit but could be freely traded from person to person. The government went along with the plan, agreeing that the banknotes could be used to pay tax bills. Modern money—backed not by some precious metal, but by the credibility of a single financial institution and its leader, Palmstruch—had arrived in Europe.
    With that, one understanding of money—as a physical object, its value rising and falling depending on supply and demand for the metal it’s made of—was replaced by another. Money was instead an idea, something unrelated to the actual value of the material on which it is printed. Instead, its value is set by the institution—specifically, the central bank—that issues it. Like Palmstruch’s printed paper, modern currency holds its value ultimately because of public confidence in the authority that stands behind it. A government can say that one dollar or pound or krona is equal to a certain amount of gold or silver or copper—but it is always within the power of that government to change that ratio, or abandon the relationship entirely. (Western nations would use gold and other metallic standards for their money for centuries to come; not until 1971 would most major industrial nations’ currencies fully decouple from gold.)
    In Sweden in the 1660s, paper money was wildly popular. Palmstruch literally couldn’t print it fast enough; it started to be traded in all the great financial centers, Amsterdam and London and Paris and Venice. No longer held back by the need to have backing for loans in the form of copper holdings, the bank increased its lending dramatically and opened new branches. The royal family alone borrowed 500,000 daler.
    Before long, there was vastly more paper money floating around than there was copper daler in the vault. By 1663, the bank was down to a piddling 4,000 copper daler in its vault—and a depositor had notified it that he wished to withdraw 10,000.
    As word started to spread that the bank was paying back depositors slowly and irregularly, closing on some days, and generally behaving as if it had something to hide, the loss of public confidence fed on itself. Stockholms Banco notes were traded at a 6 to 10 percent discount to what they theoretically represented—which just made people all the more eager to withdraw their money. Suddenly those paper notes were worth less than they had been, each one buying less herring or tin or lumber than it had before—the phenomenon now called inflation. As Palmstruch single-handedly increased the supply of money, the price of most everything rose.
    The government was getting rather concerned, and it ordered Palmstruch to call in loans so that the bank could pay depositors. This wasn’t a move taken lightly: The chancellor was strongly opposed, surely in no small part because he was the bank’s single largest borrower. After considerable debate, the parliament decided not to dissolve the bank, despite some evidence of “irregularities and inconveniences.” As it turns out, the decision to cut back on loans and vastly reduce the paper money in circulation had a negative rather than a positive effect: 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 (or possibly depression—economic statistics hadn’t been invented yet) caused by a contraction of the money supply.
    By 1667, the Swedish government had taken over and then liquidated Stockholms Banco. Palmstruch was tried for fraud and lost his privilege of running a bank. But Sweden’s experiment with a central financial authority wasn’t over. For all the tumult Stockholms Banco had caused, the