Things did not end well for Johan Palmstruch. There were no rules to limit the loans that could be issued by the bank, and Stockholms Banco’s loans far outstripped the value of the copper and silver held by the bank. Confidence in the banknotes began to evaporate, and their value fell. Demand to redeem the banknotes for copper and silver was high, but Stockholms Banco did not have enough metal to meet the demand, and Sweden experienced its first banking crisis. The bank was declared bankrupt and was liquidated. Johan Palmstruch was sentenced to death for irresponsible accounting. The death sentence was subsequently commuted, but Palmstruch had to spend the rest of his life in prison. Nonetheless, the Stockholms Banco crisis left a permanent legacy: in 1668, the authority to conduct banking operations was transferred to a bank that was later to become the Riksbank, under the direct control of the Swedish parliament, Riksdagen.1 The world’s first central bank was born.2  What is money? So what is money exactly? The simple answer is that money is a means of payment. It is also a universally recognised common unit of account. Money has therefore a key role in all financial transactions – it is a practical means of assigning value to goods and services and of settling trades. To perform these functions, money must have a fairly stable value. People will only accept money as payment if they believe it can be used again as a method of payment in the future.
For a review of Norway’s monetary history, see Eitrheim, Ø., J.T. Klovland and L.F. Øksendal (2017). A monetary history of Norway, 1816-2016, Cambridge University Press. 7 Deposit money is also reduced when customers withdraw cash. However, since cash is part of the money  supply, the total money supply in the economy does not change. 8 8/9  BIS central bankers' speeches  8 In isolation, diversification reduces banks’ funding risk. Increased use of wholesale funding may lead to slower  growth in the money supply than in credit. Banks also hold liquidity portfolios containing highly liquid securities that can be sold to compensate for deposit withdrawals. This also reduces banks’ risk. 9 For a more detailed explanation of how money is created by banks, see “Money creation in a modern economy”,  Bank of England Quarterly Bulletin2014/Q1, and Bernhardsen, T., A. Kloster and O. Syrstad (2016) “Alternative virkemidler i pengepolitikken – Den nødvendige monetære økosirk” . Staff Memo12/2016. Norges Bank (Norwegian only). 10 Lehman Brothers was an investment bank and did not accept customer deposits. However, as the bank issued  short-term paper and took part in repurchase agreements, which are included in M3, Lehman Brothers created money. The closure of Lehman Brothers led to investor flight from money market funds, very high money market volatility and higher demand for cash from US bank customers. 9/9  BIS central bankers' speeches