Three years after Palmstruch's innovation began, 400,000 copper coins had been deposited in the Bank of Stockholm. Before long, the bankers came up with another innovation. They believed it was the right time to begin issuing loans.
The Bank of Stockholm began lending funds to companies, financing inventories of tar, salt, and sugar. For the nobility, the bank started guaranteeing various forms of secured loans. Land was the most common collateral, but some highly unconventional loans also appeared. For example, one woman borrowed 2,700 copper coins against a silver candlestick, while nobles lent money on the guarantee of their own names, individually or jointly.
For a time, the system worked well. The nobility enjoyed cheap credit, and their lives became more comfortable than before they had loans. Merchants could borrow funds for future investments. When business prospered, they no longer had to rely on their own savings to expand; through the Bank of Stockholm, they could expand using other people's savings.
But in reality, the bank did not have as much money—or rather, as many copper coins—as people imagined. Yet Palmstruch could continue printing notes, which holders could redeem for Swedish riksdalers whenever they wished.
If people from China's Song dynasty had seen this, they would certainly have known what the problem was. But in Europe at the time, no one thought anything was wrong. Swedish paper money was wildly popular in the 1660s. Even Palmstruch's printing could not keep up, and the notes were soon traded in Amsterdam, London, Paris, and Venice.
Because Swedish banknotes did not need to be backed by copper reserves, the bank rapidly expanded its lending and opened many branches. This continued until 1663, when a depositor informed the bank that he wanted to withdraw 10,000 Swedish riksdalers—while the bank's vault held only 4,000.
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