The British credit crisis of 1772–1773, also known as the crisis of 1772, or the panic of 1772, was a peacetime financial crisis which originated in London and then spread to Scotland and the Dutch Republic.Sheridan, R.B. (1960) "The British Credit Crisis of 1772 and the American Colonies" The Journal of Economic History It has been described as the first modern banking crisis faced by the Bank of England.Rockoff, Hugh T., Upon Daedalian Wings of Paper Money: Adam Smith and the Crisis of 1772 (December 2009). NBER Working Paper No. w15594, Available at SSRN: https://ssrn.com/abstract=1525772 New colonies, as Adam Smith observed, had an insatiable demand for capital. Accompanying the more tangible evidence of wealth creation was a rapid expansion of credit and banking, leading to a rash of speculation and dubious financial innovation. In today's language, they bought shares on margin.
In June 1772 Alexander Fordyce lost £300,000 shorting East India Company stock, leaving his partners Henry Neale, William James, and Richard Down liable for an estimated £243,000 in debts.Tyler Goodspeed: Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772 As this information became public, within two weeks, eight banks in London and later around 20 banks across Europe collapsed. According to Paul Kosmetatos "lurid tales abounded in the press for a time of merchants cutting their throats, shooting or hanging themselves".Paul Kosmetatos, "Financial Contagion and Market Intervention in the 1772–3 Credit Crisis", Cambridge Working Papers in Economic and Social History, Working Paper No. 21 (2014), p. 18. There is evidence that the boom and subsequent crisis were most pronounced in Scotland. It triggered a liquidity crunch in Amsterdam in December, but the effects were of short duration. The credit boom came to an abrupt end, and the ensuing crisis harmed the East India Trading Company, the West Indies in general, and the North American colonial planters specifically.
Before the crisis
From the mid-1760s to the early 1770s, the credit boom, supported by merchants and bankers, facilitated the expansion of manufacturing, mining, and internal improvements in both Britain and the thirteen colonies. Until the outbreak of the credit crisis, the period from 1770 to 1772 was considered prosperous and politically calm in both Britain and the American colonies. As a result of the Townshend Act and the breakdown of the Boston Non-importation agreement, the period was marked by tremendous growth in exports from Britain to the American colonies. These massive exports were supported by credit that British merchants granted to American planters.
Problems, however, lay behind the credit boom and the prosperity of both British and colonial economies as speculation and the establishment of dubious financial institutions rose. For example, in Scotland, bankers adopted "the notorious practice of drawing and redrawing fictitious bills of exchange...in an effort to expand credit". For the purpose of increasing the supply of money, the bank of Douglas, Heron & Company, known as the "Ayr Bank", was established in Ayr, Scotland in 1769; however, after the original capital was exhausted, the firm raised money by a chain of bills on London. This method could only temporarily support economic development, but it promoted false optimism in the market. The warning signals of the impending crisis, such as overstocked shelves and warehouses in the colonies, were overlooked by British merchants and American planters.
Effects in London
In July 1770 Alexander Fordyce collaborated with two planters on Grenada and borrowed 240,000 guilders in bearer bonds from Hope & Co. in Amsterdam; he was backed by Harman and Co. and Sir William Pulteney.Clapham, J. (1944) The Bank of England, p. 249'Henry Hope', Legacies of British Slavery database, http://wwwdepts-live.ucl.ac.uk/lbs/person/view/2146665491 [accessed 4 May 2022]. He was a partner in the banking house Neale, James, Fordyce and Downe in Threadneedle Street (London), and correspondent of the Ayr Bank.Sheridan, R.B. (1960) p. 171 He bet heavily against EIC share price, which went awry.Wilson, C. (1941/1966?), pp. 120–121 Fordyce had speculated away the bank's assets. On Monday 8 June 1772, it became clear Fordyce failed. The next day, he fled to France to avoid debt repayment. He used the profits from other investments to cover the losses. The initial distress in London peaked on 22 June, now known as Black Monday. The whole City of London was in uproar when Fordyce was declared bankrupt.Clapham, J. (1944) The Bank of England, pp. 246–247 His goods and estate were seized and Neale, James, Fordyce, and Down, the largest buyer of Scottish bills, were forced to insolvency.
There was great uncertainty about the size of the shock. Economic growth at that period was highly dependent on the use of credit, which was largely based upon people's confidence in the banks. As confidence started ebbing, paralysis of the credit system followed: crowds of creditors gathered at the banks and requested debt repayment in cash or attempted to withdraw their deposits. As a result, twenty banking houses went bankrupt by the end of June, and many other firms endured hardships during the crisis. At that time, the Gentleman's Magazine commented, "No event for 50 years past has been remembered to have given so fatal a blow both to trade and public credit".The Gentleman's Magazine and Historical Chronicle (London: June 1772) MDCCLXXII, p. 293 In the first week of January 1773, trade and finance between London and Amsterdam came to a halt. The Bank of England came to the rescue on 10 January, as they allowed for the withdrawal of specie from the bank. British merchants sent money to their ailing Dutch correspondents. The strain upon the reserves of the Bank of England was not eased until towards the end of 1773.
After the crisis, a dramatic rise in the number of bankruptcies was observed. The average number of bankruptcies in London from 1764 to 1771 was 310, but the number rose to 484 in 1772 and 556 in 1773. Banks that were deeply involved in speculation endured hard times during the crisis. For example, the partners of the Ayr Bank paid no less than £663,397 in order to fully repay their creditors. Owing to this process, only 112 out of 226 partners remained solvent by August 1775. In contrast, banks that had never engaged in speculation did not bear any losses and gained prestige for their outstanding performance despite the turbulence."The Failure of the Ayr Bank, 1772" The Economic History Review
In December 1774 Fordyce was forced to sell his estate in Roehampton to Sir Joshua Vanneck, 1st Baronet; the plaintiffs were Hope & Co and Harman and Co.
Effects in Scotland
In November 1769 the moneyed interests in Scotland founded the Ayr Bank to assume many of the responsibilities associated with a central bank, principally standing ready to advance notes to Scottish banks as a 'lender of last resort.' Like other banks established in the form of limited liability companies, the Ayr Bank had the right to put banknotes into circulation, a power it used excessively.J.G. van Dillen (1970) Van Rijkdom en Regenten, p. 610 By 1772 the Ayr bank had branches in Edinburgh and Dumfries, as well as representative offices in Glasgow, Inverness, Kelso, Montrose, Campbeltown, and several other places. Among the company's 139 shareholders were well-known people such as the Duke of Buccleuch, the Earl of Dumfries, the Earl of March, Sir Adam Fergusson, Patrick Heron and Archibald Douglas, but no bankers.
On 12 June the news of the failure of Neale, James, Fordyce and Downe reached Scotland. After the weekend a run began on its Edinburgh branch.A History of Banking in All the Leading Nations, p. 190 The Ayr bank collapsed on 24 June,Clapham, J (1944), p. 163Tyler Goodspeed: Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772, p. 4 bringing other smaller banks down with it having extended credit too liberally to colonial planters. It was said that the Scotch have ten times more paper money in proportion to their specie, than ever the English had. The collapse of the bank was a major blow to the great Scottish landowning families, but seems to have hit the Scottish economy mildly. The Ayr bank managed to reopen for a brief period between September 1772 and August 1773, but a general meeting of the partners held on 12 August decided to dissolve the Company permanently. The bank may have actually spurred the economic development of Scotland, but its failure weakened public confidence in land banking schemes, leaving gold and silver as the most acceptable security for bank notes.
According to Adam Smith in The Wealth of Nations, "Being the managers rather of other people's money than of their own, it cannot be well expected, that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own."A. Smith (1976), vol. 2, pp. 264–265 In his History of Banking in Scotland (Chapter X) Andrew William Kerr wrote:
Effects on Europe
Around 1770, mortgaging became very widespread; in the same year the Van Aerssen van Sommelsdijck family managed to sell its share to the city of Amsterdam in Suriname.J. Wolbers (1861) Geschiedenis van Suriname, p. 82 The negotiations set up by the Cliffords in Surinam, the Van Seppenwoldes, Ter Borch, Hope & Co on Grenada, Sint Eustatius, and Saint Croix issued bonds to finance the loans. Such packages could contain loans to 20 or more plantations, and before 1772, at least 40 of these bundles were issued, their names as unspecific as L.a. A, B or C. Investors thus had little knowledge of what they invested in, and lent their money purely on good faith and the word of the fund director. The Dutch fund managers were also hit personally once their subprime system met its demise. In December 1772 Clifford & Co, a well established Amsterdam banking firm which obtained plantation loans as part of its portfolio declared insolvency.
In January, the Bank of Amsterdam funded a city-operated loan facility for distressed merchants.Clapham, J. (1944), p. 248The Descent of Central Banks (1400–1815) by William Roberds and François R. Velde (2014) The merchant banking firm Clifford & Sons broke eventually, followed by more of its counterparts like Herman & Johan van Seppenwolde and Abraham Ter Borch. The credit crunch was consequential for the Dutch plantation colonies in the West Indies and particularly for Surinam, where colonial agriculture was almost exclusively carried out with credit from Amsterdam.J.P. van der Voort (1973) De Westindische Plantages van 1720 tot 1795, p. 154
In Amsterdam, a worse catastrophe was averted by rapid imports of precious metals. In January 1773, Joshua Vanneck and his brother were involved by Thomas Walpole when British merchants sent £500,000, gold and piastre to Amsterdam.J.G. van Dillen, p. 613
A few bankruptcies also shook the economies of Stockholm and St. Petersburg a little later, but overall, Europe was relatively less affected. The Danish Kurantbanken was nationalized in March 1773 with the assistance of Heinrich Carl von Schimmelmann; the shareholders received the fixed interest bonds instead of shares on plantations in the Danish West Indies.Hans Chr. Johansen (1966) "J. G. Büsch's economic theory and his influence on the Danish economic and social debate", Scandinavian Economic History Review, 14:1, 18–38, Clifford was insolvent and given postponement of payment. Hope & Co., the leading banking house, suffered from a bad deal and the fall of the EIC-stocks. The turnover with the Amsterdam Exchange Bank plummeted from more than 50 million guilders in 1772 to 30 million in 1773. George Colebrooke went bankrupt.
East India Company