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Threadneedle street. Photo by Helen Steed.

Top 10 Facts about The Credit Crisis of 1772      

Before 1772, Britain made the most of a colonial land expansion that necessitated a substantial capital outlay across the East and West Indies and North America.

As goods like tobacco were transported from colonial territories to Britain, goods and necessities were also sent back to the colonies from Britain.

Colonial planters were keen to borrow cheap capital from British creditors since capital was in short supply in the American colonies.

Creditors, however, had no means of knowing the level of debt a specific planter was carrying because planters frequently kept open lines of credit through several different trade channels.

Due to the failure of London banking firm Neale, James, Fordyce and Downe on Threadneedle Street, the lending bubble abruptly came to an end.

The top 10 Facts about the credit crisis of 1772 include the following.

1. The Credit Crisis of 1772 Is the Least Known of The Time

American Revolution war. Photo by Howard Pyle.

Perhaps the least well-known financial crises of the eighteenth century was the credit crisis of 1772–1773.

 It happened in the interim between the American Revolutionary War’s economic upheaval and the banking crisis of 1763, the two infamous occurrences of the time.

 However, it is just as important historically, if not more so, because it happened at a turning point in the growth of banks, financial institutions, and the world economy.

The financial markets appeared to be recovering as 1773 came to an end and the crisis appeared to be ended. It was therefore a short-lived crisis.

By participating in the bills of exchange market and providing short-term loans to cash-strapped banks, the Bank of England significantly contributed to hastening the financial recovery.

2. Scholars Are Divided Over the Underlying Causes of The Crisis

Academics have differing opinions on what caused the crisis in the first place. While some contend that there weren’t adequate financial controls in place, others contend the opposite thing.

Either financial institutions prevented the expansion of the economy or they mismanaged the financial system.

Either the banking system’s expansion generated new economic opportunities or the interconnectedness between financial institutions caused market volatility.

 Either stock volatility grew as a result of political wrangling over the East India Company’s future, or its directors manipulated shares to their own advantage.

The controversy list keeps growing. All aspects of this historical discussion, however, have Great Britain as their focal point.

3. The Fall of a London Bank Is Thought to Have precipitated the crisis

Sir William Pulteney. Photo by Philip de Laszlo.

Alexander Fordyce, who was supported by Harman and Co. and Sir William Pulteney, borrowed 240,000 guilders in bearer bonds from Hope & Co. in Amsterdam in July 1770 to work with two other planters in Grenada.

He was a partner in the London banking firm Neale, James, Fordyce and Downe on Threadneedle Street as well as Scotland Ayr Bank’s correspondent.

 He made substantial bets against the price of the East India Company share, which horribly failed. Fordyce had lost the bank’s assets to speculation which led to the fall of the London Bank.

The fall of London bank Neale, James, Fordyce and Downe, the largest buyer of Scottish bills, is usually believed to have started the crisis.

The London bank Neale, James, Fordyce and Downe fell after its loss of £300,000 on stock speculation in the East India Company (EIC).

Alexander Fordyce, lost £300,000 in June 1772 leaving his partners responsible for a debt estimated to be £243,000.

 Alexander Fordyce then fled to France in order to escape paying back the debt.

London experienced panic following the bank’s failure, which led to bank runs and a liquidity crisis.

The financial crisis therefore started in London during a time of peace and eventually expanded to Scotland and the Dutch Republic.

It has been noted that this was the Bank of England’s first contemporary banking crisis.

4. The Period Preceding the Crisis Was Marked by Credit Boom

Adam Smith. Photo by Unknown author. Unknown Author.

Adam Smith noted that the need for capital was unquenchable in new colonies.

The credit boom, sponsored by merchants and bankers, enabled the expansion of manufacturing, mining, and internal improvements in both Britain and the thirteen colonies from the middle of the 1760s to the early 1770s.

The years 1770–1772 were regarded as prosperous and politically stable in both Britain and the American colonies until the start of the credit crisis.

The Townshend Act and the failure of the Boston Non-importation pact caused a sharp increase in British exports to the American colonies during this time period.

Between 1750 and 1772, exports to North America expanded quickly relative to imports.

Credit was provided to American landowners by British merchants, which enabled these enormous exports. The Physiocrats encouraged farming and land development.

5. Problems Behind the Credit Boom Precipitated the Crisis to Happen

There were multiple problems underpinning the credit boom and the development of the British and colonial economies in the Americas and East and West Indies.

A wave of speculation, questionable financial innovation, and the creation of questionable financial institutions followed the fast development of credit and banking.

Charles P. Kindleberger and other historians have noted that crises frequently occur quickly after significant financial or technological advancements that give investors new financial opportunities.

For instance, in an effort to increase credit, bankers in Scotland started “the notorious practice of creating and redrawing fictional bills of exchange.”

The Douglas, Heron & Company bank, sometimes known as the “Ayr Bank,” was founded in Ayr, Scotland, in 1769 with the intention of expanding the available supply of money.

However, after the initial capital was used up, the bank obtained cash through a series of bills on London.

This approach encouraged false confidence in the market as it could only support economic growth in the short-term.

 Both British merchants and American planters entirely disregarded the early warning signs of the impending disaster, such as the overstocked shelves and warehouses in the colonies.

6. The Credit Crisis of 1772 Had Far Reaching Consequences

East India Company Docks. Photo by Unknown author.

Alexander Fordyce’s partners were held accountable for an estimated £243,000 in obligations after he lost £300,000 by shorting East India Company stock in June 1772.

Within two weeks of this information becoming known, eight banks in London and then roughly 20 banks throughout Europe fell.

“Lurid rumors abounded in the press for a time of merchants cutting their throats, shooting or hanging themselves,” says Paul Kosmetatos.

The boom and ensuing collapse were thought to have been most severe in Scotland in 1960.

In December, it undoubtedly resulted in a liquidity crisis in Amsterdam, although the consequences were transient.

The credit boom abruptly ended, and the subsequent crisis hurt the East India Trading Company, the West Indies in general, and the North American colonial planters in particular.

7. People’s Confidence in The Banks Waned During the Crisis

Credit usage at the time was crucial to economic growth and was heavily reliant on the public’s trust in banks.

The losses and inconveniences suffered by several people were so severe that many prominent businessmen and gentlemen of fortune decided not to keep their money in any banks.

As consumer confidence began to decline, the credit system became paralyzed. Large groups of people—mostly creditors—gathered at banks to demand cash repayment of debts or make attempts to withdraw their funds.

Twenty significant banking institutions filed for bankruptcy by the end of June as a result, while many more businesses struggled through the crisis.

“No incident for 50 years past has been remembered to have struck such a devastating blow both to trade and public credit,” the Gentleman’s Magazine observed at the time.

Trade and financial transactions between London and Amsterdam ceased during the first week of January 1773.

8. A Dramatic Rise in The Number of Bankruptcies Was Observed After the Crisis

Following the crisis, there was a sharp increase in bankruptcies: from 1764 to 1771, there were an average of 310 bankruptcies in London; however, in 1772 and 1773, there were 484 and 556 respectively.

Banks that engaged in extensive speculation struggled during the crisis. For instance, the Ayr Bank partners paid a minimum of £663,397 to cover all of their debts.

By August 1775, only 112 of the 226 partners had managed to stay solvent as a result of this process.

As a result of their exceptional performance despite the turmoil, banks that had never engaged in speculating avoided any losses.

Alexander Fordyce was compelled to sell his Roehampton estate in December 1774 to Sir Joshua Vanneck, 1st Baronet.

9. The Crisis Had Serious Consequences in Scotland And Europe

Exterieur Amsterdamse Bank. Photo by Rijksdienst voor het Cultureel Erfgoed.

The Ayr Bank of Scotland had taken on many of the roles of a central bank, chiefly acting as a “lender of last resort” by advancing notes to Scottish banks.

The Ayr Bank had the legal authority to issue banknotes, a privilege it abused.

The Duke of Buccleuch, the Earl of Dumfries, the Earl of March, Sir Adam Fergusson, Patrick Heron, and Archibald Douglas were among the 139 shareholders in the institution, although there were no bankers.

Due to its excessively liberal lending practices to colonial planters, the Ayr bank fell on June 24 and was joined in its demise by other smaller banks.

The big Scottish landowning families suffered a huge loss when the bank collapsed.

Due to the bank’s failure, the public was less likely to trust land banking initiatives, making gold and silver the only acceptable collateral for bank notes.

The ripple effect of the credit extended to financial institutions in the Netherlands.

A loan facility run by Amsterdam for struggling business owners received funding from the Bank of Amsterdam in January.

Leading Dutch banking institutions (Andries Pels and Clifford & Son) lost money together with the other shareholders since they had made significant investments in the stock of the East India Company.

During the crisis, Clifford & Sons, a merchant bank, eventually failed, and other competitors like Herman & Johan van Seppenwolde and Abraham Ter Borch soon followed.

 For the Dutch plantation colonies in the West Indies, and particularly for Surinam, where colonial agriculture was almost entirely carried out with finance from Amsterdam, the credit crunch was a terrible calamity.

Later, the economies of Stockholm and St. Petersburg were also shaken by a few bankruptcies, but overall, Europe escaped largely unscathed.

Heinrich Carl von Schimmelmann assisted in the nationalization of the Danish Kurantbanken in March 1773; owners received fixed income bonds rather than interests in Danish West Indies plantations.

10. Debtor-Creditor Relations Between The American Colonies and Britain Deteriorated

Thomas Jefferson. Photo by Rembrandt Peale.

Relationships between Britain and the thirteen American colonies significantly deteriorated as a result of the economic crisis of 1772, particularly in the South.

Compared to the northern colonies, which produced competitive commodities, the southern colonies, which produced tobacco, rice, and indigo and exported them to Britain, were given more credit.

The total amount of debt that British merchants sought from the colonies in 1776 was estimated to be £2,958,390; of this, the Southern colonies’ claims made up £2,482,763, or approximately 85% of the total.

The commission method of trading was popular in the southern plantation colonies prior to the crisis.

The London-based merchants assisted the planters in selling their crops and shipped any goods the planters wished to buy in London as returns.

The commission was equivalent to the cost of British goods less agricultural revenue.

The planters often received credit for a period of twelve months without interest and at 5% on the sum that was repaid after the deadline. 

Thomas Jefferson received word of the disaster in Scotland in a letter dated July 8, 1772.

After the crisis began, British merchants urged rapid debt repayment, and American planters were confronted with the major challenge of how to pay the loan for a number of reasons.

First off, planters were unprepared for a large-scale debt liquidation because to the prior economic boom.

 Due to the collapse of the credit system, bills of exchange were turned down, and in December 1773, practically all of the heavy gold was shipped to Britain.

Second, planters were unable to continue producing and reselling their commodities without the help of finance.

The collapse in the price of their goods added to the pressure on planters because the entire market was paralyzed. The colonies struggled to keep the balance of payments due to the crisis.