British Credit Crisis Of 1772-1773
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The British credit crisis of 1772-1773 also known as the crisis of 1772, or the panic of 1772, was a peacetime
financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...
which originated in London and then spread to
Scotland Scotland (, ) is a country that is part of the United Kingdom. Covering the northern third of the island of Great Britain, mainland Scotland has a border with England to the southeast and is otherwise surrounded by the Atlantic Ocean to the ...
and the
Dutch Republic The United Provinces of the Netherlands, also known as the (Seven) United Provinces, officially as the Republic of the Seven United Netherlands (Dutch: ''Republiek der Zeven Verenigde Nederlanden''), and commonly referred to in historiography ...
.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 The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government of ...
. New colonies, as
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
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 (
venture capitalism Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which hav ...
). In today’s language, they bought
shares In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an ...
on margin. In June 1772
Alexander Fordyce Alexander Fordyce (7 August 1729-8 September 1789) was an eminent Scottish banker, centrally involved in the bank run on Neale, James, Fordyce and Downe which led to the credit crisis of 1772. He used the profits from other investments to cov ...
lost £300,000
shorting In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional " long" position, where the investor will profit if the value of t ...
East India Company The East India Company (EIC) was an English, and later British, joint-stock company founded in 1600 and dissolved in 1874. It was formed to trade in the Indian Ocean region, initially with the East Indies (the Indian subcontinent and Southea ...
stock, leaving his partners liable for an estimated £243,000 in debts. 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". In 1960 it was believed the boom and subsequent crisis were most pronounced in Scotland. It certainly triggered a liquidity crunch in Amsterdam in December, but the effects were of short duration. In the end, none of them actually lost money. The credit boom came to an abrupt end, and the ensuing crisis harmed the East India Trading Company, the
West Indies The West Indies is a subregion of North America, surrounded by the North Atlantic Ocean and the Caribbean Sea that includes 13 independent island countries and 18 dependencies and other territories in three major archipelagos: the Greater A ...
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 the result of the
Townshend Act The Townshend Acts () or Townshend Duties, were a series of British acts of Parliament of Great Britain, Parliament passed during 1767 and 1768 introducing a series of taxes and regulations to fund administration of the British colonies in Amer ...
and the breakdown of the Boston Non-importation agreement, the period was marked with a tremendous growth in exports from Britain to the American colonies. Exports to North America increased rapidly compared to imports to North America between 1750 and 1772. These massive exports were supported by credit that British merchants granted to American planters. The
Physiocrats Physiocracy (; from the Greek for "government of nature") is an economic theory developed by a group of 18th-century Age of Enlightenment French economists who believed that the wealth of nations derived solely from the value of "land agricultur ...
believed in land development and agriculture. Problems, however, lay behind the credit boom and the prosperity of both British and colonial economies:
speculation In finance, speculation is the purchase of an asset (a commodity, good (economics), goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline i ...
and the establishment of dubious financial institutions. For example, in Scotland, bankers adopted "the notorious practice of drawing and redrawing fictitious
bills of exchange A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
…in an effort to expand credit". For the purpose of increasing the supply of money, the bank of
Douglas, Heron & Company Douglas, Heron & Company, also known as the Ayr Bank, was a Scottish bank with its head office at Ayr. It opened in November 1769 and folded in 1772 during the crisis of 1772. History The nominal capital of the company was £150,000 or £160,00 ...
, known as the "Ayr Bank", was established in
Ayr, Scotland Ayr (; sco, Ayr; gd, Inbhir Àir, "Mouth of the River Ayr") is a town situated on the southwest coast of Scotland. It is the administrative centre of the South Ayrshire council area and the historic county town of Ayrshire. With a population ...
in 1769; however, after the original capital was exhausted, the firm raised money by a chain of bills on London. Hamilton has explained how a chain of bills works, "A, say in Edinburgh, drew a bill on his agent B in London, payable in two months. Before payment was due B redrew on A for the same sum plus interest and commission. Meantime A discounted his bill in Edinburgh and before the two months were up he drew another bill on B and so on"."The Failure of the Ayr Bank, 1772"
''The Economic History Review''
This method could only temporarily support economic development, yet it promoted false optimism in the market. The warning signals of the impending crisis, such as the overstocked shelves and warehouses in the colonies, were completely overlooked by British merchants and American planters.


Effects in London

In July 1770
Alexander Fordyce Alexander Fordyce (7 August 1729-8 September 1789) was an eminent Scottish banker, centrally involved in the bank run on Neale, James, Fordyce and Downe which led to the credit crisis of 1772. He used the profits from other investments to cov ...
collaborated with two planters on
Grenada Grenada ( ; Grenadian Creole French: ) is an island country in the West Indies in the Caribbean Sea at the southern end of the Grenadines island chain. Grenada consists of the island of Grenada itself, two smaller islands, Carriacou and Pe ...
and borrowed 240,000 guilders in bearer bonds from Hope & Co. in Amsterdam; he was backed by Harman and Co. and Sir William Pulteney. He was a partner in the banking house
Neale, James, Fordyce and Downe Neale, James, Fordyce and Downe was a London banking house, established in 1757 by Henry Neale, William James, Alexander Fordyce and Richard Downe. Its collapse in June 1772 precipitated a major banking crisis which included the collapse of almos ...
in
Threadneedle Street Threadneedle Street is a street in the City of London, England, between Bishopsgate at its northeast end and Bank junction in the southwest. It is one of nine streets that converge at Bank. It lies in the ward of Cornhill. History The stree ...
(London), and correspondent of the (large) Ayr Bank. He bet heavily against EIC share price, which went awfully awry. Fordyce had speculated away the bank's
assets In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
. 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 (
Black Monday Black Monday refers to specific Mondays when undesirable or turbulent events have occurred. It has been used to designate massacres, military battles, and stock market crashes. Historic events *1209, Dublin – when a group of 500 recently arriv ...
). The whole
City of London The City of London is a city, ceremonial county and local government district that contains the historic centre and constitutes, alongside Canary Wharf, the primary central business district (CBD) of London. It constituted most of London fr ...
was in uproar when Fordyce was declared
bankrupt Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debt ...
. His goods and estate were seized and Neale, James, Fordyce and Down, the largest buyer of Scottish bills, were forced to
insolvency In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...
. 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 people (
creditors A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...
) gathered at the banks and requested debt repayment in cash or attempted to withdraw their deposits. As a result, twenty important 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 ''The Gentleman's Magazine'' was a monthly magazine founded in London, England, by Edward Cave in January 1731. It ran uninterrupted for almost 200 years, until 1922. It was the first to use the term ''magazine'' (from the French ''magazine'' ...
'' commented, "No event for 50 years past has been remembered to have given so fatal a blow both to trade and public credit". 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 Sunday 10 January, allowing anyone who wished to withdraw specie from the bank to do so. Many British merchants quickly 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 was 310 from 1764 to 1771, 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. In December 1774 Fordyce was forced to sell his estate in Roehampton to
Sir Joshua Vanneck, 1st Baronet Sir Joshua Vanneck, 1st Baronet (1702 – 6 March 1777) was a British-Dutch merchant. Venneck was born in The Hague, the son of Cornelius Van Neck. He emigrated to Britain in 1722 and became a successful London merchant. This enabled him to pur ...
; the
plaintiffs A plaintiff (pi (letter), Π in List of legal abbreviations, legal shorthand) is the party who initiates a lawsuit (also known as an ''action'') before a court. By doing so, the plaintiff seeks a legal remedy. If this search is successful, the co ...
were Hope & Co and Harman and Co.


Effects in Scotland

In November 1769 the moneyed interests in Scotland founded the
Ayr Bank Douglas, Heron & Company, also known as the Ayr Bank, was a Scottish bank with its head office at Ayr. It opened in November 1769 and folded in 1772 during the crisis of 1772. History The nominal capital of the company was £150,000 or £160,00 ...
to assume many of the responsibilities associated with a
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
, 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, which power it used excessively. By 1772 the Ayr bank had branches in Edinburgh and
Dumfries Dumfries ( ; sco, Dumfries; from gd, Dùn Phris ) is a market town and former royal burgh within the Dumfries and Galloway council area of Scotland. It is located near the mouth of the River Nith into the Solway Firth about by road from the ...
, 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 Duke of Buccleuch (pronounced ), formerly also spelt Duke of Buccleugh, is a title in the Peerage of Scotland created twice on 20 April 1663, first for James Scott, 1st Duke of Monmouth and second suo jure for his wife Anne Scott, 4th Cou ...
, the
Earl of Dumfries Earl of Dumfries is a title in the Peerage of Scotland. It was originally created for William Crichton, 9th Lord Crichton of Sanquhar, in 1633, and stayed in the Crichton family until the death of the fourth countess in 1742, at which point ...
, the
Earl of March Earl of March is a title that has been created several times in the Peerage of Scotland and the Peerage of England. The title derived from the "marches" or borderlands between England and either Wales (Welsh Marches) or Scotland (Scottish Marche ...
, Sir Adam Fergusson,
Patrick Heron Patrick Heron (30 January 1920 – 20 March 1999) was a British abstract and figurative artist, critic, writer, and polemicist, who lived in Zennor, Cornwall. Heron was recognised as one of the leading painters of his generation. Influenced b ...
and Archibald Douglas, but no bankers. On 12 June the news of the failure of
Neale, James, Fordyce and Downe Neale, James, Fordyce and Downe was a London banking house, established in 1757 by Henry Neale, William James, Alexander Fordyce and Richard Downe. Its collapse in June 1772 precipitated a major banking crisis which included the collapse of almos ...
reached Scotland. After the weekend a
run Run(s) or RUN may refer to: Places * Run (island), one of the Banda Islands in Indonesia * Run (stream), a stream in the Dutch province of North Brabant People * Run (rapper), Joseph Simmons, now known as "Reverend Run", from the hip-hop group ...
began on its Edinburgh branch. The Ayr bank collapsed on 24 June, 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 Specie may refer to: * Coins or other metal money in mass circulation * Bullion coins * Hard money (policy) * Commodity money * Specie Circular, 1836 executive order by US President Andrew Jackson regarding hard money * Specie Payment Resumption Ac ...
, 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 Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
, in 1773 busy writing
The Wealth of Nations ''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the ''magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in 1 ...
: "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." In his ''History of Banking in Scotland'' (Chapter X) Andrew William Kerr wrote: According to Kosmetatos existing literature dealing with aspects of the episode—no comprehensive coverage exists up to now.


Effects on Europe

Around 1770, mortgaging became very widespread; in the same year the
Van Aerssen van Sommelsdijck Cornelis van Aerssen van Sommelsdijck (also: Sommelsdijk) (The Hague, 20 August 1637 - Paramaribo, 19 July 1688) was the first governor of Suriname (Dutch colony), Suriname after the establishment of the Society of Suriname in 1683. He was governo ...
family managed to sell its share to the city of Amsterdam in
Suriname Suriname (; srn, Sranankondre or ), officially the Republic of Suriname ( nl, Republiek Suriname , srn, Ripolik fu Sranan), is a country on the northeastern Atlantic coast of South America. It is bordered by the Atlantic Ocean to the north ...
. The negotiations set up by the Cliffords in Surinam, the Van Seppenwoldes, Ter Borch, Hope & Co on
Grenada Grenada ( ; Grenadian Creole French: ) is an island country in the West Indies in the Caribbean Sea at the southern end of the Grenadines island chain. Grenada consists of the island of Grenada itself, two smaller islands, Carriacou and Pe ...
,
Sint Eustatius Sint Eustatius (, ), also known locally as Statia (), is an island in the Caribbean. It is a special municipality (officially " public body") of the Netherlands. The island lies in the northern Leeward Islands portion of the West Indies, so ...
, and
Saint Croix Saint Croix; nl, Sint-Kruis; french: link=no, Sainte-Croix; Danish and no, Sankt Croix, Taino: ''Ay Ay'' ( ) is an island in the Caribbean Sea, and a county and constituent district of the United States Virgin Islands (USVI), an unincorpo ...
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 inevitable demise. In December 1772 Clifford & Co, a well established Amsterdam banking firm which obtained plantation loans as part of its portfolio declared
insolvency In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...
. The plantation mortgages had many features in common with the
subprime mortgages The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the coll ...
on American houses. Historians, notably
Charles P. Kindleberger Charles Poor Kindleberger (October 12, 1910 – July 7, 2003) was an American economic historian and author of over 30 books. His 1978 book ''Manias, Panics, and Crashes'', about speculative stock market bubbles, was reprinted in 2000 after the ...
, have pointed out that crises often follow soon after major financial or technical innovations that present investors with new types of financial opportunities, which he called "displacements" of investors' expectations. In January the
Bank of Amsterdam The Bank of Amsterdam ( nl, Amsterdamsche Wisselbank, lit=Exchange Bank of Amsterdam) was an early bank, vouched for by the city of Amsterdam, and established in 1609. It was the first public bank to offer accounts not directly convertible to co ...
funded a city-operated loan facility for distressed merchants. 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 A credit crunch (also known as a credit squeeze, credit tightening or credit crisis) is a sudden reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from banks. A credit cr ...
was a real disaster 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. 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 Thomas Walpole (6 October 1727 – March 1803), styled from 1756 The Hon. Thomas Walpole, was a British MP and banker in Paris. Life Thomas Walpole was born into a political family. The second son of the 1st Baron Walpole and his wife Telisha, ...
) when British merchants sent ₤500,000, gold and
piastre The piastre or piaster () is any of a number of units of currency. The term originates from the Italian for "thin metal plate". The name was applied to Spanish and Hispanic American pieces of eight, or pesos, by Venice, Venetian traders in the ...
to Amsterdam. A few bankruptcies also shook the economies of Stockholm and St. Petersburg a little later, but overall Europe got off relatively lightly. The Danish
Kurantbanken The Kurantbanken (also known as the københavnske Assignationsbanken, Vekselbanken or Laanebankbanken) was a Danish-Norwegian private limited company set up in Copenhagen Copenhagen ( or .; da, København ) is the capital and most popul ...
was nationalized in March 1773 with the assistance of
Heinrich Carl von Schimmelmann Heinrich Carl von Schimmelmann (13 July 1724 – 16 February 1782) was a German-born merchant, banker, nobleman, planter and politician. During the Seven Years' War, he speculated heavily on currency debasement in close association with his bu ...
; the shareholders received the fixed interest bonds instead of shares on plantations in the
Danish West Indies The Danish West Indies ( da, Dansk Vestindien) or Danish Antilles or Danish Virgin Islands were a Danish colonization of the Americas, Danish colony in the Caribbean, consisting of the islands of Saint Thomas, U.S. Virgin Islands, Saint Thomas ...
. 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 The Bank of Amsterdam ( nl, Amsterdamsche Wisselbank, lit=Exchange Bank of Amsterdam) was an early bank, vouched for by the city of Amsterdam, and established in 1609. It was the first public bank to offer accounts not directly convertible to co ...
plummeted from more than 50 million guilders in 1772 to 30 million in 1773. In 1774 Fordyce was forced to sell his estate to
Sir Joshua Vanneck, 1st Baronet Sir Joshua Vanneck, 1st Baronet (1702 – 6 March 1777) was a British-Dutch merchant. Venneck was born in The Hague, the son of Cornelius Van Neck. He emigrated to Britain in 1722 and became a successful London merchant. This enabled him to pur ...
; the
plaintiffs A plaintiff (pi (letter), Π in List of legal abbreviations, legal shorthand) is the party who initiates a lawsuit (also known as an ''action'') before a court. By doing so, the plaintiff seeks a legal remedy. If this search is successful, the co ...
were Hope & Co and Gurnell, Hoare, & Harman. George Colebrooke went bankrupt.


East India Company

The
East India Company The East India Company (EIC) was an English, and later British, joint-stock company founded in 1600 and dissolved in 1874. It was formed to trade in the Indian Ocean region, initially with the East Indies (the Indian subcontinent and Southea ...
, formerly mainly a trading company with a limited territory, was now entrusted with the management of a much larger area, for which task its outdated organisation was not up to. At the London Stock Exchange, however, there was still the expectation that the Company would soon be paying higher dividends, an expectation shared by the Dutch capital owners who were used to investing part of their capital in English funds. This optimism gave rise to increasing speculation boom in the futures trade in securities in both London and Amsterdam. In May 1772 the EIC stock price rose significantly. In summer the EIC's debt suddenly skyrocketed - in India alone, the company had bill debts of £1.2 million. Meanwhile, speculation in futures in East India stock had weakened the London money market. The
Great Bengal famine of 1770 The Bengal Famine of 1770 was a famine that struck Bengal and Bihar between 1769 and 1770 and affected some 30 million people. It occurred during a period of dual governance in Bengal. This existed after the East India Company had been granted ...
, which was exacerbated by the actions of the
East India Company The East India Company (EIC) was an English, and later British, joint-stock company founded in 1600 and dissolved in 1874. It was formed to trade in the Indian Ocean region, initially with the East Indies (the Indian subcontinent and Southea ...
, led to massive shortfalls in expected land values for the company. The East India Company bore heavy losses and its stock price fell significantly. Hope & Co. was stuck with a considerable positions in EIC and
BoE BOE, BoE or Boe may refer to: Abbreviations, acronyms or initialisms * Bank of England, the central bank of the United Kingdom * Bank of English, a representative subset of the 4.5 billion words COBUILD corpus * Barrel of oil equivalent, a uni ...
stock. On 19 September the value of its shares dropped by 14%. The root of this crisis in relation to the East India Company came from the prediction by
Isaac de Pinto Isaac de Pinto (10 April 1717 – 13 August 1787) was a Dutch merchant and banker of Portuguese Sephardic Jewish origin who was one of the main investors in the Dutch East India Company, as well as a scholar and philosophe who concentrated on Je ...
that ‘peace conditions plus an abundance of money would push East Indian shares to ‘exorbitant heights.’The International Lender of Last Resort- An Historical Perspective by Joanna Rudd
/ref> As leading Dutch banking houses (
Andries Pels Andries Pels (2 September 1655, in Amsterdam – 8 February 1731) was a rich Dutch banker and insurer from Amsterdam. He was the banker of France in the era of John Law. He was nephew of his namesake, poet Andries Pels, and cousin to the colon ...
and Clifford & Son) had invested extensively in the stock of the East India Company, they suffered the loss along with the other shareholders. In this manner, the credit crisis spread from London to Amsterdam.Clapham, J. (1944) The Bank of England, p. 248 The
Regulating Act of 1773 The Regulating Act of 1773 (formally, the East India Company Act 1772) was an Act of the Parliament of Great Britain intended to overhaul the management of the East India Company's rule in India. The Act did not prove to be a long-term soluti ...
significantly reformed the East India Company's practices. It was complemented by the
Tea Act The Tea Act 1773 (13 Geo 3 c 44) was an Act of the Parliament of Great Britain. The principal objective was to reduce the massive amount of tea held by the financially troubled British East India Company in its London warehouses and to help th ...
1773, which had a principal objective that was to reduce the massive amount of tea held by the financially troubled British East India Company in its London warehouses and to help the financially struggling company survive. The East India Company had eighteen million pounds of tea sitting in British warehouses. A huge amount of tea as assets which were lying unsold. Selling it in a hurry would do wonders for its finances. On 14 January 1773 the directors of the EIC asked for a government loan and unlimited access to the tea market in the American colonies, both of which were granted. In August the Bank of England assisted the EIC with a loan.


Effects on the Thirteen Colonies

The credit crisis of 1772 greatly deteriorated debtor-creditor relations between the
thirteen American colonies The Thirteen Colonies, also known as the Thirteen British Colonies, the Thirteen American Colonies, or later as the United Colonies, were a group of British colonies on the Atlantic coast of North America. Founded in the 17th and 18th centur ...
and Britain, especially in the South. The southern colonies, which produced tobacco, rice, and indigo and exported them to Britain, were granted higher credit than the northern colonies, where competitive commodities were produced. (It was estimated that in 1776 the total amount of debt that British merchants claimed from the colonies equaled £2,958,390; Southern colonies had claims of £2,482,763, nearly 85 per cent of the total amount. Before the crisis, the commission system of trading prevailed in the southern plantation colonies. The merchants in London helped the planters sell their crops and shipped what planters wanted to purchase in London as returns. The commission equaled the price of the British goods minus the revenue of the crops. The planters were usually granted credit for twelve months without interest and at five per cent on the unpaid balance after the deadline. News of the crash in Scotland reached
Thomas Jefferson Thomas Jefferson (April 13, 1743 – July 4, 1826) was an American statesman, diplomat, lawyer, architect, philosopher, and Founding Fathers of the United States, Founding Father who served as the third president of the United States from 18 ...
in a letter dated 8 July 1772. After the outbreak of the crisis, British merchants urgently called for debt repayment, and American planters faced the serious problem of how to pay the debt for several reasons. First, because of the economic boom before the crisis, planters were not prepared for large-scale debt liquidation. As the credit system broke down, bills of exchange were rejected and almost all heavy gold was sent to Britain in December 1773. Second, without the support of credit, planters were unable to continue producing and selling their goods. Since the whole market became crippled, the fallen price of their goods also intensified the pressure on planters. Owing to the crisis, the colonies endured hard times to maintain the balance of payments. The crisis of 1772 also set off a chain of events related to the controversy over the colonial tea market. The
East India Company The East India Company (EIC) was an English, and later British, joint-stock company founded in 1600 and dissolved in 1874. It was formed to trade in the Indian Ocean region, initially with the East Indies (the Indian subcontinent and Southea ...
was one of the firms that suffered the hardest hits in the crisis. Failing to pay or renew its loan from the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government of ...
, the firm sought to sell its eighteen million pounds of tea from its British warehouses to the American colonies. Back then the firm had to market its tea to the colonies through middlemen, so the high price made its tea unfavorable compared to the tea that was smuggled to, or was produced locally in, the colonies. In May 1773, however, the Parliament imposed a three
pence A penny is a coin ( pennies) or a unit of currency (pl. pence) in various countries. Borrowed from the Carolingian denarius (hence its former abbreviation d.), it is usually the smallest denomination within a currency system. Presently, it is th ...
tax for each pound of tea sold, and allowed the firm to sell directly through its own agents. The
Tea Act The Tea Act 1773 (13 Geo 3 c 44) was an Act of the Parliament of Great Britain. The principal objective was to reduce the massive amount of tea held by the financially troubled British East India Company in its London warehouses and to help th ...
reduced the tea price and enabled the East India Company’s monopoly over the local tea business in the colonial tea market. The Tea Act proved to be wildly unpopular in the colonies, leading to the infamous Boston Tea Party, which was a major precursor to the American Revolution. Furious about how British government and the East India Company controlled the colonial tea trade, citizens in Charleston, Philadelphia, New York and Boston rejected the imported tea, and these protests eventually led to the
Boston Tea Party The Boston Tea Party was an American political and mercantile protest by the Sons of Liberty in Boston, Massachusetts, on December 16, 1773. The target was the Tea Act of May 10, 1773, which allowed the British East India Company to sell tea ...
in December 1773."Tea and Antipathy"
''American Heritage''
Bills of exchange had become so scarce by December 1773 that all of the dollars and heavy gold had been sent to Great Britain for remittance. The crisis also worsened the relationship of the North American colonies and Britain, due to the fact that it affected all 13 of the colonies, and due to the fact that the British were forced to introduce controversial legislation for the colonies in an attempt to remedy the crisis, which made the crisis one of the causes of the
American Revolutionary War The American Revolutionary War (April 19, 1775 – September 3, 1783), also known as the Revolutionary War or American War of Independence, was a major war of the American Revolution. Widely considered as the war that secured the independence of t ...
.


Further reading


Geest, Patrick van der (2021) In Search of the First Domino: The Credit Crisis of 1772-1773 in a Global History Perspective

Goodspeed, Tyler (2016) Legislating Instability

Hoonhout, Bram (2013) The crisis of the subprime plantation mortgages in the Dutch West Indies, 1750-1775
* Jong, Abe de, Kooijmans, Tim and Koudijs, Peter (2020) Intermediation in Mortgage-Backed Securities: The Plantation Business of F.W. Hudig, 1759-1797 . Available at SSRN: https://ssrn.com/abstract=3610648 or http://dx.doi.org/10.2139/ssrn.3610648
Kosmetatos, Paul (2018) Last resort lending before Henry Thornton? The Bank of England’s role in containing the 1763 and 1772–1773 British credit crises, ''European Review of Economic History.''

Koudijs, Peter and Hans-Joachim Voth (2011) Optimal delay: distressed trading in 18th c. Amsterdam

Koudijs, Peter (2011) Trading and Financial Market Efficiency in Eighteenth Century Holland
*
Narron, James and David Skeie (2014) Crisis Chronicles: The Credit and Commercial Crisis of 1772

Rockoff, Huge (2009) UPON DAEDALIAN WINGS OF PAPER MONEY: ADAM SMITH AND THE CRISIS OF 1772

Rudd, Joanna () The International Lender of Last Resort- An Historical Perspective
* Sheridan, Richard B. “The British Credit Crisis of 1772 and The American Colonies.” The Journal of Economic History, vol. 20, no. 2, 1960, pp. 161–86, http://www.jstor.org/stable/2114853. Accessed 9 Apr. 2022.


References

{{American Revolutionary War Financial crises 1772 in economics 1773 in economics 1772 in Great Britain 1773 in Great Britain Economic history of the United Kingdom