...advances on October 7 in four squadrons…

The credit boom, supported by merchants and bankers, has 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 is considered prosperous and politically calm in both Britain and the American colonies.

As the result of the Townshend Act and the breakdown of the Non-importation Act, the period is marked with a tremendous growth in exports from Britain to the American colonies.

Exports to North America have increased rapidly compared to imports to North America between 1750-72.

These massive exports are supported by credit that British merchants grant to American planters.

Problems, however, lie behind the credit boom and the prosperity of both British and colonial economies: speculation and the establishment of dubious financial institutions.

For example, in Scotland, bankers have 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", had been established in Ayr, Scotland in 1769; however, after the original capital was exhausted, the firm had raised money by a chain of bills.

Henry 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. New Series, Vol. 8, No. 3 (1956), pp. 405-417 )

This method can only temporarily support economic development, yet it promotes false optimism in the market. The warning signals of the impending crisis, such as the overstocked shelves and warehouses in the colonies, ware completely overlooked by British merchants and American planters

The credit crisis of 1772 is triggered when, following the flight of their partner Alexander Fordyce to France, the London banking house of Neal, James, Fordyce and Down (which has been speculating in East India Company stock) suspends payment June 10.

The resultant panic causes other banks, particularly in Scotland, to fail, extends to Amsterdam and the Thirteen Colonies of British North America, and threatens the East India Company with bankruptcy.

The credit crisis of 1772 had greatly deteriorated debtor-creditor relations between the American colonies and Britain, especially in the South.

The southern colonies, which produce tobacco, rice, and indigo and export them to Britain, had been granted higher credit than the northern colonies, where competitive commodities are produced.

It is 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 eighty-five per cent of the total amount.

Before the crisis, the commission system of trading had prevailed in the southern plantation colonies.

The merchants in London had helped the planters sell their crops and had 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.

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 gold was sent to Britain.

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 have endured hard times to maintain the balance of payments.