crisis of 1772
1772 CE
The crisis of 1772, also known as the credit crisis of 1772 or the panic of 1772, is a peacetime financial crisis that originates in London, then spreads to other parts of Europe, such as Scotland and Netherlands.
On 8 June 1772, Alexander Fordyce, a partner in the banking house Neal, James, Fordyce and Down in London, flees to France to avoid debt repayment, and the resulting collapse of the firm stirs up panic in London.
Economic growth in this period is highly dependent on the use of credit, which is largely based upon people’s confidence in the banks.
As confidence starts ebbing, paralysis of the credit system follows: crowds of people gathers at the banks and request debt repayment in cash or attempt to withdraw their deposits.
As a result, twenty important banking houses go bankrupt or stop payment by the end of June, and many other firms endure hardships during the crisis.
At this time, the Gentleman’s Magazine comments, "No event for 50 years past has been remembered to have given so fatal a blow both to trade and public credit".
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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 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 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.