Credit crisis of 1772

The crisis of 1772, also known as the credit crisis of 1772 or the panic of 1772, was a peacetime financial crisis which originated in London and then spread 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, fled to France to avoid debt repayment, and the resulting collapse of the firm stirred up panic in London. 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 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 or stopped payment 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".

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 and the breakdown of the Non-importation Act, the period was marked with a tremendous growth in exports from Britain to the American colonies. As shown in the graph (Fig. 1), exports to North America, represented by the red line, increased rapidly compared to imports to North America between 1750-72. 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: speculation and the establishment of dubious financial institutions. 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. 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". 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.

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