A portrait of a banking calamity

The spectre of financial crisis looms particularly large at present. My interest in the collapse of banking systems dates back more than a decade to my experience of working in the City. In just 12 years I have witnessed three major market wobbles: the Russian crisis of 1998, the dotcom bubble of 1999-2000, and the current credit crunch. For my PhD research in the Faculty of History, however, I have chosen to focus on an episode that took place almost two and a half centuries ago.

One rascally and extravagant banker has brought Britannia, Queen of the Indies, to the precipice of bankruptcy! It is very true, and Fordyce is the name of the caitiff. He has broken half the bankers. (Horace Walpole, 22 June 1772)

With the benefit of hindsight, the pronouncement by the Georgian author and politician Horace Walpole may seem overly dramatic, particularly as most people today have never even heard of the Panic of 1772. At the time, this crisis was a major shock to British finance. The storm was unleashed in early June 1772 with the failure of the banker Alexander Fordyce, a former Aberdonian hosier whose daring speculations had brought him great wealth, an aristocratic marriage and almost a Parliamentary seat. Soon the panic in London was universal, as the Scots Magazine reported:

Words cannot describe the general consternation of the metropolis on the 22nd. A universal bankruptcy was expected, and the stoppage of every banker looked for. The whole city was in uproar, and many of the first families in tears. Every countenance appeared clouded, occasioned either by real distress, or by what they feared for their friends.

Although a Bank of England bail-out of selected private banks restored calm in London, a credit crunch set in, turning this episode into an international crisis which quickly spread across the credit networks of the era. In Scotland it caused the failure of the big and ambitious Ayr Bank, founded only three years before with the backing of most of that country’s elite, and cut a burgeoning economic boom short. In a letter to the economist Adam Smith on June 27, the philosopher David Hume painted a particularly grim picture:

We are here in a very melancholy Situation: Continual Bankruptcies, universal Loss of Credit, and endless Suspicions... The Carron Company is reeling, which is one of the greatest Calamities of the whole, as they gave Employment to near 10,000 People.

Aftershocks were felt as far afield as Amsterdam – then a major financial hub – and even the North American colonies, then still very much a part of the British Empire. The freezing of the credit markets expedited the loss of independence of the over-extended East India Company, as the Government seized the opportunity to take partial control of it in exchange for a giant bailout. Although not quite a ‘nationalisation’ as we would understand the term today, the Regulating Act of 1773 marked a major step in the process that ended with India as a British possession.

As an interesting aside, the Company also received the right to sell tea to the restive American colonies as part of this deal. Although nobody in their right mind would claim that the financial crisis caused the American Revolution, there is nonetheless an amusing chain of coincidences which leads from Fordyce’s flight to a load of East India tea being thrown in the waters of Boston Harbor in December 1773.

Although now largely forgotten by the wider public and overlooked in academia, the 1772-3 credit crunch has several claims to being an important episode in the history of financial crises, not least the fact that it broke out in the midst of peace - a rare enough occurrence for 18th century Britain - and relative prosperity. The victorious end of the Seven Years War in 1763 and Clive’s Indian victories had turned Britain into the pre-eminent world power and the arbiter of Indian affairs, and had enabled a vigorous economic expansion. These same circumstances then that made the crisis seem a bolt out of the blue for its contemporaries are a rare boon to the modern historian,  enabling the focus to fall on the way capital markets can become unstable by themselves, without the obscuring effects of war, harvest failure, or government policy.

Hume’s letter to Smith (quoted earlier) makes interesting reading in more ways than one; not so much his fears about the Carron ironworks which after all avoided bankruptcy until 1982, in the meantime giving Britain red pillar boxes and red phone boxes, but rather the much broader question he asked afterwards:

Do these Events any–wise affect your Theory? Or will it occasion the Revisal of any Chapters?

Smith’s mind seems to have been very much on them, as his almost explicit references in The Wealth of Nations demonstrate. As the long boom before 1772 had been fuelled by a rapid expansion in the supply of paper money and bank credit, Smith used the example of the crash in outlining a set of regulations under which the monetary and banking systems would safely operate.

Smith did not operate in a vacuum, however. His is but one of the many contemporary voices which debated this very public episode. Newspaper articles, pamphlets, sermons and that uniquely Georgian medium, the satirical print, all grappled with its causes and implications for the country and its economy. Much of this discourse was emotive and politically charged, particularly in the context of the controversies of the period like the virulent anti-Scottish rhetoric then popular with a portion of the English public.

As Walpole put it, with both Fordyce and the Ayr Bank being Scottish, “all the clamour against that country is revived, and the war… carried very far, at least in the newspapers”. Scapegoating, particularly of minorities, is a common reaction of societies in the presence of public calamity, and in the wake of this crisis Scots were often attacked in the press with the same conspiracy theories, and often the same epithets, more usually encountered in anti-Semitic attacks down the ages.

Some of this commentary now appears economically naïve, replete as it is with anxiety about the loss of English silver in exchange for “worthless” foreign paper, or the perils of credit-fuelled luxury and the social mobility that allowed jumped-up Scots hosiers to rise above their station and plunge “the first families into tears”. Bankers and speculators were predictably vilified, and the usual apocryphal stories about distraught financiers jumping out of windows also made the rounds - although at least in one case this seems to be corroborated by the primary sources. 

That said, there is still a surprising amount of thoughtful and perceptive analysis on issues that even today trouble the financial industry and its regulators, from insider trading (a practice made officially illegal only in the 20th century) and the separation of banking from stock-jobbing, to broader considerations about the nature of financial bubbles and the rightful place of financial risk in a commercial society.

In the end the 1772-3 financial crisis had few lasting economic effects outside Scotland, where the Ayr Bank mess took decades to resolve. The American war (a full European war after 1778) and the harvest fluctuations in what was still an overwhelmingly agricultural society, almost certainly caused more pain to British society than any credit crunch could. The historical significance of this episode in the development of political economy and of the banking industry is, however, hard to deny.