18th century crises: Credit crises of 1772 orginated in London

Credit crisis of 1772

source: wikipedia

The Credit Crisis of 1772 originated in London and then spread to other parts of Europe, such as Scotland and Netherlands.

Before 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 theTownshend 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.
  • 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, theAyr 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”[6]. This method could only temporarily support economic development, yet it promoted false optimism in the market.

Effects on Europe

  • After the crisis, a dramatic rise in the number of bankruptcies was observed: the average number of bankruptcies in London was 310 from 1764-71, 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.
  • The East India Company bore heavy losses and its stock price fell significantly. As Dutch banking houses 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.

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[3]. 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

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