The 1772–73 British Credit Crisis

351 Pages·2018·5.17 MB·English

by  Paul Kosmetatos

PALGRAVE STUDIES IN
THE HISTORY OF FINANCE
THE 1772–73 BRITISH
CREDIT CRISIS
PAU L
KO SMETATOS
Palgrave Studies in the History of Finance
Series Editors
D’Maris Coffman
Bartlett Faculty of the Built Environment
University College London
London, UK
Tony K. Moore
ICMA Centre, Henley Business School
University of Reading
Reading, UK
Martin Allen
Department of Coins and Medals, Fitzwilliam Museum
University of Cambridge
Cambridge, UK
Sophus Reinert
Harvard Business School
Cambridge, MA, USA
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Paul Kosmetatos
The 1772–73 British
Credit Crisis
Paul Kosmetatos
University of Edinburgh
Edinburgh, UK
Palgrave Studies in the History of Finance
ISBN 978-3-319-70907-9 ISBN 978-3-319-70908-6 (eBook)
https://doi.org/10.1007/978-3-319-70908-6
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To my late parents, Nikos Kosmetatos and Avra Zentzi.
I like to think that they exited life’s stage, almost hand-in-hand, with the
satisfaction of knowing that I was about to begin a new, and better, act.
P
reface
Academic and popular interest in financial crises unsurprisingly grows in
the immediate aftermath of a major contemporary crisis event. The global
financial crisis that began in August 2007 is no exception, and although
much new work has inevitably focused on this latest event and the lessons
that could be learnt from it, attention has been also directed to older epi-
sodes, their causes, progress, and impact. Several of the concepts that are
treated in the present book have been the subject of important new aca-
demic work, especially so on the matter of crisis containment and the role
of central banks in effecting it. The historical debate on Free Banking in
the eighteenth century has been revitalised after simmering away from the
limelight for around a quarter of a century, with the long neglected crisis
of 1772–73 now the subject of a new book that analyses it through this
prism.1 All this is an especially fortuitous development as far as the present
work is concerned. My personal interest in financial crises was for many
years that of an interested layman and predated the 2007–08 drama by at
least a decade, since my induction to the financial industry coincided with
the 1997–98 Asian/Russian/LTCM saga. I first encountered the credit
crisis of 1772–73 like many financial practitioners still do, as one of the
many examples of a Minsky bubble in Charles Kindleberger’s ever popular
Manias, Panics and Crashes. As merely supporting evidence in a wider
argument, 1772 did not stand out as a landmark and certainly seemed to
be far less historically significant than the Tulipmania, South Sea Bubble,
1 Tyler Beck Goodspeed, Legislating Instability: Adam Smith, Free Banking, and the
Financial Crisis of 1772 (Cambridge, MA, 2016).
vii
viii PREFACE
or 1929 Crash. It was much later, as a fledgling researcher at Kings College
London looking for a suitable project, that I focused on this crisis by a
simple process of elimination and isolation of variables. I required an early
British crisis, as close to the traditional ‘start date’ of the Industrial
Revolution as possible, with banking and monetary structures reasonably
well developed but not as yet recognisably ‘modern’—at least as I under-
stood modern banking through my own professional experience. At the
same time I needed an occasion that was insulated from the economic
noise associated with the endless Anglo-French wars of the period. 1763
and 1772 were the only real candidates; the former was uncomfortably
close to the end of the Seven Years’ War, while the latter occurred in clear
peacetime and was also immortalised in an intriguing short passage in the
Wealth of Nations. My continuing investigation at the University of
Cambridge inevitably proceeded down paths I had not foreseen, like all
satisfying research does. By the time the bulk of my work was completed,
I was convinced that the 1772 crisis deserved to be seen as far more than
a supporting example of a broader historical pattern, as Kindleberger
would have it, but rather as a seminal event in its own right. This was a
story that needed to be told. As luck would have it, I am now able to retell
it and to analyse its significance against a backdrop of renewed academic
interest on the subject and the period.
Apropos of ‘retelling the story’: new academic historians learn early on
to value ‘analysis’ over mere ‘description’, and this is as should be. With
that said, this research is founded on the study of archival material that has
at best not been intensively used since Henry Hamilton’s 1956 account of
the Ayr Bank failure2; the greatest part in fact consists of wholly original
material that has not been used in any published account at all. This has
therefore necessitated a fair amount of the dreaded ‘description’, though
I hope not to the detriment of analysis. In order to strike a—hopefully—
happy compromise, I have delegated to the footnotes such information
that may be on the whole interesting but which does not have a direct
bearing on the main argument. Biographical information, references to
2 The aforementioned new book by Tyler Beck Goodspeed is mostly founded on a set of
well-known printed period sources, especially Smith, the Scots Magazine, and the Ayr Bank
partners’ 1778 report on their investigation on the failure of the firm (the Precipitation—of
which much more will be said in this book). As Goodspeed’s analysis is particularly focused
on matters concerning the development of Political Economy, these sources serve him well
most of the time. The present work has a different interest on this crisis and accordingly
adopts a much more archivally based methodology.
PREFAC E ix
visual sources of some of the main personages playing a part in these events
(such as portraiture or caricature), and later developments in the life of
those firms that survived the crisis (occasionally down to the present day)
are typical examples of this sort. Readers may thus find footnotes to be
occasionally long and discursive. I hope, however, that they may still find
them engaging and not distracting. With a few exceptions where data
already presented elsewhere in the literature are reproduced in a new
graphical representation, for instance, the trends on parliamentary
enclosure, canal investment, or the number of London private banks, I
have tried to limit graphs and tables to include only previously unpub-
lished evidence or to present my own numerical treatment of already
published data; most of the economic trend tables in Chap. 2 fall under
this latter category. There remains a wealth of primary material, espe-
cially on the unwinding of the Ayr Bank, for which there was simply no
room here and which will have to wait for the later publication of an
edited sourcebook.
Readers familiar with the more famous aspects of the 1772 crisis, most
notably Smith’s roundabout description of the Ayr Bank debacle, may be
struck by the absence of much comment on its ideological and cultural
impact. This is because this work is intended to be above all one of finan-
cial and banking history. Any political, cultural, or ideological issues aris-
ing, including Smith’s much commented upon analysis, are thus dealt only
incidentally and always in association with the financial aspects of the affair.
The contemporary public understanding of its causes and the allocation of
blame to its perceived originators enters the discussion of the supposed
‘irrationality’ of the pre-crisis period in Chap. 3, but this is the limit of any
cultural historical discussion. Anti-Scottish attitudes in the London press
and their connections to Wilkite agitation only impact a small part of the
contagion discussion in Chap. 4. Similarly, the reader will not find here a
discussion of the possible impact of the 1772–73 episode in the long-term
development of Political Economy. Leaving aside the considerations of the
length of the present study, it is doubtful that the influence of this crisis
went much deeper than what has been already commented upon in exist-
ing literature or mentioned in this book in passim: Adam Smith’s explicit
references to the Ayr Bank affair in Book II of the Wealth of Nations; his
analysis of bills of exchange credit exposures and the dangers of swivelling;
his take on the Law of Reflux and the Real Bills Doctrine; his support of
usury limits and the limitation of banknotes to a minimum denomination
x PREFACE
of £5; the superficial similarities of the Ayr Bank’s capital structure with Sir
James Steuart’s prescription for private banks based on land ownership in
countries like Scotland; and the nascent debate among market insiders like
George Home and Henry Dundas on the need for last resort lending.
Comparing and correlating these debates with the corresponding ones
taking place in earlier and later crisis occasions (especially 1720 and
1825–26) is a very interesting question but one that is decidedly beyond
the scope of this work.
From conception to completion this work has been in the making for
the better part of seven years and would not have reached this point with-
out the support and encouragement of friends, family, mentors, colleagues,
and owners and curators of archival data. I am especially indebted to:
The Duke of Buccleuch for permitting the use of the Buccleuch Papers
(lodged with the National Records of Scotland) for this research and
any resulting publications.
The staff of the various archives where most of the original work presented
here was performed: Ben White and Joe Hewson of the Bank of England
Archives; Andrea Waterhouse of the Barclays Group Archives; Tracey
Earl of the Coutts Archives; Rosemary Moodie, Hania Smerecka, and
Siân Yates of the Lloyds Banking Group (Bank of Scotland) Archives;
and Orla O’Brien, Sophie Volker, and Laura Yeoman of the Royal Bank
of Scotland Archives. Because of the size and workload of the National
Archives in Kew and Edinburgh, the British Library in London, and the
Ayrshire Archives in Ayr, it is not possible to identify by name those
who assisted me there, like they daily assist so many other researchers,
academic or private. They will know who they are if they read these lines
and that they have my gratitude.
My MA supervisor at KCL, Dr David Todd, my PhD supervisors at
Cambridge, Dr D’Maris Coffman and Dr Craig Muldrew, and my thesis
examiners, Professor Martin Daunton and Dr Ali Coşkun Tuncer, for
their numerous perceptive comments and constructive criticism during
my time in KCL and Cambridge.
Professor Julian Hoppit for his comments on the contagion and LOLR
part of this work and his identification of the Arthur Young reference
found in Chap. 5.
The delegates of the British Society of Eighteenth Century Studies,
January 2013 Conference, University of Oxford, for their remarks on
preliminary aspects of the Ayr Bank-related work.