Credit Crisis of 1772

Credit crisis is the economic condition whereby there is a huge difficulty in obtaining investment
capital from banks or investors. The lenders are fully reluctant to lend to the borrowers because of
the fear of bankruptcies and defaults by the borrowers. One such crisis took place in 1772 which
started in London and then quickly spread over to several countries in Europe. it had a major effect
on countries such as Scotland and the Netherlands, and it is often credited with sparking the
deterioration of ties between the United Kingdom and the thirteen American colonies. People were
overly trusting banks at that time, and therefore economic development was entirely based on the
credit system of the economy. With the fleeing of Alenxander Fordyce, the partner of the financial
bank, Neal, James and Down in London, people lost confidence in the financial institutions and thus,
lead to the halt of the credit system with angry and fearing crowd lined up to withdraw deposits or
to replace debt bills with cash.

The effect of this crisis on London is that the collapse of the financial institute Neal, James, Fordyce
and Down caused a roar and panic among Londoners. The recession dealt a hude blow to the British
banking system, resulting in the failure of about 22 banks in England and the loss of around 3 billion
pound in deposit. Alexander Fordyce was a Scottish equivalent whose risky speculations had earned
him reputation and fortune. He was interested in speculative investments, where he invested in
high-risk financial instruments in order to benefit from stocks. He was engaged in the speculative
trading of the East India Company’s stocks. The East India Company was making big profits and was
considered a successful investment. A catastrophe had ravaged Bengal, the province of its colony
India, and the company had refused to respond, resulting in the deaths of millions of people. The
company’s stock plummeted as a result of this. Fordyce fled to France to avoid loan repayments
because the bank, Neal, James, Fordyce and Down, was deeply in debt. This resulted in a credit
squeeze, forcing the company’s directors seek federal assistance in resolving the situation.

The credit crisis soon became an international crisis spreading across the credit networks of the
time. Banks involved in speculative investments were hit hard during the crisis. It led to the failure of
the Scottish bank, Douglas, Herom & Company or popularly known as Ayr Bank, which had been
founded by the elite business tycoons of Scotland. It was involved in issuance of Bills not only in the
markets of Scotland, but also in London. The failure of Neal, James, Fordyce and Down bank, which
was the largest buyer of Scottish bills in London, caused a huge panic and uproar in the creditors of
the Scottish bank. This led to a pressure developing on the bank to repay its creditors, with very less
assets on its balance sheet.

The effect on American colonies is where the British traders were involved in facilitating trade for
the crops produced by the American plantations by selling them in London and its other markets and
by giving them a return of basic goods. In the period between 1952 and 1972, the exports from
North America outnumbered the imports. This extensive high level export was powered by the
credits granted by the British financial institutions. It was estimated that in 1776, the total amount of
debt that British merchants claimed from the colonies more than the Southern colonies had claims.
The crisis made this process to halt and made the American borrowers worse off. The American
colonies were facing the problem to pay the debts, in such a short span of time. These led to huge
problems in maintenance of the balance of payments in the colonies.