4. Propagation and Containment: Financial Contagion and the Lender of Last Resort in 1772–73

For instance, Ashton, Fluctuations, p. 128; Kindleberger, Manias, p. 124; Sheridan, ‘1772 and the American colonies’, p. 172; all use the word ‘spread’ to describe the progress of the crisis.

Some historical work on contagion exists, but it does not as a rule go much further back than the late nineteenth century, for example, Bordo and Murshid, ‘Are financial crises becoming increasingly more contagious?’; Park, ‘Bank failure contagion in historical perspective’; Calomiris and Scheinkart, ‘Panic of 1857’. James, ‘Panics, payments disruptions and the Bank of England before 1826’, unfortunately only goes back to 1793 as he requires a well-developed country banking system for his analysis.

Public Advertiser, 8 July 1772. The word had been also used in 1763 (Gazetteer and London Daily Advertiser, 14 October 1763).

General Evening Post, 2–5 January 1773. Similar sentiments were expressed in the St James’s Chronicle, 7–9 January 1773.

Gazette de France (Paris, 1631), 5 March 1773 (available online http://​gallica.​bnf.​fr/​ark:​/​12148/​bpt6k62360397/​f5.​image).

Thornton, Paper Credit of Great Britain, pp. 113–16; Baring, Observations, pp. 19–20. The term Baring used was in fact dernier resort. A good recent account of the origination of the term in the Baring-Thornton-Bagehot tradition is Wood, History of Central Banking, pp. 23–47.

Capie, ‘British financial crises in the Nineteenth and Twentieth Centuries’, Schwartz, ‘Real and pseudo crises’.

Bignon et al., ‘Bagehot for beginners’, James, ‘Panics, payments disruptions and the Bank of England before 1826’.

Price, ‘The Bank of England’s discount activity’.

White, Free Banking in Britain, ‘Banking without a Central Bank’, 53–6, ‘Reply to dissenting view’, and ‘Scottish banking and the Legal Restrictions Theory’; Dow and Smithin, ‘Free banking in Scotland’; Gorton, ‘Banking theory and Free Banking history’; Dow, ‘Why the banking system should be regulated’; Rothbard, ‘Myth of free banking in Scotland’; Sechrest, ‘White’s free-banking thesis’ and ‘A Dissenting View’; Cowen and Kroszner, ‘Scottish Banking before 1845’ and Kroszner, ‘Free Banking: the Scottish experience’; Kindleberger, ‘Free Minting’; de Boyer, ‘Endogenous money and shareholders’ funds’. It is not only Free Banking supporters who have doubted the Bank’s LOLR role in the eighteenth century: Hawtrey, Art of Central Banking, 119–20, holds that before 1844 the Bank ‘did not easily or willingly assume the responsibilities of the lender of last resort’ and links the development of the concept with the crisis of 1793 when the ‘ordinary discounting facilities offered by the Bank were found inadequate’ and especially the Restriction of Cash payments between 1797 and 1821, when a formal Gold Standard was finally established. For an introduction to the larger question of self-regulating banking systems, see Bordo and Schwartz, ‘Performance and stability of banking systems under self-regulation’, and Dowd, ‘Competitive banking, bankers clubs, and bank regulation’.

Munn, ‘Comment on Chap. 2’.

Please refer to the Appendix at the end of this chapter for a detailed description of the BOE primary sources and the methodology used to arrive at the various figures and tables in this chapter.

The peak activity in the autumn of 1763 roughly corresponds to reports of the continental crisis spreading across Europe (e.g. SM XXV (1763), pp. 458–60 and 565–7). The corresponding spikes in activity in 1777–78 roughly coincide with the first reports in Britain of the capitulation at Saratoga (e.g. London Chronicle, 9–11 December 1777) and concern over imminent French intervention in the American war in the spring of 1778. We have also identified the spike in 1770 as corresponding to the war scares over the Falkland Island dispute with Spain in that year.

This major London private bank was involved in a bill of exchange dispute with the Ayr Bank and Sir George Colebrooke in 1773 (NAS CS271/32001).

The London private bank of the ‘Douglas’ of Douglas, Heron & Co., one of the founders of the Ayr Bank.

Price, France and the Chesapeake, pp. 608–9; Hamilton, Economic History, pp. 255–6.

BOE G4/21, fos. 265, and Walpole, Letter. Although in the later recriminations over the eventual failure of Alexanders, Thomas Walpole claimed that ‘exclusive of the Bank debts [his banks] were in advance for [Alexanders] in upwards of £60,000’, there is no evidence that the Bank supplied this additional amount as well, and hence it should not be considered as part of the rescue. See also Acres, Bank of England from Within, pp. 202–4.

These were the plantations of ‘Chemin’ and ‘Bacolet’.

By 23 July only £40,000 of the £160,000 had been as yet disbursed, with a further £40,000 authorised to be paid on 25 July (BOE G4/21, fos. 268).

RBS RB/12/11, fos. 50–1 and 58–9. BOS 20/30/4, 15 June 1772.

BOE G4/21, fos. 260.

The Dukes of Buccleuch and Queensberry, Archibald Douglas, and Patrick Heron.

Parliamentary Register, 1832 Committee, q. 2217. The quote is better known from Bagehot, Lombard Street, pp. 51–2.

BOE C29/1, fos. 6, G4/21, fos. 343.

Literature on the LOLR is both longstanding and extensive. For a review see in general Freixas et al., ‘LOLR: a review of the literature’, and more specifically, Humphrey and Keleher, ‘LOLR: A historical perspective’; Humphrey, ‘LOLR: the concept in history’; Kaufman, ‘LOLR: a contemporary perspective’; Bordo, ‘LOLR: alternative views’ and ‘LOLR: some historical insights’.

Though the Bank itself never officially adopted these ‘rules’ at any point of its existence, they have become a widely accepted starting point in any LOLR discussion. For example, the recent (2012) influential paper by Bignon et al. on the BOE’s nineteenth-century operations is titled ‘Bagehot for beginners’ and uses these ‘rules’ as its point of departure.

Refer to Chap. 2, footnote 140.

BOE ADM7/18, fos. 24–5 and ADM7/20, fos. 26–7. Because of a 1765 change in the Bank’s annual accounting from August to February end-of-year statements, as well as the fact that the pivotal events of the 1763 crisis occurred very close to the close of the 1762–63 financial year, it is necessary to include both years to show the longer-term effects on discount profitability. In 1772–73, on the other hand, the abnormal rise in activity took place almost in the middle of the financial year, and therefore a comparison with the 1771–72 returns is sufficient.

BOS Melville Papers, MEL/1, ‘Observations by Geo. Home on Bank & Circulation’. This document dates from 1777. Dundas was Solicitor General in 1772 and afterwards became Lord Advocate for Scotland.

NAS GD267/22/7/57, George Home to Patrick Home, 29 June 1772. Emphasis added.

George Home letter as per footnote 39 above.

For instance, Réflexions sur les dernieres banqueroutes, and the letter by Robert Bogle Jr. to George Bogle, London, 19 November 1772, quoted in Price, France and the Chesapeake, p. 640.

Hamilton, ‘Ayr Bank’, p. 413.

Henry Dundas and Ilay Campbell.

J.A. Cannon, ‘WALPOLE, Hon. Thomas (1727–1803), of Carshalton, Surr.’, in Namier and Brooke, History of Parliament, accessed online at http://​www.​historyofparliam​entonline.​org/​volume/​1754-1790/​member/​walpole-hon-thomas-1727-1803

Forbes, Memoirs, pp. 39–44; SM XXXIV (1772), p. 311.

George Home letter as per footnote 61 above, King George III Correspondence, Vol. I, Letter 154, The King to Lord North, 1 January 1773, p. 121; NAS, Duke of Gordon Papers, GD44/43/88/46, Charles Gordon to the Duke of Gordon, 31 March 1773; Smith, Correspondence, 10 April 1773, Letter 136, David Hume to Adam Smith, pp. 167–8.

BM Add 38208, fos. 176–7, William James to Charles Jenkinson, 14 September 1775.

TNA B6/5, fos. 126, 212.

SM XXXIV (1772), pp. 315–16; ‘An Englishman’, Craftsman or Say’s Weekly Journal, 18 July 1772.

13 Geo. III, c. 63 and 64.

14 Geo III, c. 21. The Act remained in the statute books until 1989.

Winifred Stokes and R.G. Thorne, ‘VANNECK, Joshua (1745–1816), of Heveningham Hall, Suff.’, History of Parliament, 1790–1820, accessed online at http://​www.​historyofparliam​entonline.​org/​volume/​1790-1820/​member/​vanneck-joshua-1745-1816

London Chronicle, 23–26 January 1773; Braudel, Civilization and Capitalism, pp. 271–2.

SM XXV (1763), 458–9; Buist, At Spes Non Fracta, p. 13.

SM XXV (1763), p. 567; Andreadēs, History of the Bank of England, p. 177, repeats this story and adds the Bank of Stockholm and the Empress Catherine of Russia among the various Continental intervention agents, sadly with no primary evidence to substantiate either of them.

NAS GD267/3/3/1, George Home to Patrick Home, 11 January 1773.

Smith, Correspondence, Letter 131, David Hume to Adam Smith, 27 June 1772, pp. 161–2; Campbell, ‘The financing of Carron Company’ and Carron Company.

RBS RB/12/11, fos. 50–1 and 58–9, BOS 20/30/4, 15 June 1772.

TNA B4/21.

On that occasion unsuccessfully. He had to wait until 1776 to finally get elected. See Charles Welch (rev. M.J. Mercer), ‘Hallifax, Sir Thomas (1722–1789), mayor of London’, Oxford Dictionary of National Biography, 2017. Sir Richard Glyn had also run unsuccessfully for Parliament in 1768: Fulford Glyn’s, p. 6; Watson, Reign of George III, p. 131.

John Woodhouse seems to have been previously associated with Sir Richard Glyn to the extent of being listed with him in a 1771 Public Annuitant Society advertisement. The other two individuals are listed as City merchants in the London directories for 1772—for example, London Directory (1772) but are otherwise unknown.

The firm survived into the twentieth century as Glyn, Mills & Company and is now part of the Royal Bank of Scotland group.

GD267/22/7/89, George Home to Patrick Home, 26 August 1773.

BOS 1/94/20, RBS RB/12/11. Around £2,000 remained at large as late as 1793, mostly in the notes of the old Ayr and Dumfries banks that had been taken over in 1771 (NAS GD224/178/732/1/9).

Emphasis added.

Like contagion (or indeed, financial crisis), systemic risk does not have a globally accepted definition. This quote is from Bordo et al., ‘Real versus pseudo-international systemic risk’, p. 31. See also Rochet, ‘Interbank lending and systemic risk’, p. 733; Kaufman, ‘Bank failures, systemic risk, and bank regulation’, p. 25; Marshall, ‘Understanding the Asian Crisis’, for other attempts at definition.

De Bandt and Hartmann, ‘Systemic risk’, pp. 251–6. This review article is also a good starting point for approaching the vast literature on financial contagion. For other literature reviews, see Allen and Carletti, ‘What is systemic risk?’; Forbes, ‘Identifying contagion’; Kaufman, ‘Bank contagion’; Moser, ‘Financial contagion’; Pericoli and Sbracia, ‘A primer on financial contagion’.

Kindleberger, ‘The experience of 1888–93’; Van Rijckeghem and Weder, ‘Sources of contagion’.

Moser, ‘What is international financial contagion?’.

Allen and Gale, ‘Financial contagion’; Jorion and Zhang, ‘Credit Contagion from Counterparty Risk’; Marshall, ‘Systemic risk as coordination failure’.

The National Archives (TNA) B1/61, fos. 23–8, B1/62, fos. 74–6, B1/65 fos. 136, 305.

BM Add 38,208, fos. 176–7, William James to Charles Jenkinson, 14 September 1775.

Middlesex Journal, 30 June–2 July 1772. There are no reliable contemporary estimates of Fordyce’s losses beyond the liabilities claimed on his commission of bankruptcy and in petitions to the Lord Chancellor (please refer back to Table 3.6). There is occasional confusion in older literature and a repetition of the wildest press claims; for example, Andreadēs, History of the Bank of England, p. 157, quotes £300,000 and in the process refers to NJFD as ‘the firm of Heale’ (sic).

SM XXV (1763), 458. Andreadēs, History of the Bank of England, as above, repeats and earlier figure for total losses due to the crisis at £10 million.

Soltow, ‘Scottish traders in Virginia’.

Quoted in Sheridan, ‘1772 and the American colonies’, p. 173.

Land, ‘Economic behavior in a planting society’, p. 479.

NAS CS181/6942, William Alexander & Sons, sequestration proceedings in England, NAS CS222/278, sequestration proceedings in Scotland.

TNA B3/3675-6.

Specifically Sir George Colebrooke, John Fordyce and Adam Wood. Please refer back to Table 3.3.

Fordyce, Letter, p. 10. The literature has tended to repeat this supposed correspondence relationship between Fordyce and the Ayr Bank as an established fact (e.g. Clapham, Bank of England, I, p. 245; Sheridan, ‘1772 and the American colonies’, p. 171) and on occasion has displayed confusion as to its causal direction. Wilson, Anglo-Dutch Finance, p. 170, has attributed Fordyce’s troubles on his ‘acceptance of dubious bills for the Ayr Bank’, an assertion that has no support in the primary record. Ashton, Fluctuations, pp. 136–7, has similarly dissented from the traditional narrative in that he sees contagion travelling from Scotland to London and not the other way round, also without further elaboration. Brady, ‘So fast to ruin’, has claimed that Fordyce owed ‘£40,000 apiece to Charles Fergusson and Fordyce, Grant’, but also gives no source. For a list of the bank’s actual London correspondents see Table 5.8 (bottom).

BGA 392.

92 of the claimants ‘appear to be’ of Dutch or Jewish origin based on their names, but there is no evidence, such as claimant addresses, to corroborate this.

The literature usually quotes an editor’s footnote in the 1860 edition of Forbes, Memoirs, p. 42n. W. Fullarton, General View of the Agriculture of the County of Ayr (Edinburgh, 1793), p. 22, contains an earlier instance of this claim (1791) but does not offer any details.

BOS 1/160/2.

NAS GD224/178/6, George Home to John Davidson, 28 June 1782. Along with a list of 14 estates auctioned in 1782 and expected to fetch £42,900 (BOS 1/160/2), this optimistic target is one of the few instances where quantitative information on land sales appears in the primary record.

NAS GD224/178/5, George Home to the Duke of Buccleuch, 6 May 1780.

See Chap. 6 for the issue of the ‘contributions’ and the unwinding process of the Ayr Bank.

Diamond and Dybvig, ‘Bank runs’.

BOS NRAS945 1/5/6, 1 July 1772, BLB 6/6/2, fos. 293, 16 June 1772, ABC 2/2/1, fos. 78, 3 July 1772.

Please refer back to Table 3.7 and Figs. 3.5–3.7 in Chap. 3.

We will indeed return to them repeatedly in Chap. 6.

Sheridan, ‘1772 and the American colonies’, pp. 175, 178.

Lloyds Group (Bank of Scotland) Archives (BOS) 20/30/3, RBS EQ/23/35-6.

Hoppit, ‘Financial Crises’, p. 54; Sheridan, ‘1772 and the American colonies’, p. 172; Price, France and the Chesapeake, p. 639; and Capital and Credit, p. 131.

Morning Chronicle, 24 June 1772; Bingley’s London Journal, 4–11 July 1772; London Chronicle, 17–19 November 1772; General Evening Post, 25–27 June 1772 and 2–4 July 1772. See also Seaver and McGuire, History of Suicide in England, 1650–1850, Vol. 6, pp. 254–66 for three further press pamphlet references. The first of these (‘On Suicide’, Morning Chronicle, 25 July 1772), written barely a month after the peak of the London phase of the crisis, opens with the assumption that ‘so many acts of the horrid crime of self-murder have lately been committed… in consequence of a recent event’. Seaver and McGuire (ibid., p. 417, note 2) consider this event as ‘unidentified’, though it is no big stretch to make the connection with the 22 June stoppages.

For instance, the Weekly Journal or British Gazetteer, 12 May 1722, reports the suicide of ‘the Son of the King’s Harbinger, being reduc’d to Despair, by having lost his whole Estate by Stock jobbing’ and ‘a Gentleman of the Guards who had Beggar’d himself by the same Traffic throwing himself likewise, in Despair, into the Seine’. For similar eighteenth-century press reports on suicide supposedly motivated by financial loss, see Seaver and McGuire, History of Suicide in England, 1650–1850, Vol. 4, pp. 7–8 for three South Sea era news reports.

Henry, ‘Rushing into eternity’, Gates, Victorian Suicide, pp. 61–3. For the issue of suicide among the moneyed and landed classes as part of eighteenth-century anti-luxury invective, see Andrew, Aristocratic Vice. Galbraith, The Great Crash, pp. 148–52, has put paid on the most famous instance of the trope, that of the wave of suicides following the October 1929 stock market crash.

RBS CH/229, 20 April 1773, 19 June 1773, 19 February 1774.

BOS BLB 6/6/2, fos. 293.

Middlesex Journal, 3–6 September 1772; Bingley’s Journal, 6–13 June 1772; General Evening Post, 20–23 June 1772; NAS GD44/43/70/7, James Balfour to James Ross, 21 July 1772.

Correspondence, as footnote 62 above. Johnson, Letterbook, 41d, 22 June 1772, p. 40.

BGA 392/135, Pye, Rich and Wilkinson to Stone & Mainwairing, 12 November 1773.

BLB 6/6/2, fos. 293, 16 June 1772.

NAS GD44/63/67/28, Boldero, Grant, Barnston & Co. to the Duke of Gordon, London, 11 June 1772. See also NAS GD44/43/88/32, 46, 48–9 John Boldero to Mr. Charles Gordon, London, 26 March 1773, Charles Gordon to the Duke of Gordon, Edinburgh, 31 March 1773, and John Fordyce to the Duke of Gordon, Edinburgh, 31 March 1773, GD44/43/82/11, John Fordyce to the Duke of Gordon, 18 January 1773. For the memorial of the completed transaction, see NAS GD/44/42/1/24.

‘Regulus’, Bingley’s London Journal, 20–27 June and Public Advertiser, 2 July and 6 August 1772; ‘Hollis’, Public Advertiser, 25 March 1773; ‘Tullius’, Public Advertiser, 7 May 1773; London Evening Post, 14–16 July 1772; ‘Atticus’, Public Advertiser, 8 July 1772; ‘Honestus’, London Evening Post, 23–25 July 1772. Some pro-Scottish articles did appear in the London press as well, for instance, General Evening Post, 27–30 June 1772; Middlesex Journal, 27–30 June 1772, but they were greatly outnumbered by the hostile ones.

‘A.B.’, London Evening Post, 24–26 June 1773. Similar conspiracy theorising can be found in Middlesex Journal, 27–30 June 1772 and Morning Chronicle, 26 June 1772 and 10 February 1773.

‘Matter of Fact’, Public Advertiser, 29 August 1772; ‘Kulligan’, Public Advertiser, 14 September 1772.

SM, as footnote 81 above. Parts of this argument are repeated almost verbatim in the Morning Chronicle, 25 June 1772.

Bingley’s Journal, 20–27 June 1772. Note how the ‘electrical wire’ simile made by Boswell in his Reflections to incite compassion about Scotland’s distress was also used by the hostile London press in an argument against the country.

NAS GD267/22/7/81, George Home to Patrick Home, 1 May 1773.

NAS GD248/116/4, Alexander Grant to Sir James Grant, 13 May 1774.

Smith, Lectures on Jurisprudence, p. 538. When listing in mock seriousness the epithets usually thrown against various nationalities, the unknown author of NATION in the Encyclopédie put the Scots down as ‘proud’, the English ‘wicked’, the Irish ‘lazy’—and the French ‘carefree’.

Wilson, Anglo-Dutch Finance, p. 176, quoting De Koopman, IV, pp. 298–9.

Very roughly: £7 million out of £42.5 million, using Palma/Capie’s low estimates—see Chap. 2.

Refer back to Fig. 2.17 in Chap. 2 for these much quoted annual returns.

Specifically 15 June–14 July.

Fordyce’s flight was made public on 10 June. June 12 is the first working day recorded in the ledgers.

Thornton, 1802, p. 114, stressed that ‘a failure in the punctuality of any one such payment is deemed an act of insolvency’.

Campbell, ‘Usury and annuities’.

More on this will be said in Chap. 5.

For a list of all these rate changes, see BOE 13A298/1, ‘Volume of Notes and Statistics Found Amongst Papers Relating to Frank May’, fos. 49.

Price, ‘The Bank of England’s discount activity’, uses such monthly averaging.

See Fig. 2.19 in Chap. 2.