The 1772-73 British Credit Crisis

Nowadays remembered only through Adam Smith’s references in the Wealth of Nations to the short-lived Ayr Bank in Scotland, the 1772-3 financial crisis was an important historical episode in its own right, and one that has hitherto not been covered in its entirety. This book uses a variety of archival sources to question the bubble narrative traditionally associated with this episode, and to identify the mechanisms of financial contagion that allowed the failure of a small private bank in London to cause rapid and severe distress in the 18th century financial system, involving in turn British and mainland European banks, the troubled East India Company, and even the North American colonies. It also argues that the Bank of England’s prompt efforts to contain the crisis are evidence of a Lender of Last Resort in action, some thirty years before the classical formulation of the concept by Henry Thornton.