By early 1770, the colonies, led by new manufacturing and trade, were coming out of the depression of the 1760s. Great Britain and Europe, however, were facing their own financial crisis as the new boom in trade created a credit bubble. Scottish and British banks had begun expanding credit starting in 1770. Once again, this was accompanied by over speculation in trading stock companies. The printing of paper money not backed by gold or silver created a European bubble, which when it burst caused failures of major banks throughout Europe and stock market crashes in London, Amsterdam, and Paris. The key colonial trading company, the East India Company, defaulted in 1772 as well. Britain once again looked to resolve the problem by monopolizing trade with and levying additional taxes on the colonies. Although the banks managed to stabilize the situation, the penalties on America stopped the expansion of the colonial economy. These new taxes and regulations such as the Tea Act would lead to the American Revolutionary War.
The credit crisis of 1772 followed the typical boom-bust cycle that has been common throughout the history of the United States. The period from 1770 to 1772 was one of boom and growth. The repeal of the Townshend Act opened up trade after the trade restrictions and colonial boycotts of the 1760s. In response to the pent-up demand, a flood of British goods was shipped to the colonies between 1770 and 1772. In return, crop failures in Europe also created huge demand for corn and wheat from the colonies. Tobacco also boomed during the period, hitting new highs in shipments. European banks eased credit to support this increase in trade, in particular Scottish banks that wanted to support the growth of Scottish merchants. Scottish merchants had made Glasgow a key trading point for American agricultural products, and the colonists could get cash and credit by trading with these middlemen. Great Britain, in contrast, still preferred to deal in reciprocal trade of tobacco for British goods. However, by 1770, many planters did not need large amounts of imported goods from Great Britain and preferred cash or notes of credit.
The old plantation trade system was breaking down because the value of the tobacco the colonies sold was greater than the value of the reciprocal goods offered in exchange by the British government. Tobacco planters wanted the cash equivalents offered by going directly to British merchants or Scottish agents, bypassing government agents. To support this change, British banks increased credit to European merchants. Paper money issued on the European side increased dramatically by 1772. The Ayr Bank of Scotland was founded in 1769 to liberalize credit with Scottish traders and merchants, and by 1772, it had almost two-thirds of the capital of Scotland. The increased number of paper bills of credit were also shared with, or sold to, London banks. The approach was very similar to the way American banks bundled credits for sale to other banks in the 2009 U.S. credit crisis. Speculation in the bank notes took off from 1770 to 1772.
At the end of 1771, traders and merchants were concerned about a commodity glut. American agents were reporting overstocks of tobacco that had been shipped from the colonies. The bubble burst when a major London bank, the Fordyce Bank, which dealt with the Ayr Bank, collapsed on June 8, 1772. The failure touched off a number of smaller bank closings and a panic in Scottish capital markets. Finally, on June 25, the Ayr Bank also closed, bankrupting many wealthy investors. Bank and personal bankruptcies increased rapidly. In the next six months, the crisis spread to continental Europe and Russia. The credit crisis crossed the sea, hitting plantation trading in Virginia, South Carolina, and the West Indies.
The credit crisis took the West Indies plantations to the breaking point and affected the triangular trade with New England traders. The East India Company was also bankrupted but received support from the British government.In Virginia, tobacco backed up in warehouses as demand and prices dropped. British credit dried up and colonial credit followed. The colonial treasuries were still in debt from the 1760s. Debt due to British merchants soared, and prominent Virginians appealed to Parliament for help. The famous Tidewater plantation owners were forced to take austerity measures unknown before 1772. Other planters moved west to reduce costs. Rice and indigo plantations in South Carolina experienced a similar depression.
The other American colonies were indirectly affected when the European economies failed. The biggest problem for the New England and middle colonies was a new round of British taxation and regulation in the midst of this downturn. Parliament passed the famous Tea Act of 1773. The act’s purpose was to raise revenue by tightening regulation and ownership of trade. The Tea Act actually reduced taxes but increased revenue for Britain by eliminating smuggling and giving the East India Company a monopoly. Giving the East India Company the right to authorize the only merchants that could sell tea eliminated colonial merchants who dealt in smuggled or Dutch tea and the growing class of smugglers and middlemen. In addition, the royal regulators were given new authority to seize goods and ships.
These regulators got a third of the taxes and fines, which further motivated them to enforce strict, if not excessive, regulation. Colonial protests included the destruction of tea shipments in actions like the Boston Tea Party and attacks on British soldiers and officials. In North Carolina, a guerrilla militia was formed to attack the king’s commissioners and regulators. Riots occurred, even in conservative New York, as merchants, artisans, and businesses went bankrupt.
Depression and political unrest hit all levels of society in 1773. Violence became commonplace as the British took more police actions. The economic crisis of 1772 had united many different groups, such as New England merchants and artisans with southern plantation owners. It became obvious that the economic arrangements with Britain had chained the colonies and disrupted their economies, and the road to revolution was now clear.
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