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The Ayr Bank Collapse (1772) and its Legacy

The Ayr Bank Collapse (1772) and its Legacy. The Development of Scottish Banking. Bank of Scotland (1695) Royal Bank of Scotland (1727)

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The Ayr Bank Collapse (1772) and its Legacy

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  1. The Ayr Bank Collapse (1772) and its Legacy

  2. The Development of Scottish Banking • Bank of Scotland (1695) • Royal Bank of Scotland (1727) • Political motivations behind Earl of Islay’s actions, “The New bank warrant is past… I believe we shall demolish them, you are a director and they have dignified me with their chiefship.”

  3. The Rise of Provincial Banks • Growing Scottish economy demands the founding of banks outside Edinburgh • Total note circulation increased 15 fold between 1744 to 1772 and 13 new banks were established • Forces alliance between the chartered banks in 1752

  4. The Ayr Bank (1769) • Supported by the economic and social elites of South-West Scotland • Begins trading with £150,000 nominal capital • By 1771 the Ayr Bank is responsible for circulating two thirds of Scotland’s paper currency

  5. The Ayr Bank Collapse 1772 • By 1772 £600,000 of the bank’s total liabilities was made up of outstanding drafts on London note exchange • Sudden collapse of Neal, James, Fordyce and Downe dooms Ayr Bank • Chartered banks refuse to grant bailout loan

  6. Economic Impact • Aberdeen Journal (September, 1772), “All the buildings and agricultural improvements in this country have stopped… the New Town between Edinburgh and Leith is suddenly stopped. In short the same shock has now been given to Scotland as in King William’s reign when the Darien Company was broke.”

  7. Adam Smith, The Wealth of Nations (1776) • “The design was generous; but the execution was imprudent, and the nature and causes of the distress which it meant to relieve were not, perhaps, well under-stood. This bank was more liberal than any other had ever been, both in granting cash accounts and in discounting bills of exchange.”

  8. A Flawed Historiography • Richard Saville, “There were however a series of severe disruptions, both from straightforward economic crises, and in several political upheavals. The details of these assaults need not detain us… except to say that in every case the Bank of Scotland rallied considerable business and landed support.”

  9. Michael Fry, The Dundas Despotism (1992) • “in the long run the result was salutary. The lessons learned produced that remarkable Scottish achievement, an efficient monetary and banking system free of interference or control by a central bank, with an automatic stabilising mechanism in the note exchange in Edinburgh.”

  10. Mervyn King Speech 20 October 2009 • “So I am sure that we can turn this crisis to our long-run advantage by reviewing and reforming the structure and regulation of banking. As Sir Walter Scott noted, the failure of the Ayr Bank in 1772, ““was a terrible warning, and has been so well attended to in Scotland … forcing a capital on the district could only lead to wild speculation, instead of supporting solid and promising undertakings… With that, I am confident that we will have attended to our terrible warning and our varied and internationally competitive financial services industry will thrive.”

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