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

The Development of Scottish The Development of Scottish BankingBanking

Bank of Scotland (1695) Bank of Scotland (1695) Royal Bank of Scotland (1727) Royal Bank of Scotland (1727) Political motivations behind Earl of Political motivations behind Earl of

Islay’s actions, “The New bank Islay’s actions, “The New bank warrant is past… I believe we shall warrant is past… I believe we shall demolish them, you are a director demolish them, you are a director and they have dignified me with their and they have dignified me with their chiefship.” chiefship.”

The Rise of Provincial BanksThe Rise of Provincial Banks

Growing Scottish economy demands Growing Scottish economy demands the founding of banks outside the founding of banks outside Edinburgh Edinburgh

Total note circulation increased 15 Total note circulation increased 15 fold between 1744 to 1772 and 13 fold between 1744 to 1772 and 13 new banks were established new banks were established

Forces alliance between the Forces alliance between the chartered banks in 1752chartered banks in 1752

The Ayr Bank (1769) The Ayr Bank (1769)

Supported by the economic and Supported by the economic and social elites of South-West Scotland social elites of South-West Scotland

Begins trading with £150,000 Begins trading with £150,000 nominal capital nominal capital

By 1771 the Ayr Bank is responsible By 1771 the Ayr Bank is responsible for circulating two thirds of for circulating two thirds of Scotland’s paper currencyScotland’s paper currency

The Ayr Bank Collapse 1772The Ayr Bank Collapse 1772

By 1772 £600,000 of the bank’s total By 1772 £600,000 of the bank’s total liabilities was made up of liabilities was made up of outstanding drafts on London note outstanding drafts on London note exchangeexchange

Sudden collapse of Neal, James, Sudden collapse of Neal, James, Fordyce and Downe dooms Ayr BankFordyce and Downe dooms Ayr Bank

Chartered banks refuse to grant Chartered banks refuse to grant bailout loanbailout loan

Economic ImpactEconomic Impact

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

Adam Smith, Adam Smith, The Wealth of The Wealth of Nations Nations (1776)(1776)

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

A Flawed HistoriographyA Flawed Historiography

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

Michael Fry, Michael Fry, The Dundas The Dundas DespotismDespotism (1992) (1992)

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

Mervyn King Speech 20 October Mervyn King Speech 20 October 20092009

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