Sunday, 19 February 2017

How Scotland Caused the American Revolution

When I first read Niall Ferguson's The Ascent of Money a few years ago I was mesmerized not only by the brilliant clarity of his writing, but the underlying theme throughout that work, well captured on the back cover of the book itself: "[Ferguson] reveals financial history as the essential back-story behind all history." It's in line with what I've argued on numerous occassions: doing history without recourse to financial or economic reality is rather pointless  or at least seriously limited in scope. Penguin books, Ferguson's publisher, did a great job for Ascent of Money in getting potential readers hooked by listing quite a fascinating intro:
With the clarity and verve for which he is famed, Niall Ferguson explains why the origins of the French Revolution lie in a stock-market bubble caused by a convicted Scots murderer. He shows how financial failure turned Argentina from the world's sixth richest country into an inflation-ridden basket case  and how a financial revolution is propelling the world's most populous country from poverty to power in a single generation.
Now I've found another such back-story to add to Ferguson's 400-page discussion: The Ayr Crisis of 1772 in Scotland contributed to the American Revolution, a often-neglected back-story to rising up against the British empire and the Boston Tea Party. It sounds quite far-fetched and like an obvious example of economism (or "economic imperialism..."), so do hear me out.

The idea was somewhat randomly brought to me by a review on the U.S. Economic History Association's website: well-known economic historian Hugh Rockoff of Rutgers University reviewed a recently-published book by Tyler Goodspeed with the snappy title Legislating Instability: Adam Smith, Free Banking and the Financial Crisis of 1772Rather than Rockoff's pretty ordinary review, the topic Banking regulations-Adam Smith-Free Banking was still a major a selling point for me. Off I went and made Uni of Glasgow library get it for me.

What I was faced with was not exactly what I expected. Goodspeed starts off at full speed, throwing the reader into a way-too-detailed description of the managers and owners of the Ayr Bank and some overview of its collapse; it took almost ten pages before Goodspeed gave me any structure, hint or guidance at all as to what his case would be:
The central argument of my thesis is thus that the salient financial crisis of the Scottish free banking period, the obtrusive exception to the hypothesis of greater financial stability under free banking in Scotland, was, pace Adam Smith, made more rather than less likely by precisely those regulated or 'un-free' elements of Scottish banking which the author of The Wealth of Nations promoted. Further, I argue that this conclusion should hardly be cause for surprise once we realize that it was none other than the oldest, largest, and most established banks in Scotland that had lobbied for Smith's legal restrictions on banking. (p. 8)
To me, these kind of stories intersecting economic history and history of economic thinking are interesting in themselves, requiring no further justification, but Goodspeed throws some very convincing ones at me anyway (Philosophical, historical, theoretical and methodological). Under the 'historical' justification he gives what at first seems to be an off-shot: A Scottish Bank crisis ignited the American Revolution. He describes the Scottish economy on the eve of the Ayr collapse in June 1772 and points out the various trade links with North America, in particularly that Scotland "accounted for a staggeringly disproportionate 42 percent of all imports into Great Britain from the North American colonies in the year before the crisis, and more than 50 percent of tobacco imports." (p. 13)

The case in regards to triggering the American Revolution is as follows: much of Virginian debts was owed to British creditors, including many well-known and prominent characters in the American Revolution (Jefferson, Monroe, Washington, Lee, etc) who all owed more than £1000 (equivalent of over $160 000 in 2013 prices) to predominantly Scottish merchants and banks. In aggregate numbers, it's even more stunning:
For the North American colonies as a whole, as much as £1.4 million of an estimated £4-5 million owed to British creditors on the even of the revolution was due to Scottish lenders. (p. 13)
The particular way in which Scottish and Glaswegian funds were advanced to Virginian merchants and farmers was a delicate and locked-in long-term one, which often required Scottish merchants and banks to take up short-term funding from London in order to stay afloat. Shortly after the collapse of the Ayr Bank, a credit crunch on most of the British Isles followed, meaning that creditors called in as many loans as they could. Goodspeed cites many examples to support his case: one particular lender who instructed their agents in Virginia to "force payment of our overgrown large debts"; Glaswegian merchants refused to roll-over debts and began to demand more collateral such as personal bonds or real estate assets. Goodspeed summarises the impact on Virginia:
Not only did such bankruptcies exacerbate the contraction of fresh credit to colonial borrowers, but the resulting institutional liquidations furthermore intensified demands for the collection of outstanding debt. At the same time, colonial debtors were also struggling with a shart drop in demand from Scottish importers [...]. American debtors were quite simply getting crushed by the original sin of foreign-denominated debt. (pp. 15-16) 
And the result was fairly predictable, not unlike relations between Greece and the European Union in recent times:
The financial strains generated by the crisis of 1772 thus ignited intense antipathy, long latent, between Virginian and Marylander debtors and their Scottish creditors. As Scottish factors pursued debt claims through the colonial courts, they were often met with intimidation or outright civil disobedience.
Goodspeed lists pages with examples from Maddison and Jefferson to many less-known characters who all refused to pay their debts to Scottish creditors (around the time of his death, Jefferson still owed the equivalent of a million dollars in 2013 prices to a Glaswegian creditor); accusations that Scots "bread up under strange feudal tennets", don't understand liberty; American rebel forces boasting that they owed more than they were worth to Scottish creditors, a debt they intended to discharge "with the broad brush, meaning the destroying of the books and papers of the merchants." (pp. 15-19).

In a way, the discussion is brief, somewhat circumstancial, and not Goodspeed's main argument, but the suggestion is hardly unfeasible. Apparently, the argument is not even novel in the economic history literature; in his endnotes, Goodspeed's citations in support of the argument are well substantiated: Soltow (1959)Sheridan (1960); Gipson (1961); Devine (1973; 1974; 1976) and a quick google venture give me even more readings on the topic.

As Ross Roberts recently discussed on the Economic Rockstar podcast (whose creator and, Frank Conway, will be at Glasgow Economic Forum!): economic reasoning is a powerful tool for understanding human interaction and relations; it goes way beyond analysis of stock markets or interest rates, and it can help us to get the most out of our lives. Same goes for historical analysis: applying economic reasoning, even as a context, can improve the viability and applicability of historical research. That's not "economic imperialism" or "dismal science", it's taking advantage of the powerful tools at our disposal.

Goodspeed's credientials are absolutely intimidating, and I'm looking forward to going through some of his writings. Maybe I'll even end up at King's in not-so-far-off future and get the pleasure of engaging with him in person. Until then, the next stop is his super-interesting HET adventure: Rethinking The Keynesian Revolution: Keynes, Hayek and the Wicksell Connection

No comments:

Post a Comment