The encyclopedia · Finance & Accounting · Financial decision · 1772
The Ayr Bank printed notes faster than it could find good loans
Douglas, Heron and Company was founded in 1769 to spread credit across Scotland. It expanded so fast that its notes outran its borrowers.
Douglas, Heron and Company
From historyHistory and classical literature, legend included. An analogy to think with, not a modern precedent.
What it means today
When a lender scales by pushing capital out the door, the loans that look best on paper are often the ones that should never have been made. Growth in note issuance is not growth in credit quality.
What happened
Douglas, Heron and Company was established in Ayr in 1769 with a large capital and a bold plan: to extend banking and credit throughout Scotland, especially to landowners who wanted to improve their estates. Its partners included dukes, earls, and leading lairds, and it traded on their social standing.
The bank issued notes aggressively and found itself with more paper in circulation than it could place in sound loans. Much of the lending went to speculation in London and to projects that could not repay quickly. By late 1771 other Scottish banks were refusing Ayr Bank notes at par, and London bankers were wary of Scottish bills tied to it.
In June 1772 the London-Scottish house Neale, James, Fordyce and Downe collapsed. The shock exposed Ayr Bank's weakness. It could not meet demands for cash, closed its doors on 25 June, and set off a credit crisis that reached London. The partners were personally liable, and many were ruined.
Why it happened
- The bank confused the prestige of its noble partners with the creditworthiness of its borrowers
- It issued notes to create demand rather than responding to demand that already existed
- Loans were made to keep the bank's own paper moving, not because the projects could repay
- When suspicion began, there was no cushion: every note returned for redemption had to be met from a shrinking pool of liquid assets
The lesson
Credit expansion is not growth. When notes circulate faster than real borrowers can absorb them, the bank is lending to its own momentum.
Aftermath
The bank closed in June 1772 and took fifty-five years to wind up. The crisis forced the Bank of England to act as lender of last resort and shaped Adam Smith's views on banking in The Wealth of Nations.
Sources
- P. Kosmetatos, 'The winding-up of the Ayr Bank, 1772–1827' — Financial History Review (Cambridge University Press)
- Your Scottish Archives — Douglas, Heron and Company records
spotted an error? The club wants to know.
More like this
GFG Alliance financed Liberty Steel on invoices for unsold goods, then its lender vanished
A ¥6.3B rescue couldn't stop a ¥23.7B writedown at China's mall giant
Gome's founder surrendered the company to a creditor for HK$377M
Somewhere, someone solved the problem this company failed at. 2nd Opinion →
Comments · 0
Sign in to join the comments.