1772two Hundred And
Twenty-five Years Ago

In the summer and fall of 1772,
panic took hold of London’s financial circles. It began with the collapse
of a firm called Neale, James, Fordyce,
& Down. Alexander Fordyce had been
speculating successfully for a decade,
but in the early 1770s his investments
went sour. He managed to deceive his
partners for a while; according to one
biographer, “It is said he succeeded in
quieting their fears by the simple expedient of showing them a pile of bank
notes which he had borrowed for the
purpose for a few hours.” When things
got too hot, though, Fordyce skipped
town owing a hundred thousand
pounds. In early June his firm suspended payment of its debts.

In a generally overextended market
many other firms were just as vulnerable, and the dominoes started falling. By the end of June twenty major
houses had collapsed. Those that were
left suffered the usual squeeze: Debtors
were slow to pay, while creditors were
quick to demand payment. Among the
hardest hit was the already foundering
East India Company, which had a
monopoly on trade, chiefly in tea, with
Britain’s Asian colonies.

In September the company took out
a loan from the Bank of England, to be
repaid from the sale of goods later
that month. But with buyers scarce,
most of the sale had to be postponed,
and when the loan fell due, the company’s coffers were empty. On October
29 the bank refused to renew the loan.
That decision set in motion a chain of
events that made the American Revolution inevitable.

The East India Company had eighteen million pounds of tea sitting in
British warehouses. Selling it in a hurry would do wonders for its finances.
The American market beckoned, but
there were two problems. First of all,
the company was required by law to
sell its tea to the highest bidder in England, letting merchants there and in
America ship and resell it. Second, tea
sold in America carried a tax of threepence a pound, which made it unpopular with restive colonists.

After prolonged wrangling, in May
1773 Parliament let the company eliminate the middleman and market the
tea itself through its own American
agents. It also refunded duties that the
company had paid upon bringing the
tea to England. With these changes
the East India Company could easily
undercut the smugglers who had been
taking much of its business. On the
tax issue, however, the government
would not budge. While admitting that
threepence a pound yielded negligible
revenue, it insisted on maintaining
Britain’s power to tax its colonies.

It seemed a perfect compromise: The
company would make money, the
colonies would get cheap tea, and
Britain would uphold its rights. So His
Majesty’s government was quite surprised when citizens in Charleston,
Philadelphia, New York, and most famously Boston vigorously rejected the
tainted tea. Their “tea parties” showed
that America would not be bribed into
accepting taxation without representation. Yet that was not the only issue.

There was nothing new about the
tea tax. Colonists had been paying it—
and similar taxes on sugar, molasses,
and wine—for years. The new and obnoxious feature of the Tea Act was
the East India Company’s monopoly,
which would deprive American merchants of their business in both legal
and smuggled tea (and which they
feared would be extended to many
other goods). By alienating this wealthy
and powerful group, the British united
self-interest and revolutionary fervor in
a combination that would soon destroy the colonial bond. Just as the
failure of a single bank had caused a financial panic, so too did a seemingly
innocuous attempt to collect a tax that
was already on the books lead directly
to the American Revolution.