October 1997 | Volume 48, Issue 6
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.