Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772 by Tyler Beck Goodspeed

1 A Very Melancholy Situation

On 27 June 1772, as the city of Edinburgh reeled from its worst fi nan-

cial crisis since the collapse of the Darien Com pany in 1700, David 
Hume posted an anxious letter from the Scottish capital to Adam Smith, in 
Kirkcaldy, then working on An Inquiry into the Nature and Causes of the Wealth 
of Nations. To his friend, Hume noted that

We are here in a very melancholy Situation: Continual Bankruptcies, uni-

versal Loss of Credit and endless Suspicions. Th ere are but two standing 
Houses in this Place, Mansfi eld’s and the Couttses . . . Mansfi eld has pay’d 
away 40.000 pounds in a few days; but it is apprehended, that neither he 
nor any of them can hold out till the End of the next Week, if not Altera-

tion happen. Th e Case is little better in London . . . even the Bank of 
 England is not entirely free from Suspicion. Th ose of Newcastle, Norwich 
and Bristol are said to be stopp’d: Th e Th istle Bank has been reported to 
be in the same Condition. Th e Carron com pany is reeling, which is one of 
the greatest Calamities of the whole; as they gave Employment to near 
10.000 people.
He concluded by inquiring of Smith whether “ these Events any- wise aff ect your 
Th eory? Or will it occasion the Revisal of any Chapters?”1
Two weeks earlier, on 10 June, the London banking house of Neale, James, 
Fordyce, and Down, of Th readneedle Street, had been issued a commission 
of bankruptcy upon news that one of their partners, Alexander Fordyce, had 
racked up a staggering £300,000 in trading losses (see Figure 1.1). Fordyce, 

Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772 by Tyler Beck Goodspeed