Debt binges are common in financial history - huge accumulations of debt by companies, individuals or governments. The deflation which may follow in their wake can transform economies and societies. A lesser known example occurred in Scotland in the 17th century when Highland chiefs amassed a mountain of debt.
Scotland is divided geographically into Highlands and Lowlands. Highland society in the 17th century was made up of clans - social groups held together by bonds of kinship, with chiefs at the apex. The chiefs were responsible for the welfare of their clan, overseeing justice and governing relations with other clans. Their authority was considerable because the power of the Scottish state was limited in the Highlands at the time.
Following the Reformation in Scotland (1560), moneylending laws were relaxed. As a result, borrowing became easier and a debt market developed; a supply of credit at lower interest rates increasing demand. Highland chiefs, like Lowland nobles, began to borrow significantly from the late 16th century.1
The chiefs borrowed for a number of reasons. King James VI encouraged them to resolve their differences in the central courts in Edinburgh rather than feuding in the Highlands. This coincided with an explosive rise in legal fees which increased the costs of taking cases to court
The chiefs also borrowed to spend conspicuously on foreign travel, expensive clothing and furniture, luxury goods, castle building, educating their children in the Lowlands and, of course, the ever popular pastimes of fine wine and gambling.
By the middle of the 17th century many chiefs were heavily in debt. Their creditors were mainly lairds (small landowners) and lawyers in the Lowlands who had a surplus of capital to invest. Chiefs such as the Earl of Argyll, Earl of Atholl, MacLean of Duart, MacLeod of Dunvegan and MacKenzie of Kintail all experienced problems caused by indebtedness in the early 17th century. Lord Lovat, chief of the Frasers, died in 1633 leaving his estate ‘under insuperable debt.’2
The borrowing binge was ended by the mid-century civil wars. King Charles I’s introduction of a prayer book in Scotland, based on the English model, outraged the Scots, who protested by signing the National Covenant in 1638 and invading the north of England. Charles was forced to summon his English Parliament to deal with the rebellion, unleashing a political storm which tipped the kingdoms of England, Scotland and Ireland into a bloody and protracted civil war.
The Highlands suffered significantly during the conflict. Montrose’s campaigns in 1644-5 and the Glencairn Rebellion of 1653-4 were devastating. Highland estates were ruined and the chiefs’ incomes collapsed; some falling by as much as 90%.3 Debts could not be serviced and the chiefs defaulted en masse.
Labyrinth of Debt
In the second half of the 17th century, economic conditions became very harsh for debtors due to a severe deflation in the price of agricultural commodities, including oats, wheat, beef and mutton, which was caused by the civil war. As a result, the real value of debts increased at a time when incomes declined, putting severe pressure on the chiefs’ finances.
The crash had a number of important effects on the chiefs. Long, bitter, legal disputes with creditors, some lasting for decades, were very expensive and forced the chiefs to employ ‘clan lawyers’ in Edinburgh to manage their affairs.
The financial crisis altered the way in which chiefs viewed land. In the early 17th century, land was seen, primarily, as a source of manpower – a reservoir of armed clansmen. By the later 17th century it was being viewed as a source of income. A more commercial attitude to running estates transformed the traditional relationship between chief and clan. Those who held land without paying rent, such as hereditary professional families (doctors, lawmen and poets), or for military service, lost these preferential positions. There was also pressure to convert rents in kind (livestock and produce) to payment in cash, and to increase the productivity of estates, including a major push to expand the cattle droving trade. Most controversially, the chiefs transferred part of the financial burden onto their people by raising rents. This provoked bitter ripostes from contemporary Gaelic poets who lambasted the chiefs
in their poems for wasting money on foreign luxuries and raising rents: ‘A finely fashioned belt from the shop, a silver-tipped bow and a golden bugle… and a higher rent will be charged for my land.’4
Some chiefs were forced to transfer their estates to commissions which administered them until debts were reduced. This curtailed the political position of the chiefs, as well as the symbolic power of their lordship. For example, the Marquis of Argyll was humiliated by his creditors at Dalkeith in 1654 when his goods were sold off in public to cover some of his debts. The exalted position of the chiefs at the apex of the clan-based system declined significantly as a result.
Not surprisingly, in the late 17th century many chiefs were voicing feelings of despondency in their letters. Some looked back to a Highland golden age in the past, and tried to recreate themselves in a more Highland light by wearing traditional Highland dress which they had abandoned during the previous century. The chiefs became a self-conscious group of individuals reacting to the insecurity of the times.
The debt crisis began the transition of Highland chief into landlord. The scene was set for further sweeping economic and social change in the Highlands over the following two centuries when, in order to boost incomes further, the chiefs removed their people from their landholdings and replaced them with sheep – a process which has been called the Highland Clearances. Some clans-folk were violently driven from their homes. In Harris in the Outer Hebrides, for example, the people were forced to move from good land on the western machair to the rocky east side, where they had to eke out an existence from crofting and fishing. It is no wonder that thousands, across the Highlands and Islands, were forced to seek a better life in Australia, Canada and the US. The Highland debt binge of the 17th century set the scene for the Clearances and mass emigration.
The history of the Highland chiefs in the 17th century indicates the power of debt as an agent of historical change. It also highlights the destructive power of debt deflations.
At Stewart Investors we pay close attention to rapid accumulations and excessive levels of debt. As bottom-up stock-pickers, we focus particularly on debt at a company level. We prefer conservative companies, with low debt or even net cash positions on their balance sheets, and those where management make a conscious effort to reduce debt. Smaller companies in particular, find that banks rarely ‘offer umbrellas when the rain is falling.’
Oneof the questions we like to ask company management is what might happen to their businesses if interest rates doubled or even trebled – not impossible given how low rates are compared with the last fifty years. It is easy to judge from their response whether they have ever seriously considered such an eventuality.
Weexamine carefully any mismatches between the currency of a company’s revenues and that of its interest payments. Mismatches can make companies vulnerable to significant exchange rate movements.
During difficult times, even high quality businesses can be swept away by too much debt. Companies with robust balance sheets, however, should be in a stronger position to survive downturns. They may also be able to buy assets at attractive prices, thus underpinning long-term growth.
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