Fox, who became Pitt's lifelong political rival, then joined a coalition with Lord North, with whom he collaborated to bring about the defeat of the Shelburne administration. When Lord Shelburne resigned in 1783, King George III, who despised Fox, offered to appoint Pitt to the office of Prime Minister. But Pitt wisely declined, for he knew he would be incapable of securing the support of the House of Commons. The Fox–North coalition rose to power in a government nominally headed by William Cavendish-Bentinck, 3rd Duke of Portland.
Losing the war and the Thirteen Colonies was a shock to the British system. The war revealed the limitations of Britain's fiscal-military state when it had powerful enemies and no allies, depended on extended and vulnerable transatlantic lines of communication, and was faced for the first time since the 17th century by both Protestant and Catholic foes. The defeat heightened dissension and escalated political antagonism to the King's ministers. Inside parliament, the primary concern changed from fears of an over-mighty monarch to the issues of representation, parliamentary reform, and government retrenchment. Reformers sought to destroy what they saw as widespread institutional corruption. The result was a crisis from 1776 to 1783. The peace in 1783 left France financially prostrate, while the British economy boomed due to the return of American business. That crisis ended in 1784 as a result of the King's shrewdness in outwitting Fox and renewed confidence in the system engendered by the leadership of Pitt. Historians conclude that the loss of the American colonies enabled Britain to deal with the French Revolution with more unity and organisation than would otherwise have been the case. Britain turned towards Asia, the Pacific, and later Africa with subsequent exploration leading to the rise of the Second British Empire.
The Fox-North Coalition fell in December 1783, after Fox had introduced Edmund Burke's bill to reform the East India Company to gain the patronage he so greatly lacked while the King refused to support him. Fox stated the bill was necessary to save the company from bankruptcy. Pitt responded that: "Necessity is the plea for every infringement of human freedom. It is the argument of tyrants; it is the creed of slaves." The King was opposed to the bill; when it passed in the House of Commons, he secured its defeat in the House of Lords by threatening to regard anyone who voted for it as his enemy. Following the bill's failure in the Upper House, George III dismissed the coalition government and finally entrusted the premiership to William Pitt, after having offered the position to him three times previously.
Convicts were originally transported to the Thirteen Colonies in North America, but after the American War of Independence ended in 1783, the newly formed United States refused to accept further convicts. The Pitt's government took the decision to settle what is now Australia and found the penal colony in August 1786. The First Fleet of 11 vessels carried over a thousand settlers, including 778 convicts. The Colony of New South Wales was formally proclaimed by Governor Arthur Phillip on 7 February 1788 at Sydney.