Railway Mania
Encyclopedia
The Railway Mania was an instance of speculative frenzy
in Britain
in the 1840s. It followed a common pattern: as the price of railway shares increased, more and more money was poured in by speculators, until the inevitable collapse. It reached its zenith in 1846, when no fewer than 272 Acts of Parliament were passed, setting up new railway companies, and the proposed routes totalled 9500 miles (15,288.7 km) of new railway. Around a third of the railways authorised were never built – the company either collapsed due to poor financial planning, was bought out by a larger competitor before it could build its line, or turned out to be a fraudulent enterprise to channel investors' money into another business.
Britain's (and the world's) first recognisably modern inter-city railway, the Liverpool and Manchester
, opened in 1830 and proved to be highly successful for transporting both passengers and freight. However, the late 1830s and early 1840s saw the British economy slow down. Interest rate
s rose, making it more attractive to invest money in government bonds – the main source of investment at the time, and political and social unrest deterred banks and businesses from investing the huge sums of money required to build railways (the L&M cost £637,000 (£ as of ),)
However, by the mid-1840s the economy was improving and the manufacturing industries were again growing. The Bank of England
cut interest rates, making government bonds less attractive investments, and existing railway companies' shares began to boom as they moved ever-increasing amounts of cargo and people, making people willing to invest in new railways.
Crucially, there were more investors in British business. The Industrial Revolution
was creating a new, increasingly affluent middle class
. While earlier business ventures had relied on a small number of bank
s, businessmen and wealthy aristocrat
s for investment, a prospective railway company had (on top of these sources) a large, literate section of population with savings to invest. In 1825 the government had repealed the Bubble Act
, brought in after the near-disastrous South Sea Bubble of 1720 which put close limits on the formation of new business ventures and, importantly, had limited joint stock companies
to a maximum of five separate investors. With these limits removed anyone could invest money (and hopefully earn a return) on a new company and railways were heavily promoted as a foolproof venture. New media such as newspaper
s and the emergence of the modern stock market
made it easy for companies to promote themselves and provide the means for the general public to invest. Shares could be purchased for a 10% deposit with the railway company holding the right to call in the remainder at any time. The railways were so heavily promoted as a foolproof venture that thousands of investors on modest incomes bought large numbers of shares whilst only being able to afford the deposit. Many families invested their entire savings in prospective railway companies – and many of those lost everything when the bubble collapsed and the companies called in the remainder of their due payments.
The British government promoted an almost totally 'laissez-faire
' system of non-regulation in the railways. Companies had to submit a Bill to Parliament to gain the right to acquire land for the line, which required the route of the proposed railway to be approved, but there were no limits on the number of companies and no real checks on the financial viability of a line. Anyone could form a company, gain investment and submit a Bill to Parliament. Since many MPs
were heavy investors in such schemes, it was rare for a Bill to not pass during the peak of the Mania in 1846, although Parliament did reject schemes that were blatantly misleading or impossible to construct – at the Mania's peak there were several schemes floated for 'direct' railways which ran in vast, straight lines across swathes of countryside that would have been difficult to construct and nearly impossible for the locomotives
of the day to work on.
Magnates like George Hudson
developed routes in the North and Midlands by amalgamating small railway companies and rationalising routes. He was also an MP, but ultimately failed owing to his fraudulent practices of, for example, paying dividends from capital
.
As with other bubbles
, the Railway Mania became a self-promoting cycle based purely on over-optimistic speculation. As the dozens of companies formed began to operate and the simple unviability of many of them became clear, investors began to realise that railways were not all as lucrative and as easy to build as they had been led to believe. Coupled to this, in late 1845 the Bank of England put up interest rates. As banks began to re-invest in bonds, the money began to flow out of railways, under-cutting the boom. The share prices of railways slowed in their rise, then levelled out. As they began to fall, investment stopped virtually overnight, leaving numerous companies without funding and numerous investors with no prospect of any return on their investment. The larger railway companies such as the Great Western Railway
and the nascent Midland
began to buy up strategic failed lines to expand their network. These lines could be purchased at a fraction of their real value as given a choice between a below-value offer for their shares or the total loss of their investment, shareholders naturally chose the former.
Many middle class
families on modest (but comfortable) incomes had sunk their entire savings into new companies during the Mania, and lost everything when the speculation collapsed.
The boom-and-bust cycle of early-industrial Britain was still in effect, and the boom that had created the conditions for Railway Mania began to cool and then a decline set in. The number of new railway companies fell away to almost nothing in the late 1840s and early 1850s, with the only new lines constructed being by the large companies. Economic upturns in the 1850s and 1860s saw smaller booms in railway construction, but these never reached anywhere near the scale of the Mania – partly due to more thoughtful (if still very limited) government control, partly due to more cautious investors and partly because the UK railway network was approaching maturity, with none of the 'blank canvas' available to numerous companies as in the 1840s.
s, however, there was actually a net tangible result from all the investment: a vast expansion of the British railway system
, though perhaps at an inflated cost. Amongst the high number of impractical, overambitious and downright fraudulent schemes promoted during the Mania were a good number of practical trunk routes (most notably the initial part of the Great Northern Railway
and the trans-Pennine Woodhead route
) and important freight lines (such as large parts of what would become the North Eastern Railway
). These projects all required vast amounts of capital all of which had to be raised from private enterprise. The speculative frenzy of the Mania made people much more willing to invest the large sums required for railway construction than they had been previously or would be in later years. Even many of the routes that failed when the Mania collapsed became viable (if not lucrative) when in the hands of the larger company that had purchased it. A total of 6220 miles (10,010.1 km) of railway line were built as a result of projects authorised between 1844 and 1846 – by comparison, the total route mileage of the modern UK railway network is around 11000 miles (17,702.7 km).
The line in Lewis Carroll
's The Hunting of the Snark
, "They threatened its life with a railway share", could be a reference to the Railway Mania and those who lost money investing in it.
Manias can be compared with a similar mania in the 1990s in the stock of telecom
companies. The telecom mania resulted in the installation and deployment of a vast amount of fibre-optic telecommunications infrastructure, ironically spurred on from the realisation that the same railway rights-of-way could make affordable conduits for fibre optics. Yet another boom occurred in the period 1995-2000, during the development of the Internet
, when many companies were established to promote new services on the growing network. The dotcom bubble soon collapsed, although some companies such as Google
grew and prospered.
Stock market bubble
A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation....
in Britain
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
in the 1840s. It followed a common pattern: as the price of railway shares increased, more and more money was poured in by speculators, until the inevitable collapse. It reached its zenith in 1846, when no fewer than 272 Acts of Parliament were passed, setting up new railway companies, and the proposed routes totalled 9500 miles (15,288.7 km) of new railway. Around a third of the railways authorised were never built – the company either collapsed due to poor financial planning, was bought out by a larger competitor before it could build its line, or turned out to be a fraudulent enterprise to channel investors' money into another business.
Causes
Liverpool and Manchester Railway
The Liverpool and Manchester Railway was the world's first inter-city passenger railway in which all the trains were timetabled and were hauled for most of the distance solely by steam locomotives. The line opened on 15 September 1830 and ran between the cities of Liverpool and Manchester in North...
, opened in 1830 and proved to be highly successful for transporting both passengers and freight. However, the late 1830s and early 1840s saw the British economy slow down. Interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s rose, making it more attractive to invest money in government bonds – the main source of investment at the time, and political and social unrest deterred banks and businesses from investing the huge sums of money required to build railways (the L&M cost £637,000 (£ as of ),)
However, by the mid-1840s the economy was improving and the manufacturing industries were again growing. The Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
cut interest rates, making government bonds less attractive investments, and existing railway companies' shares began to boom as they moved ever-increasing amounts of cargo and people, making people willing to invest in new railways.
Crucially, there were more investors in British business. The Industrial Revolution
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
was creating a new, increasingly affluent middle class
Middle class
The middle class is any class of people in the middle of a societal hierarchy. In Weberian socio-economic terms, the middle class is the broad group of people in contemporary society who fall socio-economically between the working class and upper class....
. While earlier business ventures had relied on a small number of bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s, businessmen and wealthy aristocrat
Aristocracy (class)
The aristocracy are people considered to be in the highest social class in a society which has or once had a political system of Aristocracy. Aristocrats possess hereditary titles granted by a monarch, which once granted them feudal or legal privileges, or deriving, as in Ancient Greece and India,...
s for investment, a prospective railway company had (on top of these sources) a large, literate section of population with savings to invest. In 1825 the government had repealed the Bubble Act
Bubble Act
Bubble Act 1720 was an Act of the Parliament of Great Britain that forbade all joint-stock companies not authorised by royal charter. It was passed on 9 June 1720, and was also known as the Royal Exchange and London Assurance Corporation Act 1719, because those companies were incorporated under...
, brought in after the near-disastrous South Sea Bubble of 1720 which put close limits on the formation of new business ventures and, importantly, had limited joint stock companies
Joint stock company
A joint-stock company is a type of corporation or partnership involving two or more individuals that own shares of stock in the company...
to a maximum of five separate investors. With these limits removed anyone could invest money (and hopefully earn a return) on a new company and railways were heavily promoted as a foolproof venture. New media such as newspaper
Newspaper
A newspaper is a scheduled publication containing news of current events, informative articles, diverse features and advertising. It usually is printed on relatively inexpensive, low-grade paper such as newsprint. By 2007, there were 6580 daily newspapers in the world selling 395 million copies a...
s and the emergence of the modern stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
made it easy for companies to promote themselves and provide the means for the general public to invest. Shares could be purchased for a 10% deposit with the railway company holding the right to call in the remainder at any time. The railways were so heavily promoted as a foolproof venture that thousands of investors on modest incomes bought large numbers of shares whilst only being able to afford the deposit. Many families invested their entire savings in prospective railway companies – and many of those lost everything when the bubble collapsed and the companies called in the remainder of their due payments.
The British government promoted an almost totally 'laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
' system of non-regulation in the railways. Companies had to submit a Bill to Parliament to gain the right to acquire land for the line, which required the route of the proposed railway to be approved, but there were no limits on the number of companies and no real checks on the financial viability of a line. Anyone could form a company, gain investment and submit a Bill to Parliament. Since many MPs
Member of Parliament
A Member of Parliament is a representative of the voters to a :parliament. In many countries with bicameral parliaments, the term applies specifically to members of the lower house, as upper houses often have a different title, such as senate, and thus also have different titles for its members,...
were heavy investors in such schemes, it was rare for a Bill to not pass during the peak of the Mania in 1846, although Parliament did reject schemes that were blatantly misleading or impossible to construct – at the Mania's peak there were several schemes floated for 'direct' railways which ran in vast, straight lines across swathes of countryside that would have been difficult to construct and nearly impossible for the locomotives
Steam locomotive
A steam locomotive is a railway locomotive that produces its power through a steam engine. These locomotives are fueled by burning some combustible material, usually coal, wood or oil, to produce steam in a boiler, which drives the steam engine...
of the day to work on.
Magnates like George Hudson
George Hudson
George Hudson , English railway financier, known as "The Railway King", was born, the fifth son of a farmer, in Howsham, in the parish of Scrayingham in the East Riding of Yorkshire, north of Stamford Bridge, east of York. He is buried in Scrayingham...
developed routes in the North and Midlands by amalgamating small railway companies and rationalising routes. He was also an MP, but ultimately failed owing to his fraudulent practices of, for example, paying dividends from capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
.
The end of the Mania
Stock market bubble
A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation....
, the Railway Mania became a self-promoting cycle based purely on over-optimistic speculation. As the dozens of companies formed began to operate and the simple unviability of many of them became clear, investors began to realise that railways were not all as lucrative and as easy to build as they had been led to believe. Coupled to this, in late 1845 the Bank of England put up interest rates. As banks began to re-invest in bonds, the money began to flow out of railways, under-cutting the boom. The share prices of railways slowed in their rise, then levelled out. As they began to fall, investment stopped virtually overnight, leaving numerous companies without funding and numerous investors with no prospect of any return on their investment. The larger railway companies such as the Great Western Railway
Great Western Railway
The Great Western Railway was a British railway company that linked London with the south-west and west of England and most of Wales. It was founded in 1833, received its enabling Act of Parliament in 1835 and ran its first trains in 1838...
and the nascent Midland
Midland Railway
The Midland Railway was a railway company in the United Kingdom from 1844 to 1922, when it became part of the London, Midland and Scottish Railway....
began to buy up strategic failed lines to expand their network. These lines could be purchased at a fraction of their real value as given a choice between a below-value offer for their shares or the total loss of their investment, shareholders naturally chose the former.
Many middle class
Middle class
The middle class is any class of people in the middle of a societal hierarchy. In Weberian socio-economic terms, the middle class is the broad group of people in contemporary society who fall socio-economically between the working class and upper class....
families on modest (but comfortable) incomes had sunk their entire savings into new companies during the Mania, and lost everything when the speculation collapsed.
The boom-and-bust cycle of early-industrial Britain was still in effect, and the boom that had created the conditions for Railway Mania began to cool and then a decline set in. The number of new railway companies fell away to almost nothing in the late 1840s and early 1850s, with the only new lines constructed being by the large companies. Economic upturns in the 1850s and 1860s saw smaller booms in railway construction, but these never reached anywhere near the scale of the Mania – partly due to more thoughtful (if still very limited) government control, partly due to more cautious investors and partly because the UK railway network was approaching maturity, with none of the 'blank canvas' available to numerous companies as in the 1840s.
Results
Unlike some stock market bubbleStock market bubble
A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation....
s, however, there was actually a net tangible result from all the investment: a vast expansion of the British railway system
Rail transport in the United Kingdom
The United Kingdom consists of Great Britain and Northern Ireland, and previously consisted of Great Britain and the whole of Ireland. Rail transport systems developed independently on the two islands of Great Britain and Ireland, and most of the railway construction in the Republic of Ireland was...
, though perhaps at an inflated cost. Amongst the high number of impractical, overambitious and downright fraudulent schemes promoted during the Mania were a good number of practical trunk routes (most notably the initial part of the Great Northern Railway
Great Northern Railway (Great Britain)
The Great Northern Railway was a British railway company established by the Great Northern Railway Act of 1846. On 1 January 1923 the company lost its identity as a constituent of the newly formed London and North Eastern Railway....
and the trans-Pennine Woodhead route
Sheffield, Ashton-Under-Lyne and Manchester Railway
The Sheffield, Ashton-under-Lyne and Manchester Railway was an early British railway company which opened in stages between 1841 and 1845 between Sheffield and Manchester via Ashton-under-Lyne...
) and important freight lines (such as large parts of what would become the North Eastern Railway
North Eastern Railway (UK)
The North Eastern Railway , was an English railway company. It was incorporated in 1854, when four existing companies were combined, and was absorbed into the London and North Eastern Railway at the Grouping in 1923...
). These projects all required vast amounts of capital all of which had to be raised from private enterprise. The speculative frenzy of the Mania made people much more willing to invest the large sums required for railway construction than they had been previously or would be in later years. Even many of the routes that failed when the Mania collapsed became viable (if not lucrative) when in the hands of the larger company that had purchased it. A total of 6220 miles (10,010.1 km) of railway line were built as a result of projects authorised between 1844 and 1846 – by comparison, the total route mileage of the modern UK railway network is around 11000 miles (17,702.7 km).
The line in Lewis Carroll
Lewis Carroll
Charles Lutwidge Dodgson , better known by the pseudonym Lewis Carroll , was an English author, mathematician, logician, Anglican deacon and photographer. His most famous writings are Alice's Adventures in Wonderland and its sequel Through the Looking-Glass, as well as the poems "The Hunting of the...
's The Hunting of the Snark
The Hunting of the Snark
The Hunting of the Snark is usually thought of as a nonsense poem written by Lewis Carroll in 1874, when he was 42 years old...
, "They threatened its life with a railway share", could be a reference to the Railway Mania and those who lost money investing in it.
Comparisons
Railway and canalCanal Mania
Canal Mania is a term used to describe an intense period of canal building in England and Wales between the 1790s and 1810s, and the speculative frenzy that accompanied it in the early 1790s.-Background:...
Manias can be compared with a similar mania in the 1990s in the stock of telecom
Telecommunication
Telecommunication is the transmission of information over significant distances to communicate. In earlier times, telecommunications involved the use of visual signals, such as beacons, smoke signals, semaphore telegraphs, signal flags, and optical heliographs, or audio messages via coded...
companies. The telecom mania resulted in the installation and deployment of a vast amount of fibre-optic telecommunications infrastructure, ironically spurred on from the realisation that the same railway rights-of-way could make affordable conduits for fibre optics. Yet another boom occurred in the period 1995-2000, during the development of the Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
, when many companies were established to promote new services on the growing network. The dotcom bubble soon collapsed, although some companies such as Google
Google
Google Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
grew and prospered.
See also
- List of early British railway companies
- History of rail transport in Great BritainHistory of rail transport in Great BritainThe railway system of Great Britain, the principal territory of the United Kingdom, is the oldest in the world. The system was originally built as a patchwork of local rail links operated by small private railway companies. These isolated links developed during the railway boom of the 1840s into a...
- George HudsonGeorge HudsonGeorge Hudson , English railway financier, known as "The Railway King", was born, the fifth son of a farmer, in Howsham, in the parish of Scrayingham in the East Riding of Yorkshire, north of Stamford Bridge, east of York. He is buried in Scrayingham...
- Tulip maniaTulip maniaTulip mania or tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed...
- Canal ManiaCanal ManiaCanal Mania is a term used to describe an intense period of canal building in England and Wales between the 1790s and 1810s, and the speculative frenzy that accompanied it in the early 1790s.-Background:...
- Economic bubbleEconomic bubbleAn economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...
Literature
Wolmar, C, 2007, Fire & Steam: A History of the Railways in Britain, Atlantic Book (London) ISBN 978-1-84354-629-0External links
- Report and Resolutions of a Public Meeting, Held at Glasgow, on Friday, March 20 1846, in Support of Sir Robert Peel's Suggestions in Reference to Railways – Peel had commented upon the impolity and danger of allowing too much capital to be invested in railways in too short a period. The merchants of Glasgow evidently agreed in large numbers. From Google Book SearchGoogle Book SearchGoogle Books is a service from Google that searches the full text of books that Google has scanned, converted to text using optical character recognition, and stored in its digital database. The service was formerly known as Google Print when it was introduced at the Frankfurt Book Fair in October...
- The Railway Mania: Not so Great Expectations – Economic article which argues that during the British Railway Mania of the 1840s, railway shares were not obviously overpriced, even at the market peak, but prices still fell dramatically.
- Odlyzko, Andrew. Collective hallucinations and inefficient markets: The British Railway Mania of the 1840s, 2010.