Railway Mania was an instance of a stock market bubble in the United Kingdom of Great Britain and Ireland
in the 1840s. It followed a common pattern: as the price of railway
shares increased, speculators invested more money, which further
increased the price of railway shares, until the share price collapsed.
The mania reached its zenith in 1846, when 272 Acts of Parliament
setting up new railway companies were passed, with the proposed routes
totaling 9,500 miles (15,300 km). About a third of the railways
authorised were never built—the companies either collapsed due to poor
financial planning, were bought out by larger competitors before they
could build their line, or turned out to be fraudulent enterprises to
channel investors' money into other businesses.
Causes
A painting of the inaugural journey of the Liverpool and Manchester Railway, by A.B. Clayton
The world's first recognizably modern inter-city railway, the Liverpool and Manchester Railway (the L&M), opened its railway in 1830
and proved to be successful for transporting both passengers and
freight. In the late 1830s and early 1840s, the British economy slowed. Interest rates
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 (£55,210,000
adjusted for 2015).
By the mid-1840s, the economy was improving and the manufacturing industries were once 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 banks, businessmen and wealthy aristocrats
for investment, a prospective railway company also had 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government had repealed the Bubble Act, brought in after the near-disastrous South Sea Bubble of 1720, which had put close limits on the formation of new business ventures and,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 newspapers 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.
The end of the mania
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 leveled
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 incomes had sunk their entire savings into new
companies during the mania, and they 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 bubbles, there was 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 each was in the hands of the
larger company that had purchased it. A total of 6,220 miles (10,010 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 11,000 miles (18,000 km).
Comparisons
Railway and Canal Mania 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, 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 dot-com bubble soon collapsed, although some companies such as Google grew and prospered.
