In the 1840s, Britain was gripped by a mania for railway company shares that saw share prices double before a change in prospects caused the market to give up all of these gains and more. Given the scale of the transformations promised by new railways were so substantial, railway mania was perhaps an inevitable frenzy. The basis for investors’ optimism, the timing of movements in share prices, and the construction of so many miles of track make the bubble in railway shares of the mid-1840s difficult to reprimand. This was not like most episodes of speculative excess.
Charters
The first railway opened in 1825 and the first passenger railway, the Liverpool and Manchester Railway, in 1830. The completion of the latter especially was a pivotal moment in encouraging new railway formation. The first projects were largely successful and these early successes encouraged the creation of even more railway companies. However, not just anyone could start a railway. The creation of limited liability companies generally required an Act of Parliament as did compelling property owners to sell land along a planned route.
An earlier boom had been enabled by a wave of new railway company charters in 1836 and 1837 when Parliament approved fifty-nine new railways with 1,500 cumulative miles of track. This accompanied a sharp rise in the prices for railway company shares, which rose 65% before giving back almost all of this increase with a 45% drop as the mania evaporated. A weak economy limited the longevity of the boom.
Few railway companies were launched between 1838 and 1843. Indeed, in one year track miles shrank as more track was abandoned in 1840 than was built. A new round of railway construction was soon to come though. The Railway Act of 1844 paved the way for more railways to be authorized and acquire control of property along their approved routes. The legislation also mandated railway companies offer at least one passenger service at a frequency of at least one train per day and a price per passenger of no more than one penny per mile.
A new Railway Board was established to review projects with an eye towards minimizing overlap and building an integrated national rail system. This was intended to be a controlled frenzy, one that resulted in the construction of a rational system. Some 199 applications for new railways were submitted in the 1845 parliamentary session alone, as compared to sixty-three in the prior year. Parliament would grant hundreds of charters for railway companies in the mid-1840s, in large part because of the Railway Act of 1844.
The Railway Act set out that, to be considered, a proposed railway company had to have raised 5% of its intended capital before the application was reviewed. To fund this, new railway companies issued scrip, which represented a future allocation of shares, to raise this modest initial sum. If approved, the company would issue shares to the holders of the scrip and these shareholders would have the remainder of their subscription called over time as the funds were needed. While holding scrip, investors were subject to unlimited liability since the company was not yet conferred with limited liability status. Another complication, scrip could not be traded legally. Still, a market for these instruments developed anyway.
Rational Basis
Raising the initial funds required advertising the creation of new railway companies before they had even been approved. Advertisements for new companies filled pages of magazines like the Railway Times. In Britain, there were some sixteen railway periodicals in circulation in 1845. The boom was capturing the attention of the entire press. The Economist added a section dedicated to railways and The Times published regular editorials on the brewing mania. Questionable investment guides also appeared, including one titled “Short and Sure Guide to Railway Speculation”.
Overall, the share prices of railways rose sharply within the span of a few months, some 40% or so from the beginning of 1845 through the summer. This was more than a doubling if sizeable gains in 1843 and 1844 are included in the run up. Compared to the overall movement, the share prices of the established railway companies also moved higher, though not to the same degree as new companies. In any case, tracking listed shares alone understates the increase in values as much of the appreciation of a typical company’s shares happened during its initial public offering.
While the railway mania of the 1840s may be counted among the many speculative frenzies of the 19th century, this one seemed to have more than a normal degree of sensible basis. For one, the myriad of newly formed railways were being reviewed to minimize competition with existing lines, protecting past investments. Further, construction of new railways, it was believed, would encourage more travel or shipments by rail and increase demand on the existing railway lines. Railway construction costs were falling and passenger numbers, revenues, and profits were rising. There was sound reason for optimism; it is logical to see why even a conservative investor would have thought the sharp appreciation in share prices was justified.
Interest rates were also low and falling. At 2.5%, the Bank of England’s discount rate was the lowest in its 150-year history up to then. The yield on other investments were also falling as investors in British consols could now earn just 3%. By contrast, railway company dividends were high and rising, reaching 7% in 1847 as compared to 4.4% in 1843. By most sensible measures, shares in railway companies did not look overvalued.
Overinvestment
Despite the reasons for optimism, the conditions in any industry subject to so much exuberance are bound to change. In the end, the Railway Board was disbanded as it was determined that recommendations made by the board were being ignored anyway. With this, perhaps the greatest safeguard against overinvestment was removed. This only encouraged more railway formation as the dissolution of the board meant a key hurdle for approval had disappeared.
Some 572 applications for new railways were made for the 1846 parliamentary session. Note that many projects did not even get to the step of submitting an application; the total number of railway promotions underway had exceeded 1,200 in 1845. Parliament authorized 8,590 miles of track between 1845 and 1847. For comparison, the railway network in Britain had amounted to less than 2,000 miles in 1842.
The growth in new company formation led to the creation of fifteen new stock exchanges in the country. Some of the new companies did list their shares on the London Stock Exchange; the number of railway securities traded on the London exchange tripled. However, many listed on the other newer exchanges. Amidst the enthusiasm, there was a meaningful market in the securities of new railway companies.
Low denomination shares and a small initial investment per share meant less prosperous investors participated in this boom to a degree not characteristic of most bubbles in this era or earlier. Still, inexperienced investors were not disproportionately likely to be among the losers in the bubble as the investor lists that survive indicate that professional financiers and company insiders had just as poor an experience as the bubble burst. The government increased the portion of capital that had to be paid-up for a project to be considered from 5% to 10% in July 1845 but this was not necessary to quench the mania which was nearing its end for a myriad of other reasons.
Firstly, there were mounting worries of overinvestment as the potential for construction of competing lines increased. The Times, the largest newspaper in the country, declared that the mania for railway speculation has “reached that height at which all follies, however absurd in themselves, cease to be ludicrous, and become, by reason of their universality, fit subjects for the politician to consider as well as the moralist”. This editorial, dated October 18, 1845, came just before the market crash began.
Crash
The growing realization that new railways could compete effectively with existing ones, along with external factors including poor harvests, outflows of gold, and rising interest rates, caused the bubble to deflate. Shares in railway companies fell by 20% in just one month and more over the next few years. This coincided with capital calls as the new railway companies called on their shareholders to pay the installments for their shares as construction got underway. Investors sold to avoid putting up the money, causing share prices to slide. Share prices fell in stages but eventually reached a low in April 1850 by which point values had fallen 66% from their peak and stood well below their levels from 1844.
Of the track length authorized during the boom, some 3,560 miles were abandoned. The number of railway securities in the market also fell as firms were dissolved. However, much of the anticipated construction did proceed. Despite the crash and the halted projects, the size of Britain’s railway network tripled between 1842 and 1850 alone, reaching 6,123 miles. Still, much of this track duplicated existing routes or served less populous areas, reducing the industry’s returns.
In the years immediately after the boom, annual capital formation in railways reached some 6% of GDP. In the previous boom of the mid-to-late 1830s, it had only approached 2%. By other measures, the industry had scaled up tremendously. The total paid-up capital of UK railways grew from around £30 million in the early 1840s to in excess of £100 million by the end of the decade and £140 million by 1860. Railway companies, which already made up a respectable 23% of stock market value in 1838, grew to comprise 71% by 1848, this after the bubble had undone much of the rise in share prices.
However, more competition did mean reduced profitability. In turn, dividends on railway shares fell from their heights of 7% to a mere 2.4% by 1852. Compared to dividends which had risen and fallen so abruptly, share prices did not look out of line. In fact, the fall in share prices anticipated the drop in dividends by about two years. Overall, the market did not seem to behave totally out of line with fundamentals, either on the way up or on the way down.
Perhaps the greatest legacy of the railway mania was the network forged by the miles of track laid with the money raised while enthusiasm was high. Whereas in 1835 for example, a traveler between London and Edinburgh had a choice of seven stagecoaches running daily, on a route that took two days, by 1850, there were several trains running the route in less than twelve hours. The railways would be assets to the country for decades.
Lesson
The 1840’s railway mania may not serve as a convincing textbook case of a speculative mania. The fact that railways did in short order transform Britain no less fundamentally than the optimists would have predicted mean the bubble simply lacks the ridiculousness of past and future episodes of speculative excess. Still, the mania and its aftermath illustrate that correct predictions about technological change are not always profitable as overinvestment can erode profits and dividends.
Such astounding changes as the invention of steam locomotives and the alignment of political and economic interests to seize on this development may have made a bubble likely, if not inevitable. However, the results were not altogether bad. Would Britain have been better off without the Railway Act of 1844? Certainly not.
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Further Reading
1. Campbell, Gareth, and John D. Turner. “Dispelling the Myth of the Naive Investor during the British Railway Mania, 1845–1846.” Business History Review, vol. 86, no. 1, spring 2012, pp. 3–41.
2. Campbell, Gareth. “Government Policy during the British Railway Mania and the 1847 Commercial Crisis.” British Financial Crises since 1825, edited by Nicholas Dimsdale and Anthony Hotson, Oxford University Press, Oxford, 2014.
3. Campbell, Gareth. “The Railway Mania: Not so Great Expectations?” Centre for Economic Policy Research (CEPR), 23 May 2009.
4. Narron, James, and Donald P. Morgan. “Crisis Chronicles: Railway Mania, the Hungry Forties, and the Commercial Crisis of 1847.” Liberty Street Economics, 5 June 2015.
5. Quinn, William, and John D. Turner. “Chapter 4 – Democratising Speculation: The Great Railway Mania.” Boom and Bust: A Global History of Financial Bubbles, Cambridge University Press, Cambridge, 2020, pp. 58–76.
