Railway Mania: The Largest Speculative Bubble You've Never Heard Of
“These were the first glorious days of general speculation. Railroads were emerging from the hands of the greater into the fingers of the lesser capitalists. Two successful harvests had given a fearful stimulus to the national energy; and it appeared perfectly certain that all the populous towns would be united, and the rich agricultural districts intersected, by the magical bands of iron.” So wrote W.E. Aytoun in his satirical novel How we got up the Glenmutchkin Railway.
The book was published in 1845, with the UK in the grips of a frenzy which saw investors tripping over each other to pile into railway shares, bewitched by promises of a revolutionary mode of transport, a huge untapped market and spectacular profit growth. Even the likes of Charles Darwin and the Brontë sisters were swept up by the hype. Private firms hatched grandiose investment plans, submitted hundreds of bills to parliament for new railway lines, and saw their share prices roughly double in the space of a few years. Government was obliging; in 1845, it authorized around 3,000 miles of track, roughly as much as the previous 15 years combined. And at its peak, railway investment—which lagged a few years behind planning applications—surged to 7% of GDP, representing half of total investment in the economy at the time.
The phenomenon may have been highly localized, but it shares uncanny similarities to other bubbles which have cropped up time after time in the succeeding centuries: irrational exuberance among investors, a gradual shift into the mainstream of what was a hitherto niche pursuit, and inflated claims by firms—to name a few.
The Birth of the Bubble
The seeds of the boom were sown more than a decade earlier, with the opening in 1830 of the world’s first commercial passenger railway line between Liverpool and Manchester, two burgeoning cities of the new industrial age. The UK was at the time fast becoming the world’s preeminent manufacturing powerhouse, and railways promised to catalyze the revolution underway, making it possible to move vast quantities of raw materials and finished goods more cheaply and quickly than ever before.
Until then, few people had considered the possibility of using trains to transport passengers. Many investors were actively opposed, arguing it would be all but impossible to encourage people to swap horse-drawn coaches for such noisy and potentially dangerous newfangled contraptions. However, against expectations, the Liverpool-Manchester line was a roaring success. Rail passengers far outnumbered coach travelers who had formerly used the same route; at the same time, the railway became wildly profitable, and investors were showered with dividend payments.
Investors now had hard proof that passenger railways could be money-making machines. However, although there was a spike in interest in rail shares in the mid-1830s, it was only several years later that Railway Mania truly took hold. This was partly because the Bank of England cut rates in the early 1840s, lowering financing costs and creating fertile ground for the bubble to come. But it was also because stocks could be purchased with just a 10% deposit, massively expanding the investor base. In this regard, there are glaring similarities with the 1920s U.S. stock market boom, which saw the emergence of millions of middle-class shareholders who bought stocks “on margin”. Parallels can also be drawn with the early 2000s subprime mortgage crisis in the U.S.; a combination of the Federal Reserve’s loose monetary stance and low down payments saw scores of Americans with dubious credit records get a tenuous toehold on the housing ladder.
With railway stocks now tantalizingly within reach of Britain’s emerging middle class, companies pulled out all the stops to market themselves to investors. Railway firms aggressively pushed their own shares—particularly in newspapers, the new media of the age. In late 1845, railway ads covered over half the space in many papers. Such ads were awash with inflated claims, optimistic revenue projections and questionable accounting practices, whipping up euphoria among investors.
What’s more, the accountancy profession was in its infancy; the government set no nationwide accounting standards, and the first professional accounting bodies would not appear for another few decades. Independent auditing was not a widespread practice; William Deloitte, the father of the modern consultancy firm, carried out one of the very first such audits on the Great Western Railway as late as 1849, several years after the Mania had subsided. As such, information regarding company accounts and future business prospects was surrounded by a thick fog of uncertainty.
Some businessmen even engaged in downright deception. A prime example was George Hudson; the so-called railway king—who at his peak single-handedly controlled over 1,000 miles of track and became one of the wealthiest industrialists of the day—ran a Ponzi-like scheme, paying dividends out of company capital.
Accounting standards have improved immeasurably over the subsequent centuries. Nevertheless, huge scandals continue to emerge today even in developed economies, with firms and governments engaged in a constant game of regulatory cat and mouse. Take the collapse of U.S. energy giant Enron in the early 2000s, which made skillful use of mark-to-market accounting to inflate profits, and special purpose vehicles (SPVs) to shield its mounting debt pile from prying public eyes. In response, governments around the world overhauled their legal frameworks. But the scandals keep coming. One of the more recent is UK construction company Carillion, which has been roundly criticized for failing to impair goodwill on its balance sheet, even when the underlying assets had fallen in value.
However, perhaps the most analogous situation of all is the telecoms bubble of the late 1990s. Drunk on the prospect of a disruptive new technology—and in some cases aided by financial trickery—U.S. telecommunications providers bet heavily on IT equipment, laying thousands of miles of fiber-optic cable and racking up whopping debts in the process. Investors eagerly jumped on board, and telecoms shares soared. However, around the same time as the Dot Com crash, the bubble burst, share prices tumbled, and many companies—including heavyweights such as Global Crossing, Worldcom and 360networks—went bankrupt.
The Role of the State
Private companies, however, were not the only ones responsible for the railway bubble; the finger of blame should also be pointed at the British government. The regulatory approach was lackadaisical to say the least, with parliament limiting itself to approving the construction of new lines and making no initial attempt to develop a coherent national rail strategy, or to put a brake on the huge proliferation of rail firms. Fragmented decision-making didn’t help either. At the height of the boom in 1845, there were 44 separate parliamentary committees analyzing potential network expansions, each focusing on a specific region of the country. Every single committee, without exception, approved at least one project.
The idea of too many regulators spoiling the broth should sound familiar. Just think of the UK before the 2008 financial crisis, when responsibility for financial stability was divvied up between the Bank of England, the Treasury and the Financial Services Authority. Or the EU, which created the European Banking Authority in 2011 in a bid to improve the oversight of the bloc’s financial institutions and reduce systemic risk.
But even the most joined-up thinking in the world would not have stopped the railway bubble, for the simple reason that many MPs also had skin in the game. Around 100 of the so-called “Railway Interest”, were said to have been actively involved in the industry. Their influence was brought into sharp relief in 1844, when parliament introduced a bill permitting the nationalization of railway assets at an attractive price. Companies were incandescent. After a period of heavy lobbying, the government buckled; the proposals were watered down, and ended up doing little to stifle market euphoria.
Parallels with the “Great Moderation” in the early 2000s are hard to ignore, although regulatory capture in this instance was far subtler. Then, public agencies and large financial corporations enjoyed a cozy relationship. Governments throughout the West practiced light-touch regulation, and happily collected tax receipts from booming banking sectors. Meanwhile, U.S. regulatory authorities were asleep at the wheel, blissfully unaware of the buildup of toxic assets in the housing sector.
A Lasting Legacy
In the case of Railway Mania, the bursting of the bubble brought economic pain for some; Investors who had bought at the crest of the wave were hit hard. But there was also a lasting legacy. By 1850, the UK boasted a 6,000-mile, gleaming new rail network which formed the backbone of the country’s transportation system and turbocharged the industrial revolution. The subsequent decades saw Britain’s global economic hegemony scale new heights.
This marks a clear distinction with many other speculative bubbles throughout history, which arguably brought little in the way of economic progress—think of Tulip Mania in 17th-century Holland or the global Bitcoin craze in 2017. Far more homologous is the 1990s telecoms bubble. Yes, many firms went out of business and shareholders were left scarred. On the other hand, the world was bequeathed with a comprehensive fiber-optic cable network which catalyzed future development.
The mere fact that Railway Mania can be compared to so many subsequent speculative episodes with similar characteristics makes one thing abundantly clear: It is easy in hindsight to spot a bubble, but much harder to stop one occurring in the first place. Without effective regulation in place, history is condemned to repeat itself.
As the protagonist of How we got up the Glenmutchkin Railway, a railway owner, says: “Such is an accurate history of the Origin, Rise, Progress and Fall of the Direct Glenmutchkin Railway. It contains a deep moral, if anybody has sense enough to see it; if not, I have a new project in my eye for next session, of which timely notice shall be given.”
- Tulip Mania: When Tulips Cost As Much As Houses
- Is this the beginning of the end for Bitcoin?
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Unwinding Carillion's collapse and its wider implications
Images courtesy of:
5-year economic forecasts on 30+ economic indicators for 127 countries & 30 commodities.
Author: Oliver Reynolds, Economist
Date: July 30, 2018
TagsEastern Europe Trade Portugal G7 Housing Market Major Economies India Nordic Economies Exchange Rate Africa Banking Sector Forex UK Commodities precious metals TPP Australia Vietnam Base Metals Commodities Investment Precious Metals Commodities China Asia Mexico Iran Turkey Economic Growth (GDP) Canada Unemployment rate oil prices Venezuela Infographic Greece IMF Company News Energy Commodities Russia Brexit Brazil Ukraine Latin America Cryptocurrency Sub-Saharan Africa Consensus Forecast Germany France Tunisia Oil Italy Gold European Union Emerging Markets Bitcoin USA Argentina United Kingdom Euro Area Inflation South Africa Japan Agricultural Commodities Spain OPEC Colombia United States MENA Healthcare
34 minutes ago
5 hours ago
5 hours ago
United Kingdom: Unemployment rate hits fresh multi-decade low in April-June, but wage growth continues to moderate… https://t.co/iB3LMLLmrs
6 hours ago
Activity in the German economy picked up in the second quarter, however risks persist. Full story + latest Consensu… https://t.co/zAV6FCAtcJ
7 hours ago
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- 50 Top Economics Influencers to Follow
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Venezuela's Electoral Conundrum
- Gold: The Most Precious of Metals (Part 3)
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 10 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Russian economy update in wake of OPEC deal announcement
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit