Railway mania

The first in the UK (and the world) modern Liverpool-Manchester ( L&M ) intercity railway, opened in 1830, has become extremely successful in transporting passengers and goods . However, in the late 1830s - early 1840s, the British economy was in decline. The interest rate grew, which made investments in government bonds , the main investment resource of the time, more attractive, and political and social instability deterred banks and businesses from investing large funds necessary for the construction of railways ( L&M cost £ 637,000 (£ 51,840 000 in 2013 prices).

Nevertheless, by the mid-1840s, the economy had grown significantly, and industry began to grow again. The Bank of England cut rates, making bonds a less attractive investment, which led to an increase in the shares of existing railway companies, as they transported more and more goods and people, attracting the attention of potential investors to new projects.

One of the most important factors was the increased number of investors. The industrial revolution began to create the middle class . Whereas earlier, new beginnings relied on a small number of banks , businessmen, and wealthy nobles when searching for investments, future railways besides them had a large layer of educated population with savings available for investment. In 1825, the government repealed the “bubble act” that appeared after the South Sea company bubble in 1720, which severely limited the creation of new organizations and, significantly, limited the size of the joint-stock company to 5 owners. With the disappearance of these restrictions, almost anyone could invest (and rely on profits) in new companies, and railway companies were considered a win-win option. New media (newspapers) and the emergence of a modern securities market made it possible to advertise companies and easy access of the population to investment. Shares could be bought by making only a 10% deposit, with the right of the company to demand the rest at any time. Railways were so actively advertised as a win-win option that thousands of small-scale investors bought back a substantial portion of the shares, while having funds only for deposit. Many families invested all their money in promising railway companies, and many lost everything when the bubble collapsed, and the companies demanded the rest.

The British government pursued a laissez-faire policy with virtually no rail regulation. Companies had to submit a bill to parliament in order to obtain land rights for the line indicated in the railway project, but there were no restrictions on the number of companies and no real checks on the financial viability of the future line. Anyone could create a company, collect investments and submit a bill. Since many members of parliament were significant investors in these companies, bills very rarely failed to be approved during the peak of Mania in 1846, although the parliament still did not miss frankly deceitful or impossible projects to build - there were several “direct” road projects in Mania peak passing huge straight lines through the fields, which would be very difficult to build, and on which it would be almost impossible to work locomotives of that time.

Like other speculative bubbles, the railway mania has become self-developing, based only on super-optimistic speculations. As soon as dozens of companies began to work, and the failure of their functioning became apparent, investors began to realize that not all railways were as profitable and easy to build as they believed. In addition, at the end of 1845, the Bank of England raised the interest rate, as a result of which banks began to reinvest in bonds. Money began to flow out of railroad stocks, hindering a speculative boom. Rising stock prices began to lose momentum, and then completely stopped. As soon as the fall began, investments stopped literally in one night, leaving a large number of companies without financing and a huge number of investors without a chance of returning any investments. Larger companies, such as the Great Western Railway and the nascent began to buy strategic bankrupt lines to expand their network. These lines were bought only for a small fraction of their real price, as investors were faced with the choice: to sell shares at a lower cost or to completely lose investment.

The economic cycle was actively developing, and the boom that created the conditions for the railway mania began to cool, turning into a recession. The number of new railways was reduced to almost zero in the late 1840s and early 1850s, and rare new lines were already being built by large companies. The economic boom of the 1850s and 1860s brought new growth in construction, but it never reached a small part of the scope of “mania” - partly due to more careful control by the state (construction licenses were issued by parliament), partly due to more accurate investors, partly due to the maturity of the country's railway network, with almost no white spots on the map, as was the case in the 1840s.

Unlike many economic bubbles, the railway mania brought real tangible results from all the investments spent - the UK railway system , albeit at a slightly overpriced price. Among the impractical, over-ambitious and fraudulent projects that emerged during Mania, there were also many useful basic routes. These projects required huge investments, which were required to be attracted from private companies. The excitement during Mania encouraged people to invest much needed funds, which they would not do before or after Mania. Even those routes that went bankrupt during Mania became profitable when they became the property of larger competitors. In total, over 10 thousand km of roads were built on projects approved in 1844-1846 (for comparison, the modern UK network is 18 thousand km).

• History of UK Rail Transport

• Wolmar, C, 2007, Fire & Steam: A History of the Railways in Britain , Atlantic Book (London) ISBN 978-1-84354-629-0

• 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 - Robert Peel notes the dangers of approving investing too much capital in railways for such a short period. Glasgow merchants agree with him. From Google Book Search.
• RailwayMania.co.uk - Description of events and links to recent studies
• The Railway Mania: Not so Great Expectations is an economic article that examines the fact that stocks were not overestimated during Mania, even at the peak, but prices fell dramatically anyway.
• Odlyzko, Andrew. Collective hallucinations and inefficient markets: The British Railway Mania of the 1840s , 2010.