Previously:
Money was plentiful in the United Kingdom in 1842, and with low yields on government bonds and railway shares paying handsome dividends, the desire to speculate spread—as one observer put it, “the contagion passed to all, and from the clerk to the capitalist the fever reigned uncontrollable and uncontrolled” (Francis’s History of the Bank of England). And so began railway mania. Just as that bubble began to burst, a massive harvest failure in England and Ireland led to surging food imports, which drained gold reserves from the Bank of England. Constrained by the Bank Charter Act, the Bank responded by tightening policy. When food prices fell in the spring of 1847 on the prospects for a successful harvest, commodity speculators were caught short and a crisis, one of the worst in British history (Bordo), ensued. In this edition of Crisis Chronicles, we cover the Commercial Crisis of 1847.
Railway Mania
British railway mania had a long fuse. The nation went through a lesser, “hypomanic” railway episode in the 1830s, but with the economy weak in the late 1830s and early 1840s, owing partly to the aftermath of the Panic of 1837, the spark did not catch. By 1843, however, the economy was recovering, interest rates were low, railroad construction costs were falling, and railway revenues were rising, thus setting the stage for a full-blown manic episode.
As is usually the case with technology booms, extravagant claims about the transformative powers of the new technology abounded: “Verily railways are the wonder of the world! Nothing during the last few years has created so marvelous a change as the great iron revolution of science” (Evans). Instead of “Internet speed,” as heard during the telecom bubble, the talk then was of “railroad speed.” The growing middle class in Britain, thanks to the industrial revolution, created a larger new cohort of eager investors wanting in on the action. With investors crowding, the number of railroad securities listed on the London exchange—and their prices—roughly tripled between 1843 and 1845 (see chart below).
The rise in the number of listed shares reflected the relatively simple process for founding a railroad: form a committee comprising a few local dignitaries, register the company, advertise and raise money by selling subscriptions (scrips) for an initial 10 percent down (which added leverage to the boom), survey the route, and apply for Parliamentary approval. The remaining capital would be “called” later, once Parliament granted approval and construction began. As with the Canal Mania in 1793, the scrips traded freely even before a project was approved by Parliament, with some trading on dubious schemes that were never registered or were never intended for Parliamentary approval in the first place.
The mania, or “collective hallucination,” subsided in late 1845 as expectations seemed to turn, in part because of naysaying by the Economist (founded in 1843) and the London Times. On October 16 of that year, the Bank of England raised discount rates, and as credit tightened, railroad share prices began a long, steep decline, wiping out many fortunes along the way....MORE
The Time Charles ('Popular Delusions...') MacKay Thought 'This Time it's Different'
The British Railway Mania has so many lessons for investors that I'll have to devote a couple posts to the subject.New York Fed: "... The South Sea Bubble of 1720—Repackaging Debt and the Current Reach for Yield "
I did mention the Mania in last year's "UPDATED: Visualizing Bubbles":
...The 1845 British railway bubble is also problematic. I don't know of any index that the chartmeisters could use to derive the 100% figure from and individual issues exceeded that degree of movement, some increasing 500 or 600%.Here's the latest:
Also, a lot of the railway issues were subscriptions which meant that the 'scrip' traded (not legally) prior to the issuance of the stock....
Charles Mackay’s own extraordinary popular delusions and the Railway Mania
