Railway Mania

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The Railway Mania was an instance of speculative frenzy in Britain in the 1840s. It followed a common pattern: as the price of railway shares increased, more and more money was poured in by speculators, until the inevitable collapse. It reached its zenith in 1846, when no fewer than 272 Acts of Parliament were passed, setting up new railway companies, and the proposed routes totalled 9,500 miles (15,300 km) of new railway. Around a third of the railways authorised were never built – the company either collapsed due to poor financial planning, was bought out by a larger competitor before it could build its line, or turned out to be a fraudulent enterprise to channel investors' money into another business.



Britain's (and the world's) first recognisably modern inter-city railway, the Liverpool and Manchester, opened in 1830 and proved to be highly successful for transporting both passengers and freight. However, the late 1830s and early 1840s saw the British economy slow down. 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 (£52,680,000 as of 2011),[1])

However, by the mid-1840s the economy was improving and the manufacturing industries were 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 had (on top of these sources) 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 In 1825 the government had repealed the Bubble Act, brought in after the near-disastrous South Sea Bubble of 1720 which put close limits on the formation of new business ventures and,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.

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