Anecdotal evidence from the British Railway Mania and other historical financial bubbles suggests that many investors during such episodes are naive, thus contributing to the asset price boom. Using extensive investor records, we find that very few investors during the Railway Mania can be categorized as such. Although some interpretations of the Mania suggest that naive investors were expropriated by railway insiders, our evidence is inconsistent with this view as railway insiders contributed substantial amounts of capital, and their investments performed no better than those made by other experienced investors.
The authors thank the Economic and Social Research Council (RES-000-22-1391) for financial support. The assistance of archivists at the National Archives, HSBC, and at the Halifax Bank of Scotland was much appreciated. Jill Turner provided great research assistance. Thanks also to Graeme Acheson, Rawi Abdelal, Catherine Duggan, Tom Nicholas, Aldo Musacchio, Noel Maurer, Elisabeth Köll, Patrick Fridenson, Ramana Nanda, and participants at a Harvard Business School business history seminar for their helpful comments.
1 Brennan, Michael J., “How Did It Happen?” Economic Notes 33 (2004): 3; Kindleberger, Charles P., Manias, Panics, and Crashes: A History of Financial Crises (New York, 1996, 3rd ed.), 25–26; Kindleberger, , A Financial History of Western Europe (London, 1984), 272; Mackay, Charles, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds (London, 1856, 3rd ed.), 14, 45, 89.
2 Notable exceptions include Greenwood, Robin and Nagel, Stefan, “Inexperienced Investors and Bubbles,” Journal of Financial Economics 93 (2009): 239–58; Carlos, Ann M. and Neal, Larry, “The Micro-Foundations of the Early London Capital Market: Bank of England Shareholders during and after the South Sea Bubble,” Economic History Review 59 (2006): 498–538; Temin, Peter and Voth, Hans-Joachim, “Riding the South Sea Bubble,” American Economic Review 94 (2004): 1654–68.
3 Mackay, , Memoirs of Extraordinary Popular Delusions, 84; Anon., “The Beauty of Bubbles: Booms and Busts,” Economist 389 (2008): 115; Kostal, Rande W., Law and English Railway Capitalism (Oxford, 1994), 29. The South Sea Bubble, which was central in Mackey's book, colored perceptions of stock investment well into the nineteenth century (Michie, Ranald C., “Gamblers, Fools, Victims, or Wizards? The British Investor in the Public Mind, 1850–1930,” in Men, Women, and Money: Perspectives on Gender, Wealth, and Investment 1850–1930, ed. Green, David R. et al. [Oxford, 2011], 156–83), and the Railway Mania was regarded as its reincarnation.
4 Taylor, James, “Business in Pictures: Representations of Railway Enterprise in the Satirical Press in Britain, 1845–1870,” Past and Present 189 (2005): 118. See Michie, Ranald C., Money, Mania and Markets: Investment, Company Formation and the Stock Exchange in Nineteenth-Century Scotland (Edinburgh, 1981), 96, on the impecunious investing in railways shares. Broadbridge, S. A., “The Sources of Railway Share Capital,” in Railways in the Victorian Economy: Studies in Finance and Economic Growth, ed. Reed, M. C. (New York, 1968), 204, implies that the impecunious clerk played an active part in the 1845 Mania. See Michie, Ranald C., Guilty Money: The City of London in Victorian and Edwardian Culture, 1815–1914 (London, 2009), 23–29, and Michie, , “Gamblers, Fools, Victims or Wizards?” 170–71, for additional literary references to and public perception of investors at this time.
5 Broadbridge, , “Sources of Railway Share Capital,” 204–6; Kindleberger, , Mania, Panics and Crashes, 25; Anon., “History of Bank of England,” 512; Banker's Magazine 12 (1863): 510–11; Times, 15 July 1845, 5; Francis, John, A History of the English Railway: Its Social Relations and Revelations, 1820–1845, 2 vols. (1851), 2: 195; Lee, Joseph, “The Provision of Capital for Early Irish Railways, 1830–53,” Irish Historical Studies 16 (1968): 39; Spencer, Herbert, Railway Morals and Railway Policy (London, 1855), 14.
6 Broadbridge, , “Sources of Railway Share Capital,” 206. Several contemporary commentators, however, provide a more nuanced view; see Anon., “History of Bank of England,” 510–11; Evans, David M., The Commercial Crisis, 1847–1848 (London, 1849, 2nd ed.), 52.
7 Thompson, Earl A. and Hickson, Charles A., “Predicting Bubbles,” Global Business and Economics Review 8 (2004): 217–46; Bryer, Rob A., “Accounting for the ‘Railway Mania’ of 1845—A Great Railway Swindle?” Accounting, Organisations and Society 16 (1991): 439–86.
8 See Michie, “Gamblers, Fools, Victims or Wizards?”; Maltby, Josephine et al. , “The Evidence for ‘Democratization’ of Share Ownership in Great Britain in the Early Twentieth Century,” in Men, Women, and Money: Perspectives on Gender, Wealth, and Investment 1850–1930, ed. Green, David R. et al. (Oxford, 2011), 184–206; Rutterford, Janette and Maltby, Josephine, “‘The Widow, the Clergyman and the Reckless’: Women Investors in England, 1830–1914,” Feminist Economics 12 (2006): 111–38.
9 Studies of bank investors in the nineteenth century include Anderson, B. L. and Cottrell, Philip L., “Another Victorian Capital Market: A Study of Banking and Bank Investors on Merseyside,” Economic History Review 28 (1975): 600–15; Newton, Lucy and Cottrell, Philip L., “Female Investors in the First English and Welsh Commercial Joint-Stock Banks,” Accounting, Business and Financial History 16 (2006): 315–40; Turner, John D., “Wider Share Ownership? Investors in English Bank Shares, 1826–1900,” Economic History Review 62 (2009): 167–92; Acheson, Graeme G. and Turner, John D., “Investor Behaviour in a Nascent Capital Market: Scottish Bank Shareholders in the Nineteenth Century,” Economic History Review 64 (2011): 188–213. The important studies of pre-Mania railway investors include Broadbridge, “Sources of Railway Share Capital”; Broadbridge, S. A., Studies in Railway Expansion and the Capital Market in England, 1825–1873 (London, 1970); Pollins, Harold, “The Finances of the Liverpool and Manchester Railway,” Economic History Review 5 (1952): 90–97; Reed, M. C., “Railways and the Growth of the Capital Market,” in Railways in the Victorian Economy: Studies in Finance and Economic Growth, ed. Reed, M. C. (New York, 1968); Reed, M. C., Investment in Railways in Britain, 1820–1844: A Study in the Development of the Capital Market (Oxford, 1975); Lee, “Provision of Capital”; Vamplew, Wray, “Sources of Scottish Railway Share Capital before 1860,” Scottish Journal of Political Economy 17 (1970): 425–40.
10 Economist, 4 Oct. 1845, 949.
11 Railway Times: 9 Nov. 1844, 1309; 16 Aug. 1845, 1288; 25 Apr. 1846, 578.
12 Times, 17 Nov. 1845, 4. This figure underestimates the extent of promotion, as 335 companies not on this list went on to petition Parliament (Times, 14 Jan. 1846, 6).
13 The deposit had been reduced to 5 percent just prior to the Mania, but was increased back to 10 percent during the Mania (Anon., “History of Bank of England,” 515).
14 Promoters also used their personal contacts as well as agents to help raise the necessary finance. See Pollins, Harold, “The Marketing of Railway Shares in the First Half of the Nineteenth Century,” Economic History Review 7 (1954): 230–39; Reed, , Investment in Railways, 86.
15 See, for example, Herapath's Railway Journal and the Railway Times.
16 Pollins, , “Marketing of Railway Shares,” 238.
17 Reed, , Investment in Railways, 89.
18 Anon., The Railway Speculator's Memorandum Book, Ledger, and General Guide to Secure Share Dealing (London, 1845), 7; Reed, , Investment in Railways, 89.
19 Anon., A Short and Sure Guide to Railway Speculation (London, 1845), 10.
20 Kostal, , Law and English Railway Capitalism, 76–77.
21 Broadbridge, , “Sources of Railway Share Capital,” 185; Reed, , Investment in Railways, 100–101. Of course, even share registers, if they existed, may not have picked up all speculative activity, as shares could be shorted or bought and sold within the stock exchange's fortnightly settlement period.
22 Broadbridge, , “Sources of Railway Share Capital,” 185.
23 See Vamplew, , “Scottish Railway Share Capital,” 432, who used the subscriber lists in his study of Scottish railways.
24 Anon., The Railway Investment Guide: How to Make Money in Railway Shares: A Series of Hints and Advice to Parties Speculating (London, 1845), 13.
25 British Parliamentary Papers, First and Second Reports from the S.C. of the House of Lords on Audit of Railway Accounts (London, 1849), QQ. 2624–25.
26 British Parliamentary Papers, Return of Railway Subscribers (London, 1845), 1.
27 British Parliamentary Papers, Return of Railway Subscribers (London, 1846).
28 Times, 25 July and 1 Aug. 1845; Francis, , A History of the English Railway, vol. 2, 193–94; Reed, , Investment in Railways, 97.
29 Bankers' Magazine, Oct. 1846, 51; Bankers' Magazine, Nov. 1846, 119; Railway Times, 2 Aug. 1845, 1160; Times, 15 July 1845, 5.
30 British Parliamentary Papers, Report from the S.C. on the London and York Railway Subscription List (London, 1845), 136–37. A further three individuals were found to be impecunious and unable to pay the sums that they had subscribed for.
31 British Parliamentary Papers, Report from the S.C. on the London and York Railway Subscription List, iv.
32 Reed, , Investment in Railways, 84.
33 Broadbridge, , “Sources of Railway Share Capital,” 207; Reed, , Investment in Railways, 84.
34 Reed, , Investment in Railways, 111.
35 British Parliamentary Papers, Report from the S.C. on the London and York Railway Subscription List, 136–38.
36 Broadbridge, , “Sources of Railway Share Capital,” 193.
37 Pollins, , “Marketing of Railway Shares,” 238. On the absence of favoritism in the allotment of railway shares, see The Railway Shareholder's Pocket-book and Almanac (London, 1846), 56.
38 Broadbridge, , “Sources of Railway Share Capital,” 194.
39 Anon., The Railway Investment Guide, 9.
40 Pollins, , Britain's Railways, 37.
41 Although we are not looking at trading per se, we are implicitly using the concepts of information and noise traders as articulated by Fischer Black. See Black, Fischer, “Noise,” Journal of Finance 41 (1986): 529–43. In Black's model, some information traders will lose money and some noise traders will make money, but noise traders as a group will lose money and information traders as a group will make money.
42 “Agriculture” includes farmers, cattle and corn dealers, yeomen, and millers, among others; “Bankers” include bank directors, managers, and senior officials, as well as private bankers; “Other finance” includes accountants, actuaries, and insurance brokers/agents; “Legal professionals” includes advocates, barristers, solicitors, and writers to the signet; “Manufacturers” are those whose main business is manufacturing; “Merchants” include those described as merchants as well as brokers, dealers, agents, printers, publishers, and shipowners; “Nobility” includes peers as well as baronets and knights; “Politicians” is mainly composed of MPs, but a few mayors and aldermen are also included in this category; “Professionals” include architects, company secretaries, dentists, doctors, engineers, senior civil servants, and surgeons; “Retailers” are those who retail goods or provide services via shops to the general public; “Skilled working class” includes tradesmen and occupations that required some degree of education or training; “Unskilled working class” consists mainly of laborers. “White collar” includes those occupations usually considered the preserve of the middle and lowermiddle classes: teachers, bank officials, civil servants, bookkeepers, and so on.
43 See Reed, , Investment in Railways, 110.
44 Spencer, , Railway Morals, 16–20.
45 Brennan, , “How Did It Happen?” 3.
46 Gayer, Arthur D., Rostow, W. W., and Schwartz, Anna Jacobson, The Growth and Fluctuation of the British Economy (Oxford, 1953), 380, 410; Reed, , “Railways and the Growth of the Capital Market,” 182.
47 Authors' calculations from Course of the Exchange, 31 Dec. 1844. There were over 43,000 shareholders in these banks. Authors' calculations based on data in The Banking Almanac (1845), 106–21.
48 Lists of proprietors of the Bank of Scotland, Royal Bank of Scotland, British Linen Company, and the other banks in Scotland (1846), NRAS 1110/13/192/1, Halifax-Bank of Scotland Archives, Edinburgh. Although it was published in 1846, it is more than likely that the data were gathered from 1845 shareholder lists.
49 Sheffield and Hallamshire Share Registers (598/1, 598/2), HSBC Archives, London.
50 Newton, Lucy A., “Regional Bank-Industry Relations during the Mid-Nineteenth Century: Links between Bankers and Manufacturing in Sheffield, c.1850 to c.1885,” Business History 38 (1996): 64–83.
51 The Banking Almanac (1845), 112–13.
52 Turner, , “Wider Share Ownership,” 187.
53 Broadbridge, , “Sources of Railway Share Capital,” 186; Reed, , Investment in Railways, 193–95.
54 For pre-Mania London investment in railways, see Reed, , Investment in Railways, 146–92; Broadbridge, , “Sources of Railway Share Capital,” 186–87.
55 This also illustrates the large concentration of investors in London.
56 On this issue, see Broadbridge, , “Sources of Railway Share Capital,” 193; Bryer, , “Accounting for the ‘Railway Mania,’” 483.
57 For the sake of this analysis, London is considered as a county. The pre-Mania railways tended to attract a disproportionate amount of investment from towns and regions which they served; see Broadbridge, , “Sources of Railway Share Capital,” 193.
58 This is somewhat contrary to Thomas, , Provincial Stock Exchanges, 33, who suggests that local sources of finance were unimportant in this period.
59 The price/par ratio reflects the differences between the market price of shares and the amount that investors had already paid up.
60 Anon., The Railway Investment Guide, 10.
61 The upper classes may have invested in schemes that may not have provided much in the way of financial return, but may have provided positive outcomes for them in terms of selling land to railway companies at above market prices or being able to transport agricultural produce at lower cost. Notably, the upper classes were not more likely to invest in local railways than other investors.
62 Spencer, , Railway Morals, 14, suggests that MPs were not immune from acting in an opportunistic manner during the Mania.
63 See Taylor, , “Business in Pictures,” 121–22, who highlights that railway directors were portrayed as charlatans during the Mania.
64 Great Western Railway holders of £100 shares and £20 shares 1843, 1845, and 1848, RAIL 251/28, 29, 32, 50, 52 and 54, National Archives, London.
65 See Reed, , Investment in Railways, 203.
66 Anon., A Short and Sure Guide, 11.
67 For example, the 0.413 coefficient on the women dummy variable in column 2 of Table 8 can be calculated and interpreted as follows. After controlling for other factors, for a woman (when the dummy variable equals 1) the probability of losing is 0.506, and the probability of gaining is 0.219, therefore the ratio of losing to gaining is 2.307, and the log of this ratio is 0.836. For a man (when the dummy variable equals 0) the probability of losing is 0.417, and the probability of gaining is 0.273, therefore the ratio of losing to gaining is 1.527, and the log of this ratio is 0.423. The impact of being a woman (when the dummy variable moves from zero to one) is calculated as the difference in the logs of the ratios, namely 0.836 minus 0.423, which gives the coefficient value of 0.413. The significance of the coefficient indicates that we can be confident in the result, namely that being a woman increases the probability of losing rather than gaining.
68 See Pástor, Lubos and Veronesi, Pietro, “Technological Revolutions and Stock Prices,” American Economic Review 99 (2009): 1451–83, for theoretical work on this.
69 Neal, Larry, “The Financial Crisis of 1825 and the Restructuring of the British Financial System,” Federal Reserve Bank of St. Louis Review (May/June 1998): 53–76; White, Eugene N., “The Stock Market Boom and Crash of 1929 Revisited,” Journal of Economic Perspectives 4 (1990): 67–83; Nicholas, Tom, “Does Innovation Cause Stock Market Runups? Evidence from the Great Crash,” American Economic Review 98 (2009): 1370–96; Pástor and Veronesi, “Technological Revolutions.”
70 Casson, Mark, The World's First Railway System: Enterprise, Competition, and Regulation on the Railway Network in Victorian Britain (Oxford, 2009).
71 Kenwood, A. G., “Railway Investment in Britain,” Economica 32 (1965): 318–19; Chambers, David, Crafts, Nicholas F. R., and Mitchell, Brian R., “How Good was the Profitability of British Railways, 1870–1912?” Economic History Review 64 (2011): 798–831.
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