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Dispelling the Myth of the Naive Investor during the British Railway Mania, 1845–1846

Published online by Cambridge University Press:  28 May 2012

Abstract

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.

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Copyright © The President and Fellows of Harvard College 2012

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References

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.

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4 Taylor, James, “Business in Pictures: Representations of Railway Enterprise in the Satirical Press in Britain, 1845–1870,” Past and Present 189 (2005): 118CrossRefGoogle Scholar. See Michie, Ranald C., Money, Mania and Markets: Investment, Company Formation and the Stock Exchange in Nineteenth-Century Scotland (Edinburgh, 1981), 96Google Scholar, 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), 204Google Scholar, 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), 2329Google Scholar, and Michie, , “Gamblers, Fools, Victims or Wizards?170–71Google Scholar, for additional literary references to and public perception of investors at this time.

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12 Times, 17 Nov. 1845, 4Google Scholar. This figure underestimates the extent of promotion, as 335 companies not on this list went on to petition Parliament (Times, 14 Jan. 1846, 6Google Scholar).

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,” 515Google Scholar).

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): 230–39CrossRefGoogle Scholar; Reed, , Investment in Railways, 86Google Scholar.

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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.

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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), 106–21Google Scholar.

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.

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55 This also illustrates the large concentration of investors in London.

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58 This is somewhat contrary to Thomas, , Provincial Stock Exchanges, 33Google Scholar, 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, 10Google Scholar.

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, 14Google Scholar, suggests that MPs were not immune from acting in an opportunistic manner during the Mania.

63 See Taylor, , “Business in Pictures,” 121–22Google Scholar, 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.

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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.

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