The week the bank rate went from 2.5% to 3.0%

From 1844 to 1845, over a thousand railway companies were planned in Britain, and the railway share index peaked at 1,984 on August 8, 1845 (January 1844 = 1,000). Shares were paid for in installments; applicants paid less than 10% of the par value to receive scrip, and responded to calls for payment as construction progressed. When the Bank of England raised the bank rate to 3% on October 16, 1845, the stock market turned to panic. In 1847, calls for payment coincided with grain imports, leading to a commercial crisis, and a government letter on October 25 allowed banks to lend at 8%. The index fell to 673 by April 1850, but about 60% of the authorized lines were built, and by 1850, there were 6,621 miles of railway in operation.

Original question Why did railways, which changed the world, lead to a bubble?

In 1830, the railway connecting Liverpool and Manchester opened. In the mid-1830s, Parliament authorized 59 companies and railways worth about £36.4 million, but of the 23 railway acts in England in 1836, 4 were abandoned and only 15 were completed. Subsequent promotion stalled, and in 1843, there were only 24 railway acts. In the same year, The Economist, which had just been founded, wrote that Britain's major trunk lines were already complete.

The tide turned in 1844. Bountiful harvests in the previous and current years revived the economy, and on September 7, coinciding with the enactment of the new Bank Charter Act, the Bank of England lowered its bank rate to 2.5%. The bank's bullion increased from £5,629,000 in January 1842 to £14,867,000 in January 1845. That year, 37 railways were authorized, and applications to Parliament increased from 63 the previous year to 199. In February, the deposit required by Parliament for railway petitions was lowered from 10% to 5%.

The procedure for creating a company was established. A provisional committee would issue a prospectus, and upon receiving an allotment, applicants would pay a deposit and receive bearer scrip. The company had to submit plans to the authorities by the end of November and present a bill to Parliament in the following session, accompanied by a subscription contract listing the names, addresses, and occupations of shareholders who had paid 10% and subscribed to three-quarters of the capital. Once the act was passed, the scrip became shares, and as construction progressed, the company would make calls for the remaining payments. In January 1845, 16 companies were registered, and in April, 52 companies per month. That spring, Parliament printed a 539-page directory of all applicants from the 209 subscription contracts of the previous year.

The railway stock index peaked on August 8, 1845, at 1,984 (with January 1844 as 1,000) and remained around that level for two months. In that year, the House of Commons returned the deposit requirement to 10% and demanded it be paid in cash to the Accountant-General. Nevertheless, registrations continued, with 457 companies added in September and 363 in October. The Times warned of future calls for payment on July 30, and the October issue of Blackwood's Magazine featured Aytoun's satire, "The Glenmutchkin Railway."

The turning point was Thursday, October 16. When the Bank of England raised the bank rate to 3%, trading thinned on Friday, alarms began on Saturday, and the stock market panic spread from London to Liverpool and Edinburgh. In less than two weeks, the prices of both new and old shares fell below their levels of two or three months prior. Tooke attributed the interest rate rise during this period to the provision of about £14.6 million for deposits on plans to be submitted to Parliament and to calls for payment on lines authorized in the previous session. On November 6, the bank rate became 3.5%.

On November 17, The Times published Spackman's table. It showed that 47 completed companies had raised capital of £70,688,077, 118 lines under construction required £67,359,325, and 1,263 planned companies had a capital of £563,203,000, with deposits alone amounting to £59,136,300. The number of plans submitted to the Board of Trade by the November 30 deadline, as counted by Peel the following January, was 815 (606 in England, 121 in Scotland, and 83 in Ireland), covering a length of 20,687 miles. Evans notes that less than half of the 1,263 plans resulted in a submission that met the regulations.

In January 1846, deposit payments were concentrated. Lord Russell estimated payments at £3 million for the previous year and £9 million for the current year. Hasty stated that £8 to £10 million would be paid within two weeks of the session's opening, and Stuart said that £6 to £7 million was locked up, withdrawing one-fifth to one-sixth of the currency in circulation. The Chancellor of the Exchequer and Peel did not allow deposits other than cash and did not relax the rules. On January 26, Peel stated that completing the railways authorized by the 48 acts of 1844 and 118 acts of 1845 alone would require about £70 million over three years, and proposed a select committee. The Dissolution Act of July 3 stipulated that unincorporated companies could be dissolved at a meeting of scrip holders, and the act of August 28 transferred the Board of Trade's railway powers to the Railway Commissioners.

In 1847, calls for payment coincided with payments for grain imports. Calls amounted to £6.15 million in January, £5.3 million in July, and £4.16 million in September. The bank's bullion decreased from £12.9 million at the end of January to £9.2 million on April 24, and the bank rate rose to 3.5% and 4% in January, 5% on April 8, 5.5% on August 5, and 6% on September 30. On October 1, when the Bank stopped lending against government securities, a full-blown panic ensued. On the 23rd, London bankers went to the Prime Minister's residence to request the suspension of the Act, and on the 25th, a Government Letter allowed the Bank to lend at a minimum discount rate of 8%. Hoarded banknotes returned to circulation, and the panic subsided.

Construction continued. The mileage authorized by Parliament was 2,700 miles in 1845 and 4,538 miles in 1846. The mileage of railways in operation increased from 2,044 miles in 1843 to 6,621 miles in 1850, and cumulative invested capital grew from £67.5 million to £245.8 million. Annual investment peaked in 1847 at about £44 million, rivaling the national budget. In October 1848, the low revenues of the new lines could no longer be concealed, dividends were reduced in 1849, and the index bottomed out at 673 on April 19, 1850.

What moved was not the money paid in, but the promise to pay. Shares in new companies were paid for in installments, with the initial deposit paid by subscribers being less than 10% of the nominal value. Nevertheless, share price movements applied to the entire nominal value. During the boom of 1844 to 1845, the market price of new railway shares was on average more than double the amount paid in, and the price/par ratio for companies authorized in 1845 reached a peak of 4.36. Converted to fully paid-up shares, this was 1.24. Fully paid-up and partly paid-up shares of the same company were priced in a futures relationship, discounting the unpaid amount. Campbell's interpretation is that leverage, rather than the price itself, inflated the returns.

The return from subscription to the first call after the act's passage was on average 33.7% for partly paid-up shares and 9.1% for fully paid-up shares. For companies authorized in 1844, it was 57.5% and 16.6%, and for companies authorized in 1847, it was -19.6% and -2.7%. Existing companies were in the same market. The Great Western Railway's total return index rose from 1,000 in February 1843 to 1,817 in February 1845, before falling back to 979 in March 1848. The dividend in 1845 was 8%.

Who paid in? According to Campbell and Turner, who counted the parliamentary lists, the 1845 list had 24,844 people for £83.2 million, and the 1846 list (over £2,000) had 12,533 people for £121.4 million. Merchants contributed 30.7% of the capital, gentlemen, military officers, and aristocrats 34.3%, lawyers 7.8%, and financiers 7.8%. Clergy and women accounted for 1.2%, and the working class 0.1%. The top 4 percentile contributed half of the capital, the top 1% (342 people) contributed 31.3%, and the 3,248 people who invested in both the rise and the peak contributed 46.6%. 30.6% of Scottish subscribers were also bank shareholders.

Deposits were made in cash and held at the Bank of England in the name of the Accountant-General of the Court of Chancery. Withdrawal required about 10 days' notice. In January 1846, these payments halted discounting in the City, and Hudson proposed that deposits could be made with Exchequer bills or government bonds. An amendment to the deposit law in the spring permitted this.

Calls for payment continued during construction. In 1847, these calls ranged from £1.4 million to £6.15 million per month, and in the same year, payments for imported grain reached £33,563,476 over 15 months. The Chancellor of the Exchequer stated on November 30 that railway expenditure had increased from £9,815,000 in the first half of 1846 to £26,670,000 in the second half, and £25,770,000 in the first half of 1847, and would have reached £38 million in the second half at the same rate. He explained that £80 to £90 million had been absorbed by grain and railways over 15 months. According to Odlyzko, the root of the losses was that construction costs were about 50% higher than estimated, operating expenses were about 50% of revenue instead of 40%, and revenues were 30 to 40% lower than estimated. Official projected profits were only about 7% of capital, compared to 10 to 15% in the 1830s.

Anecdotes about the Railway Mania were created right after the collapse. Thackeray's satirical poem "The Speculators" and satirical papers, Evans in 1848, and Francis in 1851 are the sources. Mackay, in the second edition of his book in 1852, added a note at the end of the chapter on the South Sea Bubble, writing: "The South Sea scheme was the greatest instance in the history of England of the infatuation of commercial gambling, until the year 1845. The first edition of this book was published a short time previous to the outbreak of the great railway mania of that and the following year."

"Widows and clergymen, poor amateurs, lost their fortunes." Francis depicts a son gambling with his widowed mother's money, a merchant applying in his young daughter's name, and a servant withdrawing money from a savings bank. The example cited in the House of Lords by the Marquess of Clanricarde of a half-pay officer on £54 a year subscribing for £41,500, and a Kent curate for £25,000, also supported this image. Counting from the parliamentary lists, the capital provided by clergy and women was 1.2%, and by the working class 0.1%. However, in the lists for the Great Western Railway, a difference has also been counted: women and the inexperienced were more likely to be losers between 1845 and 1848, while merchants and businessmen were more likely to be winners.

"The middle class was completely ruined." The sources are Francis's "it is the conviction of those best acquainted with the subject, that no panic was ever so fatal to the middle classes," and Evans's "from the peer to the peasant, few escaped its influence unscathed." What can be counted is that professionals and clerks made up about 10% of investors and about 6% of the capital. Statistics counting the total amount of losses and the number of bankruptcies have not been found.

“The Brontë sisters and Darwin also lost money.” The source is a letter from Charlotte Brontë, who wrote at the end of 1849 that York and North Midland Railway shares, with a face value of £50, had once risen to 120 and paid a 10% dividend for several years, but were now at 20. Darwin's main holding was in the London and North Western Railway, which had fallen by about 55% from its peak during the same period. The letter is not read in its original form, but as quoted by Odlyzko.

"The Railway King Hudson built it all and destroyed it all himself." Hudson became a member of the York Board of Health in 1832, Mayor in 1837, and in 1845, about £20,000 was subscribed for a testimonial to him. The accusations in 1849 questioned, among other things, his depositing of £31,000 received for land in December 1845 into his own account. Francis writes, "for the acts of himself and his colleagues, one name alone was made conspicuous." Odlyzko, while noting that the stock market bottomed out with the accounting revelations of 1849, argues that the root of the losses lay in the miscalculation of construction costs and revenues, and that blaming one person obscures the problem.

"The biggest bubble in history." Mackay's note, the description in the 1856 edition, and a 2008 article in *The Economist* form this lineage. What can be stated with a denominator is that railway investment in 1847 was about £44 million, on par with the national budget and equivalent to 6.7% of GDP.

"Insiders fleeced amateurs" and "Railways were a bubble." Regarding the former, Campbell and Turner show that insider investments did not perform better than those of businessmen or the middle class, and find no evidence of exploitation. As for the latter, about 60% of the authorized lines were built by 1852, and 6,621 miles of railway were in operation in 1850. Prices collapsed, the tracks remained.

What remains from this event today is its structure, rather than the prices. The leverage of installment payments, where a deposit of less than 10% of the face value exposed one to the price movements of the entire face value; the deposit rules that forced cash to be raised by a deadline; and the continuous calls for payment during construction. While prices were rising, leverage amplified profits; when interest rates rose, the same leverage worked in reverse. This is discussed on the page on recurring structures, under "What is offered for credit?" and "Putting a price on time."

The timing, recipient, and procedure for calling on funds invested in new technologies differ with each system. When railways are conflated with dot-coms or AI, these distinctions are the first to disappear.

It can be compared to Tulip Mania in that primary records have refuted the later image of "amateur frenzy." Just as Goldgar counted participants from notary records, Campbell and Turner counted them from parliamentary subscriber lists. The difference lies in the institutional setting. Railway shares existed within the system of parliamentary approval, deposits, and listing, while forward contracts for bulbs were outside the purview of taverns and notaries. The price data also differs; there are no continuous price lists for bulbs.

It can be linked to the Panic of 1907 in that the lender of last resort could not reach where credit had frozen, and remedies were applied outside the law. In 1847, a government letter permitted a deviation from the Act, and in 1907, trust companies outside the clearing house were supported by a committee and Treasury deposits. As the mechanisms and figures differ, the comparison is limited to this structure.

We do not compare it with Japan's asset bubble of the 1980s. The supply growth of land and railway shares is different. We also do not compare it with Madoff. The railway companies built actual lines.