Deriving the railway mania

Claims Supported by This Source

1. Shares in new companies were partially paid, and applicants paid a small deposit and were obligated to respond to calls for payment as construction progressed. Allotment letters were exchanged for scrip upon payment of the deposit, and exchanged for shares after the law was enacted (pp. 6–7).
2. The daily prices of Great Western Railway's fully paid and partially paid shares (1843–50, 2,286 trading days) are linked by a futures relationship when discounting for unpaid capital, and the cointegration vector values are 0.99–1.12 (pp. 10–15, Table 1).
3. During the 1844–45 boom, the market price of new railway shares was on average more than double the amount paid in. The peak price/par ratios by year of authorization were: 1844 authorized 2.16, 1845 4.36, 1846 3.05, 1847 1.09, unauthorized 3.03. Converted to a fully paid basis, these are 1.29, 1.24, 1.13, 1.09, and 1.12 (pp. 3, 17–20).
4. The average return from application to the first call after the law's enactment was 33.7% for partially paid shares (1844 authorized 57.5%, 1845 36.0%, 1846 21.8%, 1847 −19.6%), and 9.1% if fully paid. The initial deposit was less than 10% of the par value, and the average amount paid in after the first call was 24.4% (pp. 20–22, Table 2).
5. From 1837, Parliament required a 10% deposit, but this was lowered to 5% in February 1844 and returned to 10% in July 1845. Calls for payment in 1846–48 lowered share prices, but their explanatory power is small; changes in dividends are more significant (consistent with Odlyzko 2011) (pp. 23–26, Table 4).
6. The all-railway index peaked at 1,984 and bottomed at 673 (a 66.1% fall). If delistings are treated as a total loss, it was 1,935 → 583 (69.9%). Railway investment was 5.7% of GDP in 1846, 6.7% in 1847, and 4.7% in 1848 (via Mitchell 1964) (pp. 8–9).
7. The initial lines of the York and North Midland earned 14% on shareholder funds, but the extension lines earned 2.3% (via McCartney–Arnold 2001). In October 1848, the low revenue of the new lines could no longer be concealed, and share prices fell again (via Odlyzko 2011) (p. 8).
8. Author's conclusion: Even amid the mania, investors priced similar assets consistently, the leverage of partially paid shares significantly increased returns on new railways, and calls for payment acted as a deleveraging mechanism during the downturn. The analogy to recent housing bubbles is the author's own comparison and is not equated by this file (pp. 26–28).

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