Dispelling the Myth of the Naive Investor during the British Railway Mania, 1845–46

Claims Supported by This Source

1. In 1843, there were 63 applications for railway bills to Parliament, 199 in 1844, and a further 562 by the end of 1845. The Times estimated there were 1,263 new schemes in 1845, and another 335 companies not on its list also petitioned Parliament (p. 4, notes 11–12).
2. The railway share index (calculated from daily prices in the Railway Times, January 1844 = 1,000) peaked at 1,984 on 8 August 1845, remained near that level for two months, was at 1,623 at the end of November, and bottomed at 673 on 19 April 1850 (p. 4, Fig. 1).
3. To establish a new company, an application had to be made to Parliament in November of the preceding year, accompanied by a subscription contract listing the names, addresses, and occupations of shareholders who had paid in 10% and jointly underwritten 75% of the capital. The deposit was lowered to 5% just before the mania and returned to 10% during it. Those who received an allotment paid a 10% deposit to receive a bearer scrip and were infinitely liable for all future calls if the company was incorporated, and for all the company's debts until then (pp. 4–5, notes 13, 17).
4. In April 1845, Parliament printed a list of all subscribers (p. 539) to the 209 subscription contracts submitted by November 1844, and in April 1846, a list of subscribers of £2,000 or more (p. 320) to 556 lines up to November 1845. An investigation of the London and York Railway's list of subscribers found that 4 out of 1,101 subscribers were fictitious (pp. 6–7, notes 26–30).
5. By profession (Table 1): Clergy and women accounted for 1.2% of the capital; the working class for less than 1% of investors and about 0.1% of the capital; professionals and clerks for about 10% of investors and about 6% of the capital. Gentlemen, military officers, and aristocrats accounted for 34.3% of the capital; merchants for 21.7% of investors and 30.7% of the capital; manufacturing and retail for 8.2%; finance for 7.8%; and lawyers for 7.8%. About one-quarter of the Members of the House of Commons invested in railway shares. The 1845 list comprised 24,844 individuals and £83.2 million; the 1846 list (over £2,000) comprised 12,533 individuals and £121.4 million (pp. 7–9, Table 1).
6. Of the 12,549 people who invested near the peak, 3,248 had also invested during the upswing, and these 3,248 individuals contributed 46.6% of the capital (an average of 5.7 companies). The top 4 percentile contributed half of the capital, and the 342 individuals in the top 1% (including 125 merchants and 106 gentlemen) contributed 31.3% (p. 9, Table 2).
7. 30.6% of Scottish railway subscribers were also shareholders in Scottish banks in 1845, and these individuals contributed 43.9% of the Scottish railway capital. Of 500 investors in Sheffield, 90 were shareholders in local banks, contributing 24.4% of the capital. 473 shareholders of the GWR in 1843 (23.5%) subscribed to new railways (pp. 10–11).
8. Nearly 60% of the capital came from Lancashire, London, and Yorkshire. London accounted for 20.7% of investors and 29.9% of the capital. 34.7% of investments were made by investors residing in the counties where the lines terminated (pp. 12–13, Fig. 2).
9. Provisional committeemen (2,058 individuals) contributed 18.5% of the capital for the schemes they themselves promoted and 32.4% for all schemes, while directors of existing railways contributed 15.3% of the capital (pp. 13–14, Table 3).
10. Measured by the first-day price/par ratio, investments by women and inexperienced investors performed worse than others, while those by merchants and businessmen performed better. Investments by directors performed slightly better, but those by chairmen and provisional committeemen were no different from others, and investments by politicians also did not perform better. Local investors and those who invested in multiple schemes performed well (pp. 15–17, Tables 4–5).
11. GWR shareholder lists (1843, 1845, 1848): The total return index rose from 1,000 in February 1843 to 1,817 in February 1845, then fell to 1,102 in February 1848 and 979 in March. Defining those who held shares in 1843 and sold by 1848 as "winners" and those who did not hold in 1843 but did in 1848 as "losers," women and inexperienced investors were more likely to be losers, while merchants, businessmen, and investors from Lancashire were more likely to be winners. The GWR paid an 8% dividend in 1845 (pp. 17–20, Tables 6–8).
12. Author's conclusion: It cannot be said that naive investors drove the mania; experienced investors contributed the majority of the capital. The performance of insiders' investments was no better than that of businessmen or the middle class, which is inconsistent with the interpretation that insiders exploited amateurs. Why many people invested in railway shares that were, in hindsight, a bad deal remains an open question. The author suggests several possibilities: a lack of outlets for savings, "riding the bubble," the probability of the new technology's adoption, and the political failure of Parliament not to narrow down the schemes in the autumn of 1845 (pp. 20–21).
13. The Liverpool and Manchester Railway opened in 1830. In the mid-1830s, Parliament authorized 59 companies and about £36.4 million, and promotion ceased until 1843 (p. 4, note 10).
14. Thackeray's satirical poem "The Speculators" and contemporary satirical papers created an image of naive and poor investors, and the participation of widows, clergymen, and the middle class was discussed. Mackay, in his 1856 edition, called the event the greatest financial mania in history up to that time (pp. 2–3, notes 1, 3–6).

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