Collective Hallucinations and Inefficient Markets: The British Railway Mania of the 1840s

Claims Supported by This Source

1. Author's argument: The 1840s Railway Mania was by many measures the greatest technological mania in history. Although investors had reliable quantitative indicators showing that demand was insufficient for expected returns, the power of the new technology and manipulation of public opinion by interested parties created a "collective hallucination," and the market was inefficient. Opponents (The Times, The Economist, Morrison) were caught in a different delusion, and their warnings were also counterproductive (Abstract, pp.4–5, 188–190).
2. Investors included Darwin, Babbage, J. S. Mill, the Brontë sisters, and Thackeray. At the end of 1849, Charlotte Brontë wrote, "My shares are in the York and North Midland. The £50 shares rose at one time to 120, and for years paid a 10% dividend, but now they are at 20." Darwin's main holding was the London and North Western, which had fallen about 55% from its peak during the same period (pp.4–5, 80).
3. Parliamentary authorization mileage (Fig.1) and railway investment (Fig.2): Investment peaked in 1847 at about £44 million (the national budget was about £50 million). It took about one year from authorization to the start of construction, and several years to completion (pp.6–7).
4. Table 2 (p.34): Mileage of railways in operation was 2,044 miles in 1843, 2,441 in 1845, 3,945 in 1847, and 6,621 in 1850. Cumulative invested capital was £67.5 million in 1843, £88.5 million in 1845, £167.3 million in 1847, and £245.8 million in 1850. Revenue per mile fell from £2,499 in 1845 to £1,833 in 1848.
5. Chronology: Mileage authorized in the 1843 session was 91 miles, 805 in 1844, 2,700 in 1845, 4,538 in 1846, 1,354 in 1847, and 371 in 1848. Of the approximately 12,000 miles authorized in total, about 60% were built by 1852. On November 30, 1845, about 800 plans were submitted for the 1846 session (pp.77–78).
6. The author's share price index fell from 167.9 in July 1845 to 60.5 in October 1849. Factors contributing to the losses were construction costs being about 50% higher than estimated, operating costs being about 50% of revenue instead of 40%, and revenue being 30–40% lower than estimated. The official projected profit was only about 7% of capital, compared to 10–15% in the 1830s (pp.78–80).
7. The panic of autumn 1847 was often attributed to railway investment, and The Times wrote of a "life-and-death struggle between the railways and commerce." However, the panic subsided when the Bank of England was allowed to break the law to provide liquidity, and railway investment was largely unaffected. Share prices bottomed out in 1849 when dividends were cut and Hudson's "creative accounting" was exposed (pp.79–80).
8. The formation of new companies peaked in October 1845, and plans had to be submitted to the government office by November 30. Many of the schemes at this stage were companies for "plucking the public pigeons." The loss on deposits, while heavy for individuals, was not large for the economy as a whole; the real losses occurred during construction from 1846 to 1849 (p.95).
9. Spackman's table (The Times, November 17, 1845): Lines in operation had raised £71 million in capital (shares and loans). Authorized but unfinished lines had authority for £51 million in shares and £16 million in loans. The 1,263 new schemes represented a prospective capital of £563 million and about 30,000 miles. The 1846 session authorized 4,593 miles and £95.46 million in share capital (Return of Railway Acts 1844–47), and the cumulative capital by 1850 reached £246 million (pp.141, 144–145, Note 215).
10. In the House of Commons on January 26, 1846, Morrison stated that £20 million per year was the safe upper limit for spending, while Hudson reportedly said that £70 million per year could be borne. The Times set the limit at £30 million (Notes 216–218).
11. The Economist wrote in 1843 that Britain's railway network was nearly complete, and on October 4, 1845, it argued for curbing railway investment but did not call for government intervention. Railway shares later became a typical "widows and orphans" investment, with low returns and low volatility (pp.74–75, Notes 118–120).
12. Conclusion: The market was "grossly inefficient" in the 1840s, to a degree comparable to the communications bubble of a decade earlier. The author states that there will be future technological bubbles that cannot be identified in advance (pp.189–190).

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