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steam age
This page offers context by considering booms, bubbles
and crashes in the steam age.
It covers -
overviews
It is a truism that although history does not repeat,
it does rhyme. Contemporary critics - informed or otherwise
- have often pointed to episodes of railway
boom and bust as models for -
- speculation
-
investment
-
infrastructure development
-
unexpected benefits from expansion of the internet.
One critic thus compared the dot-com crash of 2000 to
the end of the UK "Railway Mania" of the 1840s,
(characterised as "the greatest technobubble ever
by many measures").
Both bubbles -
collapsed
because of gross overinvestment based on foreseeably
foolish overestimates of demand for the new technology.
But post-crash, most of the public attention in both
cases was devoted to the frauds that were uncovered
(and which did play important roles in inflating those
bubbles). The final collapse of the Railway Mania came
when it was discovered that George Hudson, the "Railway
King," the dominant figure in British railroad
industry at that time, had been massaging financial
reports for his lines and paying high dividends out
of capital. The Internet bubble had the final nail driven
into its coffin when Bernie Ebbers' WorldCom was discovered
to have committed gigantic accounting fraud and went
bankrupt.
A
realist might argue that government and community attention
to fraud and blatant incompetence usually comes after
a disaster and is not specific to bubbles. There is money
to be made in forensic analysis and public postmortems.
Lamentations about the wickedness of the corrupt, the
overweening ambition of corporate high-flyers (yesterday's
Icarus, today's feather duster) and the vulgarity of conspicuous
consumption - particularly by people who do not hold on
to their loot - have a cathartic value.
Walter Bagehot's 1873 Lombard Street commented
that -
The
mercantile community will have been unusually fortunate
if during the period of rising prices it has not made
great mistakes. Such a period naturally excites the
sanguine and the ardent; they fancy that the prosperity
they see will last always, that it is only the beginning
of a greater prosperity. They altogether over-estimate
the demand for the article they deal in, or the work
they do. They all in their degree—and the ablest
and the cleverest the most—work much more than
they should and trade far above their means. Every great
crisis reveals the excessive speculations of many houses
which no one before suspected, and which commonly indeed
had not begun or had not carried very far those speculations,
till they were tempted by the daily rising price and
the surrounding fever
Other
writers have pointed to railway-related financial crashes
in the 1870s, 1890s or early 1900s as models for the dot-com
crash, arguing that the early UK bubbles were unrepresentative.
It is questionable whether all the railway busts had a
profound and long-lasting effect on national/regional
economies (Britain, for example, appears to have recovered
quite quickly, although the pain was shared unevenly),
whether the busts were manifestations of broader economic
changes rather than the causes of economic depressions,
and whether the collapses had a lesser effect on a nation's
overall economy and culture than for example the 'decline
of the aristocracy' exacerbated by cheap grain from the
Americas.
the UK railway booms
The first UK railway bubble followed an economic decline
in the 1830s that was associated with cheap labour and
materials and with low interest rates. That encouraged
borrowing for the construction of lines (although many
lines remained plans rather than actual infrastructure),
particularly once early lines began paying 10% dividends,
ie over four times the contemporary interest rate.
Between 1830 and 1850 around £193 million (an estimated
36% of UK GDP in 1850 and equivalent to roughly £9.7
billion in 2002 values) was invested in UK railways. Private
and government investment in US, Austrian, French, German,
Russian, Australian and other railways during that century
was of a similar scale.
Individual networks involved significant capital and expertise;
their assessment - as noted in profiles here
and here
- formed the basis of modern corporate analysis. The first
stages of the UK Great Western Railway, under engineer
Isambard Kingdom Brunel, for example cost over £6
million (up from an estimated £2.5 million), perhaps
equivalent to £18 billion in terms of the same proportion
of 2002 UK GDP.
Charles Dickens' 1846 Dombey & Son commented
that
There
were railway patterns in its drapers' shops and railway
journals in the windows of its newsmen. There were railway
hotels, office-houses, lodging houses, boarding houses;
railway plans, maps, views, wrappers, bottles, sandwich
boxes, and railway time-tables; railway hackney- coach
and cab stands; railway omnibuses, railway streets and
buildings, railway hangers-on and parasites, and flatterers
out of all calculation. There was even railway time
observed in clocks, as if the sun itself had given in.
The UK railway industry was marked by two manias in 1837
and 1845.
Only 970 miles had been sanctioned by Parliament prior
to 1836, but 955 miles were approved in 1836 and a further
543 miles in 1837. Speculative investment - exacerbated
by uncertain statistics and inexperience in forecasting
traffic/revenue - interacted with entrepreneurs who sought
to outbuild each other (or merely to build networks to
particular locations while the opportunity was available)
and who in some cases expected to make money by through
fees for civil engineering rather than operating a line.
As a result some lines were not economical, some could
not be completed because costs overran projections, much
money was absorbed in promotional or regulatory costs
and many schemes collapsed ingloriously. Market capitalisation
of UK railways hit a peak in July 1845; by 1850 those
shares were worth less than half the capital spent on
them, some were worthless and the overall dividend rate
had sunk to 2%.
Investors returned to the market because traffic and the
revenue of surviving companies continued to grow (albeit
more slowly than initially projected), because survivors
were able to acquire assets at a discount and introduce
economies of scale, and because broader growth of the
economy meant that capital was available.
Herbert Spencer's 1854 Railway Morals & Railway
Policy identified discrepancies between community
perceptions of railway finances and actual activity. He
charged, somewhat unfairly, that the public equated railways
with financial malpractice
Associating
the ideas of wealth and respectability, and habitually
using respectability of synonymous with morality, it
seems to them incredible that many of the large capitalists
administration to administer railway affairs should
be guilty indirectly enriching themselves in the expense
of their constituents.
Although
he cited instances of company boards maintaining corporate
records in cypher, false share registers, gaps in corporate
minutes and 'men of straw' holding large shares on behalf
of directors - the extent of malpractice has been questioned
or reaffirmed in several works.
They include A Arnold & S McCartney's 2001 Bricks
Without Straw (PDF)
and 'Financial reporting in the context of crisis: reconsidering
the impact of the 'mania' on early railway accounting'
in 11 European Accounting Review (2002) 401-417
and 'The railway mania of 1845-1847: Market irrationality
or collusive swindle based on accounting distortions?'
in 16(5) Accounting, Auditing & Accountability
Journal (2003) 821-852, Malcolm Reed's Investment
in Railways in Britain 1820-1844: a Study in the Development
of the Capital Market (Oxford: Oxford Uni Press 1975),
neomarxist 'Accounting for the 'railway mania' of 1845
- a great railway swindle?' by Rob Bryer in 16(5) Accounting,
Organizations and Society (1991) 439-486, R W Kostal's
Law & English Railway Capitalism 1825-1875 (Oxford:
Oxford Uni Press 1994) and White-Collar Crime in Modern
England - Financial Fraud and Business Morality, 1845-1929
(Cambridge: Cambridge Uni Press 2003) by George Robb.
By 1844 UK networks amounted to around 2,000 miles (linking
London, Dover, Southampton, Brighton, Birmingham, Manchester,
Leeds, Newcastle, Bristol and Exeter). After the first
crash most operators were profitable, resulting in a second
boom that saw 1,263 schemes (with capital of £1,123m)
in the pipeline. The Manchester Guardian noted
that during one week 89 new ventures (requiring capital
of £84 million) had been advertised in three newspapers,
with some 357 schemes advertised in those papers for an
estimated £332 million.
Many of the proposals were unsuccessful and some lines
were later acquired by the major operators at a discount
of up to 93% but by 1853 total UK lines had increased
to 7,000 miles, essentially the same network in place
in 1965. Aggregate construction costs to 1870 are estimated
at £250 million (relative to the UK GDP of £1bn
per year in 1866). Gross revenues reached £5m pa
in 1844 and tripled by 1852 (when freight overtook passengers
for the first time), rising to £23m by 1870.
and in the US and Continent
Similar phenomena were experienced in France, in Germany
and Austria (where the railway mania of the early 1870s
ended with a short but particular sharp crisis in banking)
and in the US, with a cycle of construction, stockmarket
bubble and corporate rationalisation roughly every twenty
years from the 1850s to 1913.
Thoreau complained in 1846 that
Men
have an indistinct notion that if they keep up this
activity of joint stocks and spades long enough all
will at length ride somewhere, in next to no time, and
for nothing; but though a crowd rushes to the depot,
and the conductor shouts 'All aboard!' when the smoke
is blown away and the vapor condensed, it will be perceived
that a few are riding, but the rest are run over.
During
the depression of 1859 US commentator Henry Carey Baird
(1825-1912) complained that
our
railroad system has cost more than $1,000,000 and has
brought ruin upon nearly everyone connected with it,
the nation included.
In 1860 the US had 30,000 miles of track. By 1914 that
had increased to 253,000 miles and few critics agreed
with Baird's assessment that a rail network was necessarily
a bad bad thing.
Globalisation of financial pain became apparent in the
1870s, with problems spreading from Austria-Hungary (evident
in the 'Wiener Krach' or 'Gründerkrach' of 1873)
to Germany, France, the UK and US.
Industrial expansion, population growth and deregulation
- especially in the mortgage sector - fostered growth
of property-based lending in the late 1860s. A municipal
and residential property boom in Paris, Vienna and London
saw a spiral of construction, increased land values, borrowing
and speculative development.
That was accompanied by state and private investment in
railways and ports, some of which funnelled cheap grain,
oilseed, timber and other commodities from the US and
Russia. Imports of raw materials and of manufactured goods
(reminiscent of imports from China in our epoch) affected
- or were merely perceived as affecting - the economies
of Central Europe, France, the Netherlands, Scandinavia
and the UK. Those imports were often denounced as the
'American Invasion'.
The Vienna stock exchange crashed on 9 May 1873 ('Black
Friday'), an event claimed by some observers to reflect
recognition that Habsburg expectations about high levels
of continued growth were overly optimistic and that property
speculation had got out of hand. That crash saw the demise
of banks, brokers and insurance companies across the continent
(with the latter for example exposed as customers ceased
paying premiums and the value of property diminished).
UK banks husbanded their capital, wary that borrowers
and institutions would fail.
That freeze in lending flowed through to the US, where
the price of railway bonds had been in decline since 1871
amid European scepticism about corporate governance, the
complexity of particular financial instruments and promises
of a fixed return. That scepticism had seen railways and
some suppliers resort to short-term bank loans to meet
bond payments and maintain network development. In September
1873 railway czar Jay Cooke was unable to meet obligations,
triggering a stock market crash and the 'Panic of 1873'
that saw the demise of several hundred banks and large-scale
unemployment.
Subsequent observers have hailed the US panic as beneficial,
pointing to consolidation by well-managed (and well-capitalised)
enterprises and lower transport costs that drove major
growth in the Gilded Age of the following two decades.
In Austria-Hungary the consequences of the Krach were
more negative, with banks for example concentrating on
lending to government rather than private industry during
the following two decades.
studies
Charles Mackay's Extraordinary Popular Delusions and
the Madness of Crowds, first published in 1841 (coinciding
with the second UK Railway Bubble), frequently reprinted
and available here,
remains one of the more entertaining accounts of financial
speculation. Mackay avoided analysis in favour of sensation
and alas did not offer a contemprary view of rail speculation,
instead repackaging accounts of tulipmania and pre-steam
episodes of irrational exuberance.
Fans of Mackay might turn instead to Elias Canetti's quirky
but penetrating Crowds & Power and more recent
academic writing about behavioural finance noted above
or to the persuasive revisionist study
railway.com: Parallels between the early British railways
and the ICT revolution (London: IEA 2003) by Robert
Miller and 2003 paper
by Andrew Odlyzko on The Many Paradoxes of Broadband.
Odlyzko's site features a copy of John Palmer's 1959 bibliographic
guide to the 19th century British railway press (PDF).
Context is provided by 'Writing about Finance in Victorian
England: Disclosure and Secrecy in the Culture of Investment'
by Mary Poovey in 45(1) Victorian Studies (2002)
and Seymour Broadbridge's Studies in Railway Expansion
1825-1873 (London: Cass 1970).
Other work on the railway bubbles is highlighted in the
more detailed discussion
of railways as a precursor of the internet.
Those of particular significance include Alfred Chandler's
Strategy & Structure: Chapters in the History of
the Industrial Enterprise (Cambridge: MIT Press 1962),
Railroads, the Nation's First Big Business (New
York: Columbia Uni Press 1965) and Henry Varnum Poor
- Business Editor, Analyst & Reformer (Cambridge:
Harvard Uni Press 1956), Timothy Alborn's Conceiving
Companies: Joint-Stock Politics in Victorian England
(London: Routledge 1998), Robert Fogel's Railroads
& American Economic Growth: Essays in Econometric
History (Baltimore: Johns Hopkins Uni Press 1964)
and Terence Gourvish's Railways & the British Economy
1830-1914 (London: Macmillan 1980).
For excitement in 1907 see The Panic of 1907
(New York: Wiley 2007) by Robert Bruner & Sean Carr
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