On track to a financial crash: learn what caused the Railway Mania

Britain’s first inter-city railway, the London and Manchester, had been a huge success. As a result, many began channelling their energies into the creation of new railway companies, tapping into the success demonstrated by the L&M.

The creation of these companies was made relatively simple: anyone could form a company, gain investment and submit a Bill to Parliament. There were no limits on the number of companies and no real checks on the financial viability of a line.

On top of that, the emergence of the modern stock market made it easier for anyone to invest and the growth of newspapers to spread news and advertisements attracted many to the idea.

The railways were promoted as a ‘fool proof’ venture and many invested their savings into infant, unproven companies – even if all they could afford was the deposit.

It was all too good to be true and the bubble was soon to burst. By 1845 it became clear that railways were not as lucrative or as easy to build as investors had been led to believe. Investment into the railways stopped overnight – but that left larger, established companies with the opportunity to buy up lines that could work as part of their network, especially at a cost much lower than their real value because shareholders had opted to sell-out quickly to stop a total loss on their investment.

Costs were much higher than expected but larger, established companies continued to construct railway lines and over time it became clear that demand had actually been underestimated.

The result was that those who were able to stick through the crash saw real returns. In time, the railways did become a lucrative investment but more gradually than the Railway Mania would have had individuals believe – and only alongside the right choice of company for investment.

Even though it was hundreds of years ago, the Railway Mania ultimately shows that the same principles to wise investments still apply: invest in the right company, and stick to your goals and objectives – something that sounds surprisingly familiar to our philosophy today…