Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-11-26T07:10:24.065Z Has data issue: false hasContentIssue false
  • English
  • Français

Deriving the railway mania

Published online by Cambridge University Press:  01 February 2013

Gareth Campbell
Gareth Campbell*
Affiliation:
Queen's University Belfast
Get access Rights & Permissions [Opens in a new window]

Abstract

This article argues that the promotion boom which occurred in the railway industry during the mid 1840s was amplified by the issue of derivative-like assets, which let investors take highly leveraged positions in the shares of new railway companies. The partially paid shares which the new railway companies issued allowed investors to obtain exposure to an asset by paying only a small initial deposit. The consequence of this arrangement was that investor returns were substantially amplified, and many schemes could be financed simultaneously. However, when investors were required to make further payments it put a negative downward pressure on prices.

Keywords

bubblesmaniaderivativesleverage

JEL classification

G11: Portfolio Choice • Investment Decisions G01: Financial Crises G12: Asset Pricing • Trading Volume • Bond Interest Rates N23: Europe: Pre-1913
Type
Articles
Information
Financial History Review , Volume 20 , Issue 1 , April 2013 , pp. 1 - 27
Copyright
Copyright © European Association for Banking and Financial History e.V. 2013

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acheson, G. G., Hickson, C. R., Turner, J. D. and Ye, Q. (2009). Rule Britannia! British stock market returns, 1825–1870. Journal of Economic History, 69, pp. 1107–37.Google Scholar
Acheson, G. G, Turner, J. D and Ye, Q. (2012). The character and denomination of shares on the British equity market, 1825–70. Economic History Review, 65(3), pp. 862–86.Google Scholar
Allen, F. and Gale, D. (2000). Bubbles and crises. The Economic Journal, 110(460), pp. 236–55.Google Scholar
Aoki, K., Proudman, J. and Vlieghe, G. (2002). Houses as collateral: has the link between house prices and consumption in the UK changed?Economic Policy Review, Federal Reserve Bank of New York, May, pp. 163–77.Google Scholar
Arnold, A. J. and McCartney, S. (2004). Were they ever ‘productive to the capitalist’? Rates of return on Britain's railways, 1830-55. Journal of European Economic History, 33(2), pp. 383–410.Google Scholar
Bryer, R. A. (1991). Accounting for the ‘railway mania’ of 1845 – a great railway swindle? Accounting, Organisations and Society, 16(5/6), pp. 439–86.Google Scholar
Buffett, W. (2002). Berkshire Hathaway Annual Report.Google Scholar
Campbell, G. (2012). Myopic rationality in a mania. Explorations in Economic History, 49, pp. 75–91.Google Scholar
Dale, R., Johnson, J. E. V. and Tang, L. (2005). Financial markets can go mad: evidence of irrational behaviour during the South Sea Bubble. Economic History Review, 58(2), pp. 233–71.Google Scholar
Detken, C. and Smets, F. (2004). Asset price booms and monetary policy. ECB Working Paper no. 364.Google Scholar
Engle, R. F. and Granger, C. W. J. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica, 55, pp. 251–76.Google Scholar
Fama, E. F. and French, K. R. (1992). The cross-section of expected stock returns. Journal of Finance, 47(2), pp. 427–65.Google Scholar
Hull, J. (2003). Options, Futures, and other Derivatives. New York: Pearson Prentice Hall.Google Scholar
Jefferys, J. B. (1946). The denomination and character of shares, 1855–1885. Economic History Review, 16, pp. 45–55.CrossRefGoogle Scholar
Kindleberger, C. P. (2000). Manias, Panics, and Crashes: A History of Financial Crises. New York: John Wiley & Sons.Google Scholar
McCartney, S. and Arnold, A. J. (2001). ‘Capital clamours for profitable investment, confidence has become eager and may shortly become blind’: George Hudson and the 'railway mania' extensions of the York and North Midland Railway. Journal of Industrial History, 4(2), pp. 94–116.Google Scholar
McCartney, S. and Arnold, A. J. (2003). The railway mania of 1845–1847: market irrationality or collusive swindle based on accounting distortions? Accounting, Auditing and Accountability Journal, 16(5), pp. 821–52.Google Scholar
Michie, R.C. (1981). Money, Mania and Markets: Investment, Company Formation, and the Stock Exchange in Nineteenth-Century Scotland. Edinburgh: John Donald.Google Scholar
Mitchell, B. R. (1964). The coming of the railway and United Kingdom economic growth. Journal of Economic History, 24(3), pp. 315–36.Google Scholar
Nairn, A. (2002). Engines that Move Markets. New York: John Wiley.Google Scholar
Odlyzko, A. (2010a). Collective Hallucinations and Inefficient Markets: The British Railway Mania of the 1840s. University of Minnesota.Google Scholar
Odlyzko, A. (2010b). This time is different: an example of a giant, wildly speculative, and successful investment mania. B.E. Journal of Economic Analysis & Policy, 10(1), article 6.Google Scholar
Odlyzko, A. (2011). The collapse of the railway mania, the development of capital markets, and the forgotten role of Robert Lucas Nash. Accounting History Review, 21(3), pp. 309–45.Google Scholar
Pastor, L. and Stambaugh, R. F. (2003). Liquidity risk and expected stock returns. Journal of Political Economy, 111, pp. 642–85.Google Scholar
Pollins, H. (1954). The marketing of railway shares in the first half of the nineteenth century. Economic History Review, 7(2), pp. 230–39.CrossRefGoogle Scholar
Pollins, H. (1971). Britain's Railways: An Industrial History. Newton Abbot: David and Charles.Google Scholar
RAILWAY INVESTMENT GUIDE (1845). The Railway Investment Guide. How to Make Money in Railway Shares: A Series of Hints and Advice to Parties Speculating. British Library.Google Scholar
Scrivenor, H. (1849). The Railways of the United Kingdom Statistically Considered. London: Smith, Elder and Co.Google Scholar
Sharpe, W. F. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), pp. 425–42.Google Scholar
Shea, G. (2007). Financial market analysis can go mad (in the search for irrational behaviour during the South Sea Bubble). Economic History Review, 60(4), pp. 742–65.Google Scholar
Simmons, J. and Biddle, G. (1997). The Oxford Companion to British Railway History. Oxford: Oxford University Press.Google Scholar
Stock, J. H. and Watson, M. W. (2003). Introduction to Econometrics. Boston: Addison Wesley.Google Scholar
Tuck, H. (1845, 1847, 1848). The Railway Shareholder's Manual; Or Practical Guide to All the Railways in the World. London: Effingham Wilson.Google Scholar