The Railway Mania of the 1860s and Financial Innovation
62 Pages Posted: 14 Jan 2022 Last revised: 4 Mar 2024
Date Written: January 11, 2022
Abstract
The 1860s witnessed Britain's third, and last, large railway mania. Although it added about as much mileage to the rail network as the great Railway Mania of the 1840s, little is known about it in modern literature. This paper documents how this mania managed to delude investors into pouring immense sums into the expansion of a public infrastructure. It did so by stealth, by introducing a variety of "financial innovations" reminiscent of those involved in the Global Financial Crisis of 2008. That period, just like ours, featured new technologies, novel business models, rapid globalization, dramatic increases in speed of information transmission, and proliferation of misinformation and disinformation. Combined with progressive relaxation of government regulation and extremely opaque accounts, the "shadow banking" and "financial engineering" of the 1860s misled even very knowledgeable and inquisitive observers, such as Walter Bagehot. Those observers saw numerous anomalies in the British financial markets, but persuaded themselves that those were innocuous, and that their country was entering a new economic era. Their misconceptions were broken by the famous Overend, Gurney crash of 1866, as well as another one in 1867 that is almost totally unknown in the literature. The outcome was ruin to many individuals and businesses, and a large, but inefficient, expansion of the rail network. These in turn likely influenced the legal and institutional foundations of corporate capitalism. There are striking similarities to many aspects of modern financial markets that might be instructive, especially in the widespread reliance on the "search for a greater fool" approaches.
Keywords: 1866 crisis, bubbles, railway manias, financial innovation, accounting fraud
JEL Classification: E44, G10, G24, L92, N23, O16, O33, O38, R42
Suggested Citation: Suggested Citation