Continues from EIS July Indicator

For most of last century railways played a unique part in the development of any country which built them. A revolutionary technology for the time. The affect of their introduction went in stages, and in England and the United States in particular went in a boom / bust fashion. On a couple of occasions investment in Railroad companies took on mania proportions; the years 1845 to 1847 in England being known as "the Railroad Mania".

It is possible that studying how Railways investment developed in England can help us anticipate the development of internet investing. There are numerous similarities. Railroads changed forever the way people and business communicated. It reduced the cost of transportation of commodities by an astounding percentage. The internet is doing the same to most prices, not just of commodities. Railroads also opened up markets to previously isolated communities.

The study of what happened when Railroads were built in England is especially of interest since it was done completely by private enterprise. This is the way the internet is being built. The only position the Government took in England was that the company had to have parliament sanction the Rail line that was intended to be built. This of course resulted in the winning company holding a government granted licence. For those who have done E.I.S. cycles classes you can understand the implications of such Government granted privileges, and the vested interests that grow with them.

The birth of the English Railroad system occurred in 1836. By 1844 parliament had authorised a total of 3,090 miles to be built, being the efforts of 104 different companies. Each company represented a possible investment for the astute investor, most companies having only recently been floated on the stock exchange for the express purpose of building a Railway. It is obvious in hindsight, but perhaps not so easy at the time, to have observed that the companies that got to build the lines servicing the most people made the most profits. In the finish it was a Darwinian solution that resulted: survival of the fittest. Internet companies will go the same way, ie those with the best location (or being the best gatekeeper) will end up the most profitable. Eventually it was the Railroad companies that proved their indispensability to the travelling public that won the day. These companies ended up secure in the monopoly of the traffic for the district that they served.

The net today;
A Darwinian solution appears likely, but much faster with this current technology. It's very easy for internet traffic, that's us, to change location, shift address, surf to a new location, find the cheapest products, undercut the competition. Rail did not present the same 'surfing' opportunities.

It is interesting to observe the 1840's in England in particular. By 1844 the Government of the day was worried. In view of the wave of speculation taking place the government was wondering if it was necessary to take immediate steps to protect the investing public from either a) investing their money in unsubstantial schemes or b) from the formation of new Railway lines which would not be for the public advantage, or indeed were never likely to be built. In 1845 the Government set up an advisory board whose duty it was to examine every Railroad scheme being floated. E.I.S. can only speculate as to what opportunities this opened up for well connected insiders. (By the mid 1850's more than half of the elected Parliamentarians sat on or had connections with a Railroad company board.) The government advisory board did not last long. Here it is worth quoting from Henry Lewin, The Railway Mania and its Aftermath ;
(Railway Gazette, London 1936) page 18

"The spirit of unreasoning optimism was in the air; the possibilities and advantages which the country was to attain with liberal railway communication were deemed to be boundless, and any check upon such a short cut to riches was resented by the parties whose proposals were scrutinised in cool blood with an unfavourable result. Powerful interests were brought to bear upon the decisions of the Board, and private jealousies were introduced, so that on July 10th, 1845, by minute of the Lords of the Committee of the Privy Council for Trade, the one and only successful attempt to establish a body whose function it would be to guide the development of the country's railway system on national lines was terminated."

As the Railroad mania progressed through 1845 it was becoming abundantly clear that any areas without Railway accommodation were going to be at a substantial economic disadvantage.

In this year and especially during the Parliamentary session of 1845 the fortunes of Railroad companies went up and down in accordance with the progress of bills which affected their interests. The shares of Railroad companies were volatile to say the least.

The net today;
In Australia, Senator Alston, Liberal Party Minister for Communications, is a feted man of late. Note some of his decisions this year;
- TV stations (free to air networks) last year were allocated free digital spectrum
- a guarantee that Parliament would not issue any more TV licences before 2007.
The possibility for delivery of the internet through our own TV may not be far away. Watch the politics to help your internet investing. Fundamental to the existence of profitable capitalism is a compliant government.

The new technology was revolutionary. Most Railroads halved the time it took to travel by road coach. It also took travel within the reach of the general public for the first time ever in history. Building the lines gave a lot of work requiring many bridges, tunnels and laying of track. Many new things had to be done. Time tables for a start. In the beginning it was customary to indicate only the departure time of a train from the originating station. The arrival time at destination of stations along the way being ascertainable only by experience. The rules were written as they went. By 1845, for the first time ever, it was now possible to travel from London to Edinburgh within 24 hours. This was a revolution.

Railroads opened up many regions previously quite isolated. It also meant previously isolated farmers could get their commodities to market more easily and cheaply and brought greater mobility to the masses living along the lines. It also caused profound shifts in transportation, especially for cities which depended upon the old technologies. Certain individuals also dominated the new technology. In the 1840's and 1850's in England it was George Hudson, dubbed the Railway Napoleon, in recognition of his almost unlimited financial power. The Bill Gates of his time.

The development of rail technology superceded another; canals. Canals in England where built between 1761 and 1830, also by private enterprise and with very little government assistance. The canals, competing only against horses or wagons on turnpike roads became very profitable. The practical monopoly that they obtained resulted sometimes in poor service and / or excessive toll charges. Rail began to offer a superior service. Indeed some Canals were turned into Railways.

Railways were in direct competition with the old and some not so old canals. Many of these owners and managers "were determined to make matters as uncomfortable as possible for the Railway that had arrived to infringe their monopoly." It is interesting to observe how most canal owners settled to defend their turf, rather than see the advantages of the new technology. Only one or two moved into the new technology to compliment their existing business. Those that shifted did very well. Other Canal owners formed alliances with the Navy and Marine interests. Attempts by Rail companies to build bridges across canals or rivers was met with heavy resistance. The bridges might block shipping. The old vested interests were not giving way to the new technology without a fight. Some lines also met with great opposition from local powerful land owners; many of whom sat in the house of lords, whose assent was needed to build the line. This vested interest soon acquiesced though when it was seen how much a new Railroad increased the value of their land. Soon these lords began demanding Railroads for their area.

At times interesting groups formed to push development. For example the iron making firms up to the 1840's received their coal by canal transport. Now they wanted rail transport to both receive the coal and ship the goods as it was much cheaper. Many put to Parliament their own schemes for Railway lines.

The net today;
Watch Australia's richest government granted licence holders. Watch how existing cash businesses, casinos, newspapers etc. are being used to fund start up moves into the newest net technology. Some of their associated floats are also using other people's money, not theirs.

The 1840's business cycle peaked in 1846. The abundance of investment monies soon became a shortage. ( In the same year the repeal of the corn laws by Cobden and the failure of the potato crops fundamentally altered the finances of the Country.) Interestingly the financial pressure of the situation culminated in a financial panic in the October of 1846. Railway construction virtually came to a standstill through the inability of Shareholders to meet their calls. In early 1847 Railway companies were pressured into substantial reduction of fare prices. This came about from a "general agitation on the part of the travelling public" A large increase in the number of passengers resulted. Trains were now even better filled than previously. Fares and exhibitions became increasingly popular. More and more people could travel outside their district than ever before. Real wealth was being generated, despite the share market bubble.

1847 to 1848, the aftermath of the mania.

The boom had bust. Pessimism rather than optimism now reigned over the crowd. For the new technology of rail, it is more than a little revealing to see what took place to put things back into some sort of order, after the financial panic of '46.

The shareholders started demanding more information, and a more rigorous examination of the books by auditors. In one sense the accounting rules were also being written as they went, so new was this sort of technology and corresponding large requests for capital from investors. (Bear in mind also that the concepts of depreciation, reserve funds etc were brand new to this era.) Reporting anomalies were found, and there existed a substantial lack of uniformity in the way accounts were drawn up. Discrepancies were discovered in the way some companies reported earnings, and in the way dividends were being paid. (Some dividends even being paid out of capital, notably a consistent practice within the companies where George Hudson was Chairman).

>From 1848 to 1850, the railway shareholder found them to be unhappy years, especially for anybody who had purchased shares in the mania years 1845 to 1846. The winding up of unsuccessful or broke railway companies was proceeding a pace.

"The fact was that an entire change of feeling had now come over the country as regards railways, and whereas in the pioneer days the land owning interest had done all it could to discourage their development, and had extorted enormous sums from the companies as compensation in cases where it had been unable actually to keep the railway out, now it had come to realise the benefits afforded by railways and welcomed their advent; at the same time perpetuating the practice of trying to extort the maximum price for their land from the company willing to supply the facility. This revulsion of feeling was now to be made the pretext for a claim in cases where railway communication had been promised but not fulfilled." (Quote from Lewin.)

The net today;
Watch the changes in mass sentiment. We may have seen one recently already.
Watch the way net companies are valued. It is pie in the sky stuff, and cannot last indefinitely. For those who missed the article, a little bit of what I am talking about surfaced recently in an AFR article, Aug 18th page 13;
- the use of 'bartering arrangements' by net companies to bolster revenue
- 'registered users' aren't always paying customers
- use of IPO (float) proceeds to buy their own products.
If a protracted downturn does take place, many more interesting practices by net companies, to justify valuations, will come to light.

Just out of interest;
The new rail technology also forced discussion of many social issues. The question of Sunday travel being just one. The appearance of a Sunday train in Scotland caused uproar, offending those with strongly religious convictions. The common man however just wanted to travel.

Another social issue was whether railway companies were obliged to call in medical assistance in case of an accident. (Shareholders did not like to have to pay the expenses.)

Another issue was the question of a passenger tax. The government had found a novel way of raising more revenue, tax the traffic. (Some things just never change; the three things in life that are certain; death, taxes and stock market retracements.)

One very big difference between the railway mania, and the current net boom should be noted. Railways brought about a huge speculation in land. Land forms the very basis upon which wealth is built. Land speculation is one of the major causes of the business cycle, as is the associated credit cycle required to furnish the speculation. Last century saw wild swings in the business cycle, as rampant (and it was certainly rampant) speculation proceeded in land, due firstly to canal building, then railroads, then much later, the automobile.

The net is a different beast. The speculation in this technology will probably be more limited to the stock market. So the effects of the speculation will be much less noticed by the general economy. The new wealth created however, will at times flow into more "tangible" things like real estate, as net promoters siphon off gains. History rhymes, rather than repeats exactly.

The stock market, and the economy in general recovered after each bubble, going on to even greater heights next cycle.