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
introduction went in stages, and in England and the United States in
in a boom / bust fashion. On a couple of occasions investment in Railroad
took on mania proportions; the years 1845 to 1847 in England being known as
It is possible that studying how Railways investment developed in England
us anticipate the development of internet investing. There are numerous
Railroads changed forever the way people and business communicated. It
the cost of transportation of commodities by an astounding percentage. The
doing the same to most prices, not just of commodities. Railroads also
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
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
those who have done E.I.S. cycles classes you can understand the
such Government granted privileges, and the vested interests that grow with
The birth of the English Railroad system occurred in 1836. By 1844
authorised a total of 3,090 miles to be built, being the efforts of 104
companies. Each company represented a possible investment for the astute
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
time, to have observed that the companies that got to build the lines
most people made the most profits. In the finish it was a Darwinian
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
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
of the traffic for the district that they served.
The net today;
A Darwinian solution appears likely, but much faster with this current
It's very easy for internet traffic, that's us, to change location, shift
surf to a new location, find the cheapest products, undercut the
did not present the same 'surfing' opportunities.
It is interesting to observe the 1840's in England in particular. By 1844
of the day was worried. In view of the wave of speculation taking place
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
indeed were never likely to be built. In 1845 the Government set up an
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
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
(Railway Gazette, London 1936) page 18
"The spirit of unreasoning optimism was in the air; the possibilities and
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
whose proposals were scrutinised in cool blood with an unfavourable result.
interests were brought to bear upon the decisions of the Board, and private
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
system on national lines was terminated."
As the Railroad mania progressed through 1845 it was becoming abundantly
any areas without Railway accommodation were going to be at a substantial
In this year and especially during the Parliamentary session of 1845 the
of Railroad companies went up and down in accordance with the progress of
affected their interests. The shares of Railroad companies were volatile
The net today;
In Australia, Senator Alston, Liberal Party Minister for Communications, is
man of late. Note some of his decisions this year;
- TV stations (free to air networks) last year were allocated free digital
- a guarantee that Parliament would not issue any more TV licences before
The possibility for delivery of the internet through our own TV may not be
Watch the politics to help your internet investing. Fundamental to the
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
first time ever in history. Building the lines gave a lot of work
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
a train from the originating station. The arrival time at destination of
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
isolated farmers could get their commodities to market more easily 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
in England it was George Hudson, dubbed the Railway Napoleon, in
recognition of his almost unlimited financial power. The Bill Gates of his
The development of rail technology superceded another; canals. Canals in
where built between 1761 and 1830, also by private enterprise and with very
government assistance. The canals, competing only against horses or wagons
roads became very profitable. The practical monopoly that they obtained
in poor service and / or excessive toll charges. Rail began to offer a
service. Indeed some Canals were turned into Railways.
Railways were in direct competition with the old and some not so old
of these owners and managers "were determined to make matters as
possible for the Railway that had arrived to infringe their monopoly." It
to observe how most canal owners settled to defend their turf, rather than
advantages of the new technology. Only one or two moved into the new
to compliment their existing business. Those that shifted did very well.
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.
might block shipping. The old vested interests were not giving way to the
without a fight. Some lines also met with great opposition from local
owners; many of whom sat in the house of lords, whose assent was needed to
the line. This vested interest soon acquiesced though when it was seen how
a new Railroad increased the value of their land. Soon these lords began
for their area.
At times interesting groups formed to push development. For example the
firms up to the 1840's received their coal by canal transport. Now they
rail transport to both receive the coal and ship the goods as it was much
Many put to Parliament their own schemes for Railway lines.
The net today;
Watch Australia's richest government granted licence holders. Watch how
cash businesses, casinos, newspapers etc. are being used to fund start up
the newest net technology. Some of their associated floats are also using
people's money, not theirs.
The 1840's business cycle peaked in 1846. The abundance of investment
became a shortage. ( In the same year the repeal of the corn laws by
the failure of the potato crops fundamentally altered the finances of the
Interestingly the financial pressure of the situation culminated in a
financial panic in
the October of 1846. Railway construction virtually came to a standstill
the inability of Shareholders to meet their calls. In early 1847 Railway
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
passengers resulted. Trains were now even better filled than previously.
and exhibitions became increasingly popular. More and more people could
travel outside their
district than ever before. Real wealth was being generated, despite the
1847 to 1848, the aftermath of the mania.
The boom had bust. Pessimism rather than optimism now reigned over the
the new technology of rail, it is more than a little revealing to see what
to put things back into some sort of order, after the financial panic of
The shareholders started demanding more information, and a more rigorous
of the books by auditors. In one sense the accounting rules were also
as they went, so new was this sort of technology and corresponding large
for capital from investors. (Bear in mind also that the concepts of
funds etc were brand new to this era.) Reporting anomalies were found, and
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
practice within the companies where George Hudson was Chairman).
>From 1848 to 1850, the railway shareholder found them to be unhappy years,
for anybody who had purchased shares in the mania years 1845 to 1846. The
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
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
advent; at the same time perpetuating the practice of trying to extort the
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
had been promised but not fulfilled." (Quote from Lewin.)
The net today;
Watch the changes in mass sentiment. We may have seen one recently
Watch the way net companies are valued. It is pie in the sky stuff, and
indefinitely. For those who missed the article, a little bit of what I am
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
of Sunday travel being just one. The appearance of a Sunday train in
uproar, offending those with strongly religious convictions. The common
just wanted to travel.
Another social issue was whether railway companies were obliged to call in
assistance in case of an accident. (Shareholders did not like to have to
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
three things in life that are certain; death, taxes and stock market
One very big difference between the railway mania, and the current net boom
be noted. Railways brought about a huge speculation in land. Land forms
basis upon which wealth is built. Land speculation is one of the major
the business cycle, as is the associated credit cycle required to furnish
Last century saw wild swings in the business cycle, as rampant (and it was
rampant) speculation proceeded in land, due firstly to canal building, then
then much later, the automobile.
The net is a different beast. The speculation in this technology will
more limited to the stock market. So the effects of the speculation will
less noticed by the general economy. The new wealth created however, will
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,
to even greater heights next cycle.