Yesterday, I talked about the Dutch Tulip Bubble, where tulip bulb prices reached outrageous heights. Today we’re heading west toward England to talk about the Railroad Bubble of the 1830s.
As the steam-powered locomotive emerged in the first decades of the 19th century, it was seen as the answer to drive commercial trade between large cities, as well as to small stops in between cities. It also allowed for the hauling of mined products (iron, coal, etc.) in mass quantities from the mines to the places they were needed.
In the 1830s, 6,000 miles of new railroad tracks were laid. For a country that is less than 100,000 square miles, this is a significant amount of track.
All of this would probably have been fine except for some people with fewer scruples than Mother Theresa realized they could capitalize on the excitement. Protections for investors were less stringent than they are today, and some people began developing companies that may have laid some railroad tracks, but their real reason for existence was to gather investments to make the founders of the companies rich.
In order to grow people’s excitement, they began paying out dividends from capital (rather than earnings). Investors didn’t realize what was going on, so they poured more money in because of the great returns offered by these companies.
Eventually it all collapsed, a la Enron, and investors were left holding the bag. Although the tracks laid were of use to the country, they didn’t generate enough income to make money for the investors.
Tomorrow, we’re going to learn about the Florida Land Bubble of the early 1920s.
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At least they got railroads (compared to yesterday’s post on tulips).