George Hudson and the 1840s Railway Mania

Series: Yale School of Management
Format: Raw, online case
Topics: Financial History, Accounting, Public Policy, Corporate Governance, Technology, Investing,
Initial date of publication: April 2012
Geographic setting of case: Great Britain
Access:  Available to educational institutions by emailing case.comments@yale.edu.

Overview: Railways were one of the original disruptive technologies: they transformed England from an island of slow, agricultural villages into a fast, urban, industrialized nation. Railways brought huge increases in efficiency, reducing production costs and facilitating the development of a new middle-class consumer to buy factory-produced goods. Because of their role as the driving technology of the industrial revolution, the 19th century became known as the "railway age."

Railway locomotives and their associated infrastructure were developed over the course of several decades beginning in the late 18th century, but they entered a period of intense growth around 1830. In that year England had 98 miles of railway track; by 1840 there were about 1,500 miles of track, and by 1849 England had a network of 6,000 miles linking all of its major cities.

The building of a railway required significant capital, and, convinced of the transformative potential of the technology, investors rushed in. By 1850, about 36 percent of the country's annual GDP had been poured into railway development.

The railway age was dominated by entrepreneurs, who led the complicated process of financing, building, and operating hundreds of miles of railway lines. Among the most famous of these industrialists was George Hudson. The son of a Yorkshire farmer, Hudson rose to become one of the most successful businessmen in Victorian England. At the peak of his career, he controlled one-third of the railway lines in the country, he was a powerful Member of Parliament, and he had accumulated enough wealth to live like an aristocrat.

But railway shares experienced extreme volatility, marked by a mania in the mid-1840s. Share prices reached a peak in 1845, and then the market crashed. By 1850 railway shares were worth less than half of their original value, and dividend rates had fallen from upwards of seven percent to two percent.

When the mania came to an end, it was revealed that Hudson had engaged in improper business practices, including bribery, embezzlement, and insider trading. In essence, Hudson operated his railways through a Ponzi scheme, in which outsized dividends were distributed to old investors from the capital contributed by new investors. Hudson resigned from his directorships, lost his seat in Parliament, and spent the remainder of his days living in obscurity.

In the years following the crash of the railway mania, questions were raised about its cause. Some analysts blamed Hudson and other corrupt financiers for creating the bubble. Others pointed to irrational investors, who ignored clear signs that railways were being overbuilt. But some maintained that the high share price was justified, and that the crash was due primarily to macroeconomic factors, in particular the Irish Potato Famine.