Accounting for the “railway mania” of 1845— A great railway swindle?

Accounting Organizations andSocie~y, Vol 16, No 5/6, pp 4 3 9 - 4 8 6 , 1991 Printed m Great Britain

O361-3682/91 $3 0 0 + O0 Pergamon Press plc

ACCOUNTING FOR THE "RAILWAY MANIA" OF 1845 -A GREAT RAILWAY SWINDLE?*

1L A. BRYER Warwick Business School, University o f Warwick

Abstract This paper explores the functaonmg of accounting m the social, e c o n o m i c and pohttcal contexts surrounding the financing o f the early U K. radways The conventional v m w of e c o n o m m historians is that t h e early U K. railways were financed by an Irrational stock market "manta", followed by the mevttable crash m which many of the mmal investors were ruined. Here we explore an alternative explanattoft tmphed by a c o m m e n t by Marx m volume 3, of capital (1981), that these events were elements of a "great radway swindle" m wbach accounting was deeply m~Mg~te~ Marx pro~des no dnxct support for his statement However, the history of t h e early U IC railways has b e e n extensively researched This work is re-examined to assess the a p r i o r / v a h c h t y of the "swmdle hypothesis" Its acceptance would have Important t m p h c a u o n s for accepted views o f the nature of capttahsm and accountang m the m t d - m n e t e e n t h century Accordmg to e c o n o m i c histotaans, the "manta" was a p r o d u c t o f / a / s s e z fawe capitalism According to accounting historians, the notorious mampulattons o f radway accounts during and after t h e "manta ~ were the c o n s e q u e n c e of a lack of"generally accepted accounting principles" However, according to the swandle hypothesis, the "manta" and its aftermath w e r e the p r o d u c t o f a rational and rapacious social fuerarchy, for w h o m accounting was simply a tool to be mampulated. The paper concludes that while there ks a n e e d for m o r e research, the hypothesis is sulfictenfly consistent v a t h t h e evidence available to be firmly on the agenda o f accounting history

In recent years there has been growing recognition that to understand the functioning of accounting it must be investigated, not simply as the application of techniques in pursuit of abstract economic rationality, but also as a social and political phenomenon, within both organizations and society (e g. Burchell et aL 1980) It follows that to study the functioning of accounting it is necessary to examine (a) both the concepts it uses and their relevance to the pursuit of economic goals, ( b ) h o w and to what extent these goals are realized through social and pohtical practice, and ( c ) what are the come-

quences. This paper is a study of the functioning of accounting in the mid-nineteenth century insofar as this is revealed in the accounting practices o f the U.lC's early railway companies. It presumes that the widely-accepted m o d e r n view o f the major objective of accrual accounting - - to provide information useful to investors for forecasting potential cash f l o w s - - expresses its major conceptual potential 1 It provides evidence that this potential, inherent in doubleentry bookkeeping, was widely-understood by those c o n c e r n e d with managing and observing investment in railways, as the standard against

• Thanks are d u e to Christopher Napier of t h e London School o f Economics for his thorough, knowledgeable and helpful critique o f e a r h e r versions o f the paper, and to m y colleagues Stan Brtguall and Roger Hulme for stimulating discussion The conceptual potential of accrual a c c o u n t m g can be precisely expressed from an "earning power" perspective accounUng profit is a forecast of t h e long-run average cash flow w h i c h the firm can distribute m "steady state" E a m m g p o w e r was central to the classic s t a t e m e n t of c o n v e n u o n a l accrual accounting theory by Paton & lattleton (1940), and to the Trueblood C o m m i t t e e (AICPA, 1973, p 24), w h o s e report formed the basis for the FASB's statement on the Objectives of Financial Statements (FASB, 1978) That accrual accounting Income is a forecast o f steady state n e t cash flows to investors 439

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w h i c h t o j u d g e a c c o u n t i n g p r a c t t c e s . As Littlet o n says, w i t h t h e g r o w t h o f j o i n t s t o c k c o m p a n i e s m t h e m n e t e e n t h c e n t u r y , a n d in railways m p a r t i c u l a r , "Italian d o u b l e - e n t r y b o o k k e e p i n g , already well developed and m a sense awattmg its destiny, afforded t h e m e c h a n i s m for acc o m p l i s h i n g t h e careful s e p a r a t i o n o f t h e s e t w o e l e m e n t s , capital a n d m c o m e " ( 1933, p. 2 1 3 ) P r e s c r i b i n g rules for t h e s e p a r a t i o n o f capital a n d m c o m e ~s t h e e s s e n c e o f a c c r u a l a c c o u n t m g Several w r i t e r s h a v e s u g g e s t e d that m t h e Western World the functiomng of accounting m u s t b e u n d e r s t o o d in t h e h i s t o r i c a l c o n t e x t o f c a p i t a l i s m 2 or, as C o o p e r & S h e r e r h a v e p u t 1t, as "Apolittcal economy of accounting emphastz[ing] t h e m f r a s t r u c t u r e , t h e f u n d a m e n t a l relattons b e t w e e n classes in s o c i e t y " ( 1984, p 2 0 8 ) In t h e t r view, w h i c h ts a c c e p t e d h e r e , t h e political e c o n o m y o f a c c o u n t i n g (PEA) has t h r e e dist m c t t v e features Firstly, "The s t u d y o f a c c o u n t ing s h o u l d r e c o g m z e p o w e r a n d corttttct in socie t y a n d c o n s e q u e n t l y s h o u l d focus o n t h e effects o f a c c o u n t i n g r e p o r t s o n t h e d~stribution o f inc o m e , w e a l t h a n d p o w e r in s o c i e t y " ( C o o p e r & Sherer, 1984, p 2 1 8 ) That is, tt s h o u l d b e e x p l i c i t l y n o r m a t i v e in tts c o n c e r n s . Secondly, at " .. r e c o g n i z e [ s ] t h e stgnificance o f an h i s t o r i c a l focus in o r d e r to u n d e r s t a n d t h e c h a n g m g r o l e s of accountmg practtce and by tmphcatton the h i s t o r i c a l s p e c i f i c i t y o f an a s s e s s m e n t o f t h e social value o f t h e s e r e p o r t s " ( C o o p e r & Sherer, 1984, p 219). That is, tt s h o u l d b e e x p l i c i t l y d e s c r t p t i v e , a n d " . a t t e m p t to d e s c r t b e a n d int e r p r e t t h e b e h a w o u r o f accourrting a n d a c c o u n tants m t h e c o n t e x t o f t h e mstttuttons, social a n d political structures and cultural values of the s o c i e t y in w h i c h t h e y a r e h t s t o r i c a l l y l o c a t e d " ( C o o p e r & Sherer, 1984, p 2 1 9 ) Thtrdly, w e a r e

enloined to" adopt a more emancipated view of human mottvation and the role of accounting m s o c i e t y . that a c k n o w l e d g e s t h e p o t e n t t a l o f p e o p l e ( a n d a c c o u n t i n g ) to c h a n g e a n d r e f l e c t dtffering i n t e r e s t s a n d c o n c e r n s " ( C o o p e r & Sherer, 1984, p 2 1 9 ) In a w o r d , PEA m u s t b e "ctatmal", a n d " start from t h e p r e m i s e that p r o b l e m s in a c c o u n t i n g a r e p o t e n t i a l l y reflecttons o f p r o b l e m s m a n d o f s o c t e t y a n d a c c o r d m g l y t h a t t h e l a t t e r s h o u l d b e c r t u c a l l y analysed" ( C o o p e r & Sherer, 1984, p. 2 2 2 ) Thus, t h e y c o n c l u d e , "A PEA a p p r o a c h a t t e m p t s to explicate and mterpret the role of accounting reports m the distribution of income, wealth and power in s o c i e t y " ( C o o p e r & Sherer, 1984, p 2 2 2 ) The challenge posed by the pohttcal economy o f a c c o u n t i n g is o n e to w h i c h f e w a c c o u n t i n g s c h o l a r s h a v e so far r i s e n T h e p r o b l e m s a r e form i d a b l e N o t o n l y m u s t t h e i n v e s t i g a t o r have a c l e a r grasp o f t h e c o n c e p t u a l f o u n d a t t o n s o f a c c o u n t i n g , b u t m u s t also i n t e r r o g a t e t h e htstortcal, e c o n o m m , s o c i a l a n d p o l i t m a l c o n t e x t s o f its p r a c t i c e s . Such a b u r d e n m u s t b e shared, a n d initially at least, this m e a n s a h e a v y r e h a n c e o n h i s t o r i e s w r i t t e n for p u r p o s e s o t h e r than illuminatmg the functionmg of accounting One s u c h a r e a ts f i n a n c i n g and a c c o u n t m g for t h e e a r l y U.K. railways, a n d t h e c e n t r a l task o f this p a p e r is to r e w o r k thts h t s t o r y as a p o l i t i c a l e c o n o m y o f a c c o u n t i n g . Its o b j e c t t v e ts to assess w h i c h i n t e r e s t s w e r e f u r t h e r e d , and w h t c h interests were undermmed, by the accounting p r a c t i c e s u s e d b y t h e ratlway c o m p a m e s

THE "SWINDLE HYPOTHESIS" B e t w e e n 1831 a n d 1850 t h e bastc s t r u c t u r e o f

can be shown by rearranging the balance sheet equation mto the "clean surplus" ldenttty (Peasnell, 1982) Ct = Pt + A t where (7, = net dtstrlbutable cash flow m time t, Pt =htstoncal or current cost profit m ttme t, At = net historical or current cost of assets at time t At the begmnmg of the entity's life Co = Ao and A_ t and Po -- 0 Thus, the long-run average net cash flow ts gtven by the hmlt as T tends to Infinity of

At-t,

1

r

1

r

1

r

At

-Sum C, = --Sum IPt + A,_~ -- At] = -Sum/', + T ,=o T t=o T r=0 T Assuming htstory or, when using current costs, the present repeats ttself, Ps ts constant Thus, as Ttends to mfintty, At/T tends to zero, and the average net cash flow equals accounting profit (May, 1976, Bryer & Steele, 1990) 2 For example, Tmker, 1980, Cooper, 1980, Cooper & Sherer, 1985, Armstrong, 1987, Puxty e t a l , 1987

THE "RAILWAYMANIA"OF 1845 Britain's railway network was planned, paid for, and built. It required investment on an unprecedented scale One way of portrayang this is to estimate h o w m u c h the railways would have cost in the mid- 198Os. The total national income of the U.K. for the twenty years from 1831 to 1850 was £ 1 0 2 billion, and over this period it invested 2•2% ( £ 2 2 4 4 million) in railways (Mitchell, 1969)• The U.K.'s GNP m the mid1980s was around £ 3 0 0 billion If 2 2% of this were invested for twenty years (that is, ignoring real g r o w t h ) it would cost £ 1 3 2 billion Investment in railways (excluding land) peaked in 1845-9, taking an average of 4.5% of GNP In this period total investment for all purposes was only 5.5% (Gourwsh, 1980b, p 13). So intense was the effort that at its peak m 1847 informed contemporaries took the view that " . railway investment then required a reduction of consumption and not only a redirection of investment resources" (Hawke, 1970, p 210) Surprisingly, the large majority of the capital for the early U.IC railways was provided by provincial merchants and entrepreneurs (particularly those from Manchester and Liverpool) and the "middle-classes", and not from the very weal. thy "London capitalists" w h o studiously avoided investing in railways durmg the initial construction phase 3 Most of the finance was advanced during 1845 Shares of large denominations were sold for small down-payments, and many investors became committed to pay heavy calls ff things went w r o n g , and they did Escalating construction costs and Government restrictions on raising debt forced the railway companies to make heavy calls just as the "Commercial Crisis" of 1847 and high interest rates removed the means of many of their shareholders to meet them. Being unable to meet the calls, many of the mitial investors were forced to sell their shares at heavy losses The evidence available suggests that the purchasers were the London wealthy In the accepted view of economic historians,

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the losses incurred by the initial investors in railway were the inevitable consequence of the speculative "mania" which blinded them to economic realities. For e c o n o m i c historians the railway "mania" and the losses do not imply any criticism of the social, political and economic system in the mid-nineteenth century In their view the "manias" were merely "excrescences on the body of a sound movement" (ClevelandStevens, 1915, p. 170), "temporary aberrations" (Reed, 1975, p. 271) of laissezfaire capitalism conceived as a loose collection of self-interested and short-sighted individuals, with an understandable tendency to anarchy only imperfectly curbed by competition and interventions by the State. The germ of an alternative, critical view is only to be found in Marx, w h o noted in volume 3 of Capital that "The period of prosperity in England from 1844 to 1847 was . connected with the first great railway swindle" (1981, p 538, emphasis added) Prima facie, Marx's view appears to be a classic illustration of Brauders conception of capitahsm as " an active social h i e r a r c h [ y ] . , constructed on top of exchange • which they manipulate to their advantage. " (1985, vol. 1, p 24) Unfortunately, Marx nowhere explicitly analyses exactly what "great railway swindle" he beheved had occurred• One possibility is that by "great railway swindle" Marx simply meant the numerous, but relatively small-scale, frauds (false prospectuses, insider-dealing, false accountings, etc.) which were undoubtedly perpetrated However, if this is what he meant, it is surprising that although railway frauds achieved great notoriety, he makes no mention of them. ~ Perhaps Marx concluded these swindles were, in themselves, of little practical significance. Judging by the context in which it appears, it seems more likely that by "great railway swindle" Marx was referrmg to the role government-induced cheap credit played in fuelling the b o o m m railway shares from 1845, and the

3The constituents of these groups are defined later 4Bycontrast he makescopious references m chapter 25 to what Engelscalls ~swmdhngof this kind" (Marx, 1981,p 533) m the East Indian and Chmese trade

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Government's role in engineering the high interest rates in 1847 which undermined it. In an insert shortly before Marx's c o m m e n t on the "great railway swindle", Engels certainly made this connection: The same passton which mcreased [cotton] productton w e n t into the b u d d i n g of ratlways The thtrst of the manufacturers and merchants for speculatton found tmttal sattsifactaon, from s u m m e r 1844 onwards Stock was und e r w r i t t e n to the hmtts of po~tbthty, t e as far as there was m o n e y to cover the tmttal payments As for the rest, a way w o u l d be found I The entmmgly high profits had led to operattous m o r e extensive than the hqmd re. sources could justify But the credtt was there, easy to obtain and cheap at that W h e n the further payments dtd fall due recourse to credtt was necessary, and the main b u s m e ~ of the firm generally had to suffer The Bank's oftictal m t m m u m lending rate rose to 7 per cent m O c t o b e r [ 1847L and m N o v e m b e r to 10 p e r cent, so that the great majority of bills could be dtscounted only at colossal and usurious rates of interest, ff at all (Marx, 1981, p p 534--35).

Although Engels implies that the speculators had their "thirst" partly to blame, several of Marx's general conclusions point to the government and " m o n e y capital ''5 as the true villains. Thus, for example, although in the following Marx does not refer explicitly to railways, it is tempting to believe that he had them at least partly in mind when he concluded that " . since a rise in interest rates corresponds to a fall in the price of securities, this is at the same time a very suitable opportunity for people with available m o n e y capital to buy up such interest-bearing securities at ridiculously low prtces .. " (1981, p 483). Marx later makes clear that he is referrmg to the impact of interest rates on all types of securities, including those of "industrial undertakings", whose "depreciation in a crisis", he again notes, "is a powerful means of centralizing m o n e y

wealth" ( 1981, pp. 598-99). That Marx did have railways at least partly in mind w h e n making these c o m m e n t s ts suggested by the note which immediately follows, of an estimate of the Governor of The Bank of England that, by the 23 October 1847, Government securities and the shares of railways and canals had been " .. depreciated in the aggregate to the amount of £114,752,225" (1981, p 599) 6 Marx was, however, very explicit about w h o m he beheved had the p o w e r to influence mterest rates, w h o m he believed caused the Commercial Crisis of 1847 during which railway shares crashed, and w h o m he believed had benefited A major question tackled in Part Five of Volume Three of Capital is whether the high interest rates and the Commercial Crisis were caused by a shortage of capital for investment, as the conventional wisdom maintained, or whether it was a consequence of Government monetary policies, particularly as they were enshrined In the Bank Charter Act of 1 8 4 4 , 7 and the activities of m o n e y capital, which Marx maintained Noting "The p o w e r of the Bank of England. shown by its regulation of the market rate of interest" (1981, p 676), he concluded: Talk about centrahzatton t The credtt system w h i c h has its focal poi nt in the allegedly national banks and the big m o n e y lenders and userers that surround them, ts one e n o r m o u s centraltzatton and gives this class of parasites a fabulous p o w e r not only to d e c i m a t e the industrial capitaliStS periodically but also to interfere in actual productton m the mos t dangerous ma nne r - - and this c r e w

know nothmgofproductton and have nothingat all to do wtth tt The Actsof 1844 and 1845 are proof of the growmg power of these bandits, added to whom are the financters and stock lobbers ( 1981, pp 678--79) In his view the Bank Act of 1844, by "driv[ing] the interest rate in crisis times up to a previously

s Stmply, those v a t h concentrattons of m o n e y available for i nve s t me nt 6 Marx notes later that m o n e y capttahsts benefit from artdictally htgh interest rates etther because capttal gams may be ma de on "g overn men t paper and o t h e r securtttes" w h e n interest rates fall and thetr prtces rtse, or because htgher ytelds are obtained on those that are held (1981, p 6 3 5 ) Tlus dmtmctton will be of tmportance later w h e n w e c o m e to assess the returns earn ed b y rad way investors after the s e c o n d b o o m had collapsed 7 Tht$ msdtscus.~d m detail later Marx's vtews on the techm c a i operatton Bank Charter Act of 1844 w e r e shared by, and to a large e x t e n t d eriv ed from, several e m i n e n t l y respectable c o n t e m p o r a r y authortttes

THE "RAILWAYMANIA"OF 1845 unheard of level.., instead of abolishing crises, it rather intensifies t h e m . . . " (Marx, 1981, p 689) For Marx, this result was no accident, "For to the same extent that the metal reserve disappears, so too does the reserve of banknotes, and no-one should know this better than Mr Overstone, w h o so wisely established this very device in his 1844 Bank Act" (1981, p 652). Mr (in 1850, Lord) Overstone, previously Samuel Loyd, a wealthy and successful banker w h o prospered during the Commercial Crisis of 1847, and retired as a r e n t i e r in 1850 (Michie, 1985, p 61), was widely attributed with the design of the 1844 Act (Clapham, 1964, p. 522) For Marx he was the epitome and representative of m o n e y capital Although the "reasonably accurate" record of Overstone's investments available for public inspection suggests that he did not personally invest heavily in railway shares after the collapse of the "mania", his father did, and hts "considerable holdings" were inherited m 1858 (Michie, 1985, p 76) Finally, in a later general comment, Marx clearly distanguishes the impact of rising interest rates on share prices from both fraudulent practices and declining revenues, and doing so evokes another key element of the railway experience, the unpact of the assoctated credit squeeze on the ability of the initial investors to pay their calls, and the consequences which this had for the prices at which thetr shares could be sold In addition to the tmpact of rtsmg interest rates, he concludes, [secutatypnces] fallpartly as a result of a decline m revenues on which they are claims and partly as a result of the fraudulent character of the enterprises which they very often represent The reduction m the value of these securtttes on the stock exchange ltst, however, has nothing to do wtth the real capital which they represent As against thts, it has a lot to do with the solvencyof thetr owners ( 1981, p 625) Although neither Marx nor Engels explicitly links these c o m m e n t s to a "great railway swindle", and neither makes any c o m m e n t s whatsoever about railway accounting, making this link opens up the possibility of not only provid* ing explanations for several troublesome aspects

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of the affair, but m o r e particularly of providing an historically, economically and politically grounded explanation of two aspects of the accounting practices of the second railway "manta", which bastortans are prone to dismiss simply as the consequence of a lack of"generally accepted accounting principles". Ftrstly, it could explain w h y during the railway share b o o m of 184d ~5 the railway compames, after having appeared to accept the need for conventional accrual accounting, began to deliberately and systematmally o v e r s t a t e their profitability in their pubhshed accounts Secondly, it could explain w h y after the "mania" was broken in 1847 the railway companies began to dehberately and systematically u n d e r s t a t e t h e i r profitability in their published accounts A possible, but critical, interpretation of these events (which I shall henceforth refer to as the "swindle hypothesis") is that they were elements of a deliberate destgn by an "acuve heirarchy" to (a) fuel the "mania", thereby enticing investment in railway shares by unsuspecting middle-class and provincial entrepreneurs, and ( b ) subsequently squeeze out these investors and deflect ctatical interest in the n e w owners, the wealthy London capitahsts. Insofar as the evidence is consistent with the swindle hypothesis it supports Cooper & Sherer's suggestion that in capitahsm " accounting faces the danger of becoming a m e r e t o o l of... powerful groups". As they say, Accountingmay be vtewed as a means of sustaimng and iegtttmtzmgthe current social and economtcpohtmal ar. rangements Ratherthan provtdmg a valtd economm rattonale for actton,accounting mformatzon as used as a means to support those groups who are currently powerful tn socteO~ (Cooper & Sherer, 1984, pp 164-5,

emphases added) Limitations of resources, space and evidence dictate an exploratory and explicitly polemical analysis to assess t h e p r t m a f a c i e vahdity of the "swindle hypothesis". The paper is organized in the following way. To set the htstorical scene 1t briefly outlines the first railway "mania" of 1836--37, and the lessons that were dFawn It then turns to an analysis of the origins of the second "mania" of 1 8 4 5 - 4 6 and the assoctated financtal reporting practices, and h o w the b o o m

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was terminated by the Commercial Crisis of 1847. It then analyses the financial reporting practices of the railway compames in the aftermath o f t h e s e c o n d "mania"; t h e explanauon offered for t h e s e b y historians, and to w h a t e x t e n t the reported results reflected t h e r e t u r n s that w e r e actually g e n e r a t e d b y the railways Finally, s o m e conclusions a n d maphcations for further research are drawn.

THE FIRST RAILWAY "MANIA" A l t h o u g h t h e b u r s t o f railway p r o m o u o n s tn 1836 is usually a t t r i b u t e d to an irrational "manta" o f s t o c k m a r k e t s p e c u l a t i o n , its imm e d i a t e c a u s e w a s t h e t r i u m p h tn 1835 o f l o c o m o t i v e s o v e r h o r s e s o r static e n g i n e s ( R e e d , 1975, p . 5 ) C l a p h a m d e s c r i b e s t h e final break-

through In 1834, when part of the Carlisle hne was nearmg completion and when rads had to be ordered, the directors were still discussing horses {However] on March 9. 1835, Stephenson's "Rapid" pulled the passenger coaches "Expedition", "Sociable", and "Prospect", and Hawthorn's "Comet" the UDespatch", "Industry" and "Transit", from Blaydon to Hexham After that date little more ts heard of horse-traction on the new public railways (1964, p 382) s Thus, a l t h o u g h b y 1836 t h e s u c c e s s o f t h e Liverp o o l a n d M a n c h e s t e r Railway h a d s t i m u l a t e d t h e p r o m o t i o n a n d a u t h o r i z a t i o n o f t h e first m a j o r t r u n k r o u t e s f r o m L o n d o n ( t o B i r m i n g h a m , Bristol, S o u t h a m p t o n , Brighton, D o v e r ) , until t h e n p e t i t i o n s h a d u s u a l l y b e e n for s h o r t e x t e n s i o n s o f e x i s t i n g railways a n d local h n e s H o w e v e r , tn 1836 t h e p a t t e r n c h a n g e d 9 F r o m 1832 to 1835 t h e n u m b e r o f p e t i u o n s to P a r h a m e n t h a d b e e n ( r e s p e c t i v e l y ) 10, 12, 14 a n d 19, b u t an 1836 t h e y l e a p t to 51, a n d in 1837 to 59 A n d w h e r e a s b y 1835 t h e c u m u l a t i v e total o f capital authorized by Parliament was £18 7 mdhon, by

t h e e n d o f 1837 it h a d n e a r l y t r e b l e d t o £ 5 3 . 4 million, a n d so h a d t h e l e n g t h o f a u t h o r i z e d m i l e a g e (Mitchell, 1969, A p p e n d i x T a b l e 1 ) Thus, as C l a p h a m says, a l t h o u g h "It w a s fully o p e n to a n y o n e to argue, in 1 8 3 4 - 5 , that t h e r e was no good prospect of dividends except on a coal-line, a n d n o c e r t a i n t y there", t h e l o c o m o tive trials o f early 1835 h a d r e m o v e d ".. all p r o fessional o p p o s i t i o n : e n g m e e r s w e r e c o n v e r t e d a n d c o n v e r t i n g , a n d t h e i r ranks w e r e filling r a p i d l y to s e r v e 1t" ( 1 9 6 4 , 10p 3 8 4 - 5 ) This c h a n g e m o u t l o o k w a s r a p i d l y r e f l e c t e d tn t h e p r i c e s o f the railway shares quoted on the London Stock E x c h a n g e F r o m J u n e 1835 t o May 1836 t h e r a i l w a y s h a r e p r i c e i n d e x i n c r e a s e d f r o m 60.2 to 129 4, w h e r e a s at n o t i m e p r i o r to 1835 h a d 1t r e a c h e d 80, w h e r e a s t h o s e for canals, d o c k s , w a t e r w o r k s , i n s u r a n c e , gas, m m e s , h g h t a n d c o k e , a n d banks e i t h e r fell o r r o s e relatively slightly ( G a y e r et al., 1953, voL 1, T a b l e s 9 to 18). J o h n Francis, a c o n t e m p o r a r y o b s e r v e r c o n n e c t e d w i t h t h e Bank o f England, d e s c r i b e d t h e "bullish a t m o s p h e r e o f t h e time". The press supported the mania, the government sanctioned it, the people paid for tt Railways were at once a fashion and a frenzy England was mapped out for iron roads The profits and percentage of the laverlx~l and Manchester were largely quoted The prospects and power of the London and Blrmmgham were as freely prophesmd (1851, vol 1,p 290) H o w e v e r , a l t h o u g h this "mania" w a s b a s e d o n solid t e c h n i c a l p r o g r e s s in l o c o m o t i v e s , " . o n t h e financial side t h e r e w a s still s o m e d o u b t a m o n g e x p e r t s T h e r e was so m u c h w i l d p r o j e c tion, s o m u c h n e c e s s a r y u n c e r t a m t y as t o t h e e x e c u t i o n o f p a r t i c u l a r p r o j e c t s , so m u c h Ignora n c e o f e n g i n e e r i n g p r o b l e m s a m o n g t h e public; a n d so m u c h s y s t e m a t i c o p p o s i t i o n f r o m int e r e s t e d , a n d h a r d l y less f r o m d i s i n t e r e s t e d , q u a r t e r s " ( C l a p h a m , 1964, p 3 8 3 ) T h e railw a y s w e r e n o t y e t an o b v i o u s l y s o u n d financial

s Although Stephenson's Rocket performed successfully at the Ramhdl trials of 1829 organized by the laverpool and Manchester Radway, only with hindsight ts tt possible for PoUms to claim that" the railway age had begun "because, as he admits, " the locomotive reqmred further development and Improvement before it could completely supercede other forms of traction" ( 1969, p 140) 9The delay between the success of the locomotive m March 1835 and the presentation of petttaons arose because radway compames were created by special Acts of Parlmment with long lead times before p¢tltiofl$ and authorizations could be made

THE "RAILWAYMANIA"OF 1845 proposition simply because engineetang proj e c t s o n this scale h a d n e v e r b e e n a t t e m p t e d before, a n d it w a s i m p o s s i b l e to k n o w w i t h a n y c e r t a i n t y h o w m u c h it w o u l d all c o s t A l t h o u g h n e a r l y 6 0 0 m i l e s o f railways h a d b e e n a u t h o r i z e d b y 1833, It w a s n o t u n t i l 1838 that this a m o u n t o f mileage was open The railways might well make m o n e y simply b y s e c u r i n g existing traffic ( t h e baszs o f m o s t o f t h e p r o j e c t i o n s (Mitchell, 1969, p. 1 4 ) ) buL e v e n if traltic v o l u m e s increased, until t h e total capital o u t l a y was k n o w n it was impossible to k n o w w h e t h e r t h e y w o u l d earn t h e r e q u i r e d return. G i v e n t h e scale o f t h e r e q u i r e d i n v e s t m e n t it is s u r p r i s i n g that o n l y a small p e r c e n t a g e o f t h e e q u i t y f i n a n c e w a s p r o v i d e d f r o m London, t h e c e n t r e o f finance, c o m m e r c e , t r a d e a n d p o l i t i c a l p o w e r , w h e r e t h e w e a l t h i e s t in Britain p r e d o m i n a n t l y l i v e d This g r o u p is c a l l e d t h e " L o n d o n Capitalists" o r t h e " L o n d o n w e a l t h y " ~0 It c o m prises t w o o v e r l a p p i n g e l e m e n t s Firstly, t h e great landowners, t h e aristocracy, m a n y o f w h o m rived in London, a n d t h e g r e a t e s t o f w h o m l a r g e l y o w n e d 1t, a n d h a d b e e n h e a v i l y i n v o l v e d in its d e v e l o p m e n t ( B e c k e t t , 1986, pp. 265, 2 6 7 - 7 2 ) Secondly, t h e financiers, bankers, a n d m e r c h a n t s c o l l e c t i v e l y k n o w n as t h e City As R u b m s t e m has s h o w n b y an analysis o f t h e v a l u e o f estates at p r o b a t e , "Despite t h e Industrial Revolution, t h e m o s t i m p o r t a n t e l e m e n t in Britain's w e a l t h s t r u c t u r e d u r i n g t h e n i n e t e e n t h century, apart from landed wealth, was comm e r c e a n d finance" ( 1 9 7 7 , p 6 0 6 ) , ". that t h e

445

c e n t r e o f w e a l t h - m a k i n g in n m e t e e n t h c e n t u r y Britain w a s L o n d o n r a t h e r t h a n t h e i n d u s t r i a l t o w n s in t h e n o r t h o f England" ( 1 9 7 7 , p. 6 0 8 ) , a n d that "At t h e c e n t r e o f L o n d o n ' s w e a l t h w a s t h e City " ( 1977, p 6 1 0 ) ) l A l t h o u g h t h e real w e a l t h o f t h e c o u n t r y w a s c o n c e n t r a t e d m London, easily t h e b i g g e s t subs c r i b e r s for, a n d h o l d e r s of, r a i l w a y s h a r e s w e r e t h e m e r c h a n t s a n d industrialists f r o m Manchest e r a n d Liverpool, t h o s e o f t h e p a r t i c u l a r a r e a w h i c h t h e r a i l w a y s e r v e d , a n d t h e " m i d d l e classes" ( d e f i n e d b e l o w ) T h e m a j o r s t u d y o f t h e e a r l y r a i l w a y s h a r e h o l d e r s Is b y Reed, w h o e x a m i n e d s u b s c r i p t i o n s to t h e r a i l w a y e q u i t y issues f r o m 1823 t h r o u g h 1845 o f t h e 13 m a l o r r a i l w a y c o m p a n i e s w h o m 1838 r e p r e s e n t e d o v e r h a l f o f t h e total p a i d - u p capital for all English r a i l w a y s ( 1 9 7 5 , p 1 9 3 ) R e e d p r o v i d e s n o s u m m a r y statistics o f his data. As h e says, h e p r o v i d e s o n l y an " e l e m e n t a r y statistical analysis", a n d a c c e p t s that ".. e v e n w i t h i n t h e c o n f i n e s o f t h e d a t a a n d t h e m e t h o d s used, m o r e e l a b o r a t e results could have been presented" (1975, p . v i i i ) F u r t h e r analysis s h o w s , in fact, that investors from London held a weighted average over t h e p e r i o d 1823 t h r o u g h 1845 o f o n l y 17% o f t h e n o m i n a l v a l u e o f t h e s e c o m p a n i e s ' shares, w h e r e a s i n v e s t o r s f r o m M a n c h e s t e r a n d Iaverp o o l a l o n e h e l d 37%, a n d o t h e r local i n t e r e s t s h e l d a f u r t h e r 25%. 12 A l t h o u g h w e a l t h y m e r chants, m a n u f a c t u r e r s , b a n k e r s a n d " g e n t l e m e n " h e l d a large m a j o r i t y o f this equity, a l m o s t a t h i r d w a s h e l d b y t h e "middle-classes". i-¢ T h e l a t t e r

)0 As the wealthiest have the most money to invest, we shall see them referred to later as the "monied interest" They are Marx's "Money Capital" Jl Rubmstem calls these "top non-landed wealthhoiders" the "middle-classes', presumably to distmgmsh them from the aristocracy I do not follow his usage Apart from the fact that ttts confusing to modern readers, its real weakness ts revealed by Rubmstem's discovery that, m his terms, there are two "middle-classes" the London middle-classes and the prownctal (mainly Northern) middle classes based on manufacturing and industry (Rubmstem, 1977, pp 619--620) At this point m history it seems more appropriate to group the non-landed London wealthy with the great landowners. As Rubmstem himself says, "The chief social distraction between the two middle classes lay in their contrasting relationship with the traditional landed society The London-based middle class was far closer to the old society than its provincial counterpart" ( 1977, p 620) ~2Calculated from Reed (1975) Tables 12a, 14a, 17, 19a, 21, 23, 25a, 27, 29a, 31a, 33a t~ "Gentlemen" were those who chose no occupanonal nile, hut included many aristocrats The "middle-classes" were defined to include the following destgnanons (i) the "professions" including law, medmme, clergy, officers m services and merchant manne, architects (u) miscellaneous "white collar" groups mcludmg teachers, engdneers, craftsmen, servants (in) farmers and graziers (IV) women (v) unspecified (Reed, 1975, p 109)

446

ILA. BRYER

w e r e able to subscribe for relatively modest amounts of shares because, in accordance with the practtce of the day, the railway companies issued shares with large denominations (often of £ 1 0 each), expecting to leave large amounts uncalled 0effreys, 1946). Furthermore, Parliamentary procedures for Railway Acts initially required subscribers to pay only a 5% depostt Thus, as share values increased raptdly from 1835, even a person of limited means could acquire shares for very little m o n e y in relatton to their market value. Although subscrtbers for raftway shares w e r e taking a risk, as they might not find it easy to m e e t calls if they c a m e m difficult times w h e n credit was tight, m the national excitement generated by the early successes and the prospects for the future, m a n y s u c c u m b e d to temptation. However, as the constructton p r o g r a m m e s p r o c e e d e d tt b e c a m e clear that the railways w e r e going to be m u c h m o r e expensive to build than had b e e n antictpated. As the difliculttes and cost overruns mounted, enthusiasm for railways waned, and the n u m b e r of petitions for bills to increase authorized mileage fell sharply in 1838 (to 9, from 59 in 1837). In additaon to engineering problems, there w e r e u n e x p e c t e d cost mcreases for raw material and labour. Up to the mid-1840s railways cost roughly twice as much as engineers had estimated (Reed, 1975, Table 2, Franics, 1851, vol. 1, pp. 147, 203). These capttal overruns forced c o m p a m e s to make large calls on their shareholders just as htgh interest rates w e r e depressing trade, and many shareholders delayed or refused to m e e t calls, or w e r e finally forced to sell thetr shares In Francts' eyes a provtdential vengeance had b e e n vtslted on those "Men w h o had lifted then. heads in the pride of p r e s u m e d riches, m o u r n e d their recklessness, and w o m e n w e p t at that whtch they could not prevent" (1851, vol 1, p 300) Desperate for cash, most railway c o m p a m e s w e r e forced to b o r r o w heavtly for relattvely short periods (typically four years) at htgh interest rates, and their ratio of debt to total capital jumped from an average of around 24% from 1828 to 1836 to 32%, where it remained for the next nine years (Hawke & Reed, 1969, Fig 2)

All these factors took their toll on share prices which began failing in May 1836, reaching their lowest point in April 1837. To encourage shareholders to continue to contribute capital to enable the completton of lines, many c o m p a m e s tssued financtal instruments to, m effect, enable t h e m to pay dividends from capttal They tssued shares at heavy dtscounts and paid divtdends on the nominal value; they guaranteed dividends on equity capital; they paid interest on calls; they mortgaged future calls, and they issued prefere n c e shares w h o s e divtdends w e r e treated as mterest and capitalized. Guaranteed dividends effectively turned equity into a short-term unsecured parttcipating loan and, m full accordance with m o d e r n a c c o u n t m g practice for the construction of assets not yet available for use, the railway companies mvartably reported their net interest payments as capitaltzed until lines w e r e earning revenue (Pollins, 1969, p p 147-8). Although w e shall see that these practices w e r e later outlawed, the railway directors w e r e perfectly o p e n about then" use, seeing t h e m as an obvious solution to the p r o b l e m of raising e m e r g e n c y finance to c o m p l e t e the hnes w h e n additional finance was unavailable from their extsting shareholders (Reed, 1975, pp 6 7 - 8 ) . Arguably, by paying dividends out of capttal the dn.ectors w e r e signalling then. expectation that, despite the current circumstances, future returns would be sattsfactory Also, by guaranteemg shareholders an income, they may have helped t h e m to m e e t calls in difficult ttmes by providmg the basis for raismg a personal loan As Evans puts it. "To induce investors to subscribe to projects whtch could not in the tmmediate future earn divtdends, interest on all outstanding shares was frequently paid out of capital" (1936, pp. 2-4, emphasts added). If this was the mottvation for paying dividends from capital, h o w realistic w e r e the financtal forecasts they tmphed; In fact, although the cost overruns w e r e alarming, the financial performance of the railways up to the mtd-1840s could give investors some grounds for optimism because, although goods traffic was significantly below expectations, working expenses w e r e also m u c h lower than was expected, and ffthese

THE "RAILWAYMANIA"OF 1845 c o u l d be held and r e v e n u e s increased t What w e r e the p r o s p e c t s o f d o i n g this? Investors c o u l d take c o m f o r t in the success o f the Ltverp o o l and Manchester and the L o n d o n and Birmingham in o v e r c o m i n g cost o v e r r u n s and making u n e x p e c t e d l y large profits (Francis, 1851, pp. 147, 2 0 3 ) Also, increased r e v e n u e c o u l d c o m e f r o m b o t h increasing prices and increases in traffic. Although r e v e n u e from freight traffic had b e e n dtsappointing, there w e r e g o o d g r o u n d s for anticipating i m p r o v e m e n t Firstly, the railways w e r e p a r h a m e n t a r y m o n o p o l i e s w h i c h the major c o m p a n i e s w e r e p r e p a r e d to fight hard, and pay handsomely, to p r o t e c t f r o m c o m p e t i n g lines; secondly, it w o u l d take time to w e a r d o w n the c o m p e u t i o n f r o m canals and for n e w investment to be made, particularly in coal m i n i n g w h e r e the p r o s p e c t s o f expansion w e r e excellent (Clapham, 1964, p. 399). Furthermore, a l t h o u g h the railway c o m p a n i e s w e r e pleasantly surprised by the d e m a n d for passenger traffic, the p r o s p e c t s for further increases w e r e excellent as p o p u l a t t o n g r o w t h was acc e l e r a t m g rapidly 14 Also, even t h o u g h it was mitially excessive capttal e x p e n d i t u r e that was raising d o u b t s about financtal viability, as technological and supply bottlenecks w e r e o v e r c o m e , increases in d e m a n d c o u l d be m e t b y further c o n s t r u c t t o n at l o w e r costs, particularly as q u a h t y i m p r o v e m e n t s m rails and l o c o m o ttves p e r m i t t e d s t e e p e r gradients. Finally, the major c o m p a n i e s c o u l d anttcipate m e r g e r s to spread then" o v e r h e a d s o v e r a larger turnover. In short, although achieving g o o d financial results from the investments m a d e m railways was n o t certain, there w e r e g o o d g r o u n d s for the t r e n d increase in the railway share index from the middle o f 1841 As Francis noted, having weathered all storms In 1843, railways, though depressed in value, were regarded as good as consols If railroads were found un-

447

profitable one year, they were almost certmn to tmprove with the commerce and the capital of another epoch and compel a divtdend H was but a question o f ttme (1851, vol 2, pp 132-7, emphasis added) And this a p p e a r e d to be the clear message conv e y e d b y the a c c o u n t i n g r e p o r t s of the railway c o m p a n i e s at this time

RAILWAY A C C O U N T I N G BEFORE THE "MANIA" o f 1845 W h e n lmes began o p e n i n g in the late 1830s and early 1840s c o m p a n i e s began p u b l t s h m g b o t h capital and r e v e n u e a c c o u n t s to replace ( o r s o m e t t m e s s u p p l e m e n t ) the total cash a c c o u n t s p r o d u c e d to that time (Edwards, 1985, p 24). Although railway c o m p a n i e s mvariably included in their statutes the hmltation to only declare "Dividends o u t o f the clear profits o f the said Undertaking", so that " t h e Capital of the said C o m p a n y shaU [ n o t ] . . . in any Degree b e r e d u c e d o r impaired", n o g u i d a n c e was gxven o n h o w profit was to he measured, and the o p e n i n g o f lines tmmediately raised the q u e s u o n o f the extent to w h i c h c o m p a n i e s should r e p o r t o n an accruals o r a cash basis (Edwards, 1985, p. 24 ) The main issues w e r e w h e t h e r d e p r e c i a u o n was to be c h a r g e d and, if so, o n w h a t basis~ Accrual a c c o u n t m g is based o n the postulates o f financial capital m a i n t e n a n c e and "going-concern", t~ By the late 1830s and early 1840s m a n y railway c o m p a n i e s w e r e only just e m e r g i n g as g o i n g - c o n c e r n s with r e c o g m z a b l e "steady states" Thus, although there was w i d e s p r e a d a g r e e m e n t that d e p r e c i a t i o n should at least be c h a r g e d o n rolling stock, there was little technical data about its e x p e c t e d life and rate o f deterioration, and real differences b e t w e e n the e x t e n t to w h t c h c o m p a n t e s p e r c e t v e d themselves to be at steady state Thus, inttially there

t4 The populanon of England increased from 12 mflhon m 1820 to almost 18 mdhon m 1850 Added to the large demand for working class transport, whtch formed the basts of the early spectacular success of the Lsverpooland Manchester rmlway,was the demand from the raptdly growing mtddle income groups (Davis, 1973, p 305) ts In terms of the earmng power mterpretanon of htstortcal cost accrual accounting, income ts an estimate of steady state distrthutable cash flow whtlst mamtammg capital intact, assuming that htstory repeats ltseff mdefimtely

448

R. A BRYER

was w i d e variatton m a p p r o a c h e s . S o m e d i d n o t c h a r g e d e p r e c i a t i o n at all; s o m e v a l u e d r o l h n g s t o c k at n e t r e a l i z a b l e value, c h a r g e d falls in value as d e p r e c i a t t o n , a n d t o o k i n c r e a s e s m value as h o l d i n g gains. O t h e r s c h a r g e d d e p r e c t a tion o n h t s t o r i c o r r e p l a c e m e n t c o s t ( P o l h n s , 1969, p 1 4 9 - 1 5 3 ) H o w e v e r , b y t h e early 1840s the principle of charging depreciation on rolling stock, as an essential e l e m e n t m t h e m e a s u r e ment of sustainable mcome, was wtdely unders t o o d b y t h o s e professtonaUy m t e r e s t e d in railways I a t t l e t o n c o m m e n t s that, "As early m t h e dev e l o p m e n t o f railways as 1841 tt xs e v i d e n t that a t least a f e w p e o p l e h a d a v e r y g o o d c o n c e p t t o n of the relattonshlp between depreciauon and n e t i n c o m e " ( 1933, p 227, e m p h a s i s a d d e d ) By "at least a f e w p e o p l e " Littleton e l s e w h e r e m a k e s clear that he mcludes most of those who needed to k n o w . Thus, b y " g o o d c o n c e p t i o n " of, d e p r e c i a t i o n h e m e a n s that w h i c h ". r e l a t e [ d ] d e p r e ciation to the maintenance of long-lived corpor a t e assets." In hss vtew, this c o n c e p t t o n w a s " p l a i n l y r e f l e c t e d in n i n e t e e n t h c e n t u r y discussions of railroad problems and m m a n y railroad c o r p o r a t i o n ' s r e p o r t s o f that day" (I.ittleton, 1933, p. 223, emphasis a d d e d ) . Littleton's c o m m e n t , that "at least a few" p e o p l e i n v o l v e d w i t h railways u n d e r s t o o d dep r e c i a t i o n , w a s b a s e d o n a r e p r i n t in t h e American Railroad J o u r n a l m 1841 o f an a r t m l e first p u b l i s h e d m t h e British R a i l w a y Times o f t h e s a m e y e a r T h e a r t i c l e a r g u e d that "The declarat i o n o f a d i v i d e n d w i t h o u t m a k i n g a l l o w a n c e for t h e deprectat~on o f stock, c a n n o t in o u r o p i n t o n b e r e g a r d e d as o t h e r t h a n fallactous [ b e c a u s e ] . a r a t e o f d t v i d e n d n o t w a r r a n t e d b y t h e profit really m a d e . leav[es] a s u c c e e d i n g set o f p r o p n e t o r s t o m a k e u p f r o m t h e t r i n c o m e t h e replacing o f e x h a u s t e d stock" ( q u o t e d in Polhns, 1969," p 1 5 0 ) As Littleton's c o m m e n t imphes, t h e wri-

ter ofthts article clearly understood the function o f d e p r e c t a t t o n in capital m a m t e n a n c e Evid e n c e that it w a s w i d e l y u n d e r s t o o d b y t h e U K. railway c o m p a n i e s ts p r o v i d e d b y t h e C h a i r m a n o f t h e L o n d o n a n d B t r m i n g h a m Railway w h o , in 1841, r e p o r t e d t h e i r ".. p l a n o f s e t t i n g aside a fund to m e e t t h e u n a v o i d a b l e d e p r e c i a t i o n of stock", and c l a n n e d in justification that " alm o s t every other C o m p a n y . . appropriate[s] a p o r t i o n o f t h e profits e v e r y half y e a r t o m e e t t h e d e p r e c t a t t o n w h i c h has t a k e n p l a c e d u r m g that p e r i o d in t h e value o f t h e C o m p a n y ' s s t o c k - - a d e p r e c i a t i o n w h i c h it ts c l e a r m u s t b e m a d e g o o d e t t h e r f r o m t h e profits o f w o r k i n g , o r defrayed f r o m t h e capttal o f t h e C o m p a n y " (Pollins, 1969, p 153, e m p h a s i s a d d e d ) By "value" t h e c h a i r m a n l a t e r m a k e s c l e a r h e m e a n s "the capital o r i g i n a l l y i n v e s t e d m t h e p u r c h a s e o f Stock" (Pollins, 1969, p. 1 5 3 ) Thus, a l t h o u g h his statem e n t l e a v e s o p e n t h e p o s s i b i l i t y that d e p r e c i a t i o n c h a r g e s could b e s e e n as r e p r e s e n t i n g a " p o r t i o n o f profits", a n d c o u l d t h e r e f o r e f o r m t h e basis o f a d i s t r i b u t i o n , it n e v e r t h e l e s s c l e a r l y r e c o g n i z e d t h e n e e d for d e p r e c t a t i o n zf t h e C o m p a n y ' s historical financial capital as repr e s e n t e d in t h e rolling stock w a s to b e mainr a i n e d t6 E v i d e n c e that t h o s e w h o n e e d e d to u n d e r s t o o d t h e p u r p o s e o f d e p r e c i a t i o n , ts also p r o vided by Lardner who stressed the" necessity o f e s t a b l i s h i n g an annual r e s e r v e fund for t h e f u t u r e r e p l a c e m e n t o f t h e r o l h n g s t o c k at a f u t u r e e p o c h , w h e n , n o t w t t h s t a n d i n g t h e curr e n t annual repairs, a n d t h e tnfuslon o f n e w stock, t h e w h o l e s t o c k will h a v e b e e n so w o r n as to b e in t h e mass unfit for f u t u r e use, a n d o f n o o t h e r value t h a n o l d m a t e r i a l s " In hts view, this w a s w e l l u n d e r s t o o d b y at least "several o f t h e m o s t c o n s i d e r a b l e r a i l w a y c o m p a m e s " , for it w a s precisely "On the assumption of such a contmg e n c y " t h a t t h e y "... h a v e f o r m a n y y e a r s back

t6 It ts often suggested that during the mneteenth century no clear dtstmctton was drawn between deprectatton provislons as an expense and deprectatton reserves as a part of dtstnbutable profit (eg. Edwards, 1986, p 252) However, rattonal (selfinterested) investors and their agents, of necesstty, have an arnbtvalent attitude towards deprectatton if they want and expect an enterprtse to remain a gomg-concern, and they beheve tts value ts strongly related to tts earning power, deprectatton ts a charge before dtstrtbutable profits-- they are "provlstons for replacement" On the other hand, ffthey do not want or expect an enterprtse to remam a going-concern, or ff they beheve (or beheve others beheve) that the value of the enterprise ts determmed by the level of current dtvtdends, deprectat~on provlstons become dtstrtbutable "reserves"

THE "RAILWAYMANIA"OF 1845 p u t aside a s u m c a l c u l a t e d u p o n a c o n j e c t u r a l basis for this p u r p o s e " ( 1 8 5 0 , p. 114, e m p h a s i s a d d e d ) . O n the basis o f Lardner's definition, these c o m p a n i e s h e l d an accruals, cost-based c o n c e p t i o n o f d e p r e c t a t i o n ~7 An almost identical d e f i n i t i o n was g i v e n in t h e R a i l w a y T i m e s ar. t i d e o f 1841 (Pollins, 1969, pp. 1 5 0 - 1 ). T h e diff e r e n c e b e t w e e n these a n d m o d e r n d e f i n i t i o n s o f d e p r e c i a t i o n ts m e r e l y that the latter exphcitly emphasise technological and econo m i c o b s o l e s c e n c e For e x a m p l e , SSAP12 defines d e p r e c i a t i o n as" the m e a s u r e of the wearing out, c o n s u m p t i o n o r o t h e r r e d u c t i o n in the useful e c o n o m i c life o f the fixed asset, w h e t h e r arising from use, effluxton of t t m e o r obsolescence through technological or market changes" ( A c c o u n t i n g Standards C o m m i t t e e , 1987, para 3 ) H o w e v e r , as w e shall see later, Lardner a n d o t h e r s c o n c e r n e d well u n d e r s t o o d the n e e d to c o n s i d e r o b s o l e s c e n c e i n e s t i m a t i n g d e p r e c i a t i o n charges.IS Although no companies charged depreciation o n t h e p e r m a n e n t way, tt was w i d e l y c l a i m e d at the t i m e that, if p r o p e r l y m a i n t a i n e d , its life was for all practical p u r p o s e s infinite (Lardner, 1850, p . 5 6 ) Thus, b y the early 1840s, w i t h the initial h n e s c o m p l e t e d a n d traffic a n d r e v e n u e s increasing, m a n y m a j o r railway c o m p a m e s w e r e a p p r o a c h i n g steady state w i t h t h e i r existing operattons, a n d this appears to have b e e n r e f l e c t e d in their a c c o u n t m g r e p o r t s A l t h o u g h PoUins p r o v t d e s little systemattc e v i d e n c e , this also s e e m s to have b e e n hts c o n c l u s i o n As w e shall

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see later, " W h e n the c o m p a n i e s settled d o w n again after the e x c e s s e s o f the m a n i a t h e y o n c e m o r e r e c o g n i s e d the n e e d to a l l o w for depreciatton in t h e a c c o u n t s " (Pollins, 1969, p 153, emphasis a d d e d ) , clearly i m p l y i n g that they had p r e v i o u s l y d o n e so This v i e w is also g i v e n qualified s u p p o r t b y E d w a r d ' s m o r e r e c e n t r e v i e w o f early railway d e p r e c i a t i o n p r a c t i c e s w h i c h b u i l d s o n the ".. i m p o r t a n t p a p e r b y Pollins ( 1 9 5 6 ) " Edwards c o n c l u d e s that "A n u m b e r o f ratlway c o m p a n i e s o p e n e d t h e i r lines to traffic m the late 1830s and, b e t w e e n t h e n a n d the mid1840s, it was q u i t e c o m m o n p r a c t i c e to m a k e s o m e p r o v i s i o n for the d e p r e c i a t i o n of rolling stock" ( 1985, p. 255, e m p h a s i s a d d e d ) Edwards p r o v i d e s n o e v i d e n c e to s u p p o r t his qUalLfiCatlon. H o w e v e r , a l t h o u g h systemattc r e s e a r c h w o u l d b e n e c e s s a r y to d e r i v e detailed c o n c l u sions, as the c o m p a n i e s o p e n i n g t h e i r h n e s duri n g this p e r i o d w e r e d o m i n a t e d b y the "most considerable", it s e e m s r e a s o n a b l e to c o n c l u d e that d e p r e c i a t i o n a c c o u n t m g was t h e m o d a l , if not necessarily the meat6 practice

RAILWAYS IN THE DOLDRUMS Although the m a j o r railway c o m p a n i e s w e r e n o w d e a r l y going-concerns, and there was considerable s c o p e for f u r t h e r e x p a n s t o n , the difficulties of the late 1830s a n d early 1840s had d i s c o u r a g e d m a n y n e w mitiatives, a n d b e t w e e n 1837 a n d 1843 o n l y an additional 301 miles had

1~In contrast to the earher "proprmtor's" wew in winch "Depreciation apparently was not regarded as expense or cost but as a loss, as 'decay from use'" (L~ttleton, 1933, p 227) AlthoughIJttleton argues that only the former ts based on "the real nature of deprecmt~on', arguably both views mmntam capital ,n ways approprmte to their orcumstances For ~proprtetors" with relatwely small mvestrnent in fixed assets, and no assurance that they would be replaced in their current form, treating depreciation as a loss simply created undisclosed general reserves whmh could have been employed as the owner-manager thought fit. However, with large mvestments m Iong-hvedfixed assets which were expected to be replaced, m the early 1840s at least the railways recognized the need to treat deprectaUon as a specific cost or expense and so create a specific prowsion for replacement, which might or might not be funded. mAs did at least some of his readers For example, Marx generalizes Lardner's concept of"marketable depreciat|on'," the fall m prme produced, not by any detertorauon of the real value in the stock, but by other causes foreign to the business of the company acting on the market ( 1850, p 117), as "moral deter|oration" In addition to market generated obsolescence, Marx took it for granted that technological obsolescence was an essential element in depreciation, that is, as he put it, the fact that ~The means of labour are for the most part constantly revolutaomsed by the progress of mdustry Hence they are not replaced in their ortgmal form, but m the revolutlomsed form" ( 1978, p 250)

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IL A. BRYER

b e e n a u t h o r i z e d As Francis p u t s it, a l t h o u g h "... it w a s g e n e r a l l y u n d e r s t o o d that t h e stagna-

t i o n t h a t w a s t h e n e v t d e n t in t h e r a i l w a y w o r l d w a s n o t likely to e n d u r e " ( 1 8 5 1 , vol. 2, p 18), t h e p u b h c w o u l d n o t easily f o r g e t t h e r e s u l t s o f t h e first "mania", w h e n "... t h e e y e s o f t h e p e o p l e w e r e o p e n to then" folly; a n d s h a r e s o f e v e r y des c r i p t t o n fell. T h e n c a m e that t e r r i b l e revulsion..." ( 1851, vol. 1, p. 300). Railways h a d n e v e r b e e n p o p u l a r w t t h l a n d o w n e r s . N o w t h e i r unpopularity was widespread. There were many a c c u s a t i o n s o f f r a u d u l e n t p r o m o t i o n s In 1837 t h e H o u s e o f C o m m o n s h e l d an i n q u i r y into "railway rascalities" A l t h o u g h f e w i n s t a n c e s w e r e found, g r e a t p l a y w a s m a d e o f t h e " m e n o f straw" that h a d s i g n e d s u b s c r t p t l o n lists s u b v e r t m g P a r l i a m e n t ' s i n t e n t i o n t h a t t h e y w o u l d ens u r e o n l y b o n a fide, I e w e a l t h y , i n v e s t o r s applyi n g for s h a r e s T o d e t e r others, P a r l i a m e n t d e c r e e d that in f u t u r e 10% o f t h e p r o p o s e d capital b e d e p o s i t e d w i t h g o v e r n m e n t a l a u t h o r i t i e s , and that the period of notice given to Parliament for any n e w line b e e x t e n d e d f r o m o n e t o t w o years. Railways w e r e also v e r y u n p o p u l a r w i t h a large s e c t i o n o f t h e aristocracy. "Many a n o b l e l o r d o p e n l y e x p r e s s e d a h a t r e d o f t h e "infernal" railways, a n d in d o m g so h e v o i c e d t h e sentiment of hundreds of country gentlemen" (Hyde, 1934, p. 1 3 5 ) In a d d i t i o n , ratlways w e r e g e n e r ally u n p o p u l a r b e c a u s e o f then" w e i l - p u b l i c i s e d safety r e c o r d , a n d t h e "lawless a r m i e s " o f n a w i e s that w e r e b u i l d i n g t h e m Thus, tn t h e early 1840s, as Pollins p u t s it, " . m an a t m o s p h e r e o f g l o o m s o m e c o m m e n t a t o r s c a l l e d for a halt t o f u r t h e r c o n s t r u c t i o n " ( 1 9 7 1 , p 35), a n d "The p o l i t t c a l e c o n o m i s t s w r o t e essays to p r o s e that t h e r a i l w a y s w o u l d abs o r b t o o m u c h o f t h e n a t i o n a l capital, a n d d i v e r t it f r o m Its m o r e l e g t t i m a t e c h a n n e l s " (Francis, 1851, vol. I, p 2 9 5 ) It is s o m e w h a t curtous, t h e r e f o r e , that "Almost i m m e d t a t e l y a f t e r w a r d s t h e c o u n t r y was engulfed in t h e greatest railway p r o m o t t o n b o o m ever" (Pollms, 1971, p 35)! THE ORIGINS O F THE SECOND RAILWAY MANIA In early 1844 railway s h a r e p r i c e s s t a r t e d t o

rtse s t e e p l y , a n d f r o m t h e m i d d l e o f 1844 t h e s e c o n d r a i l w a y "mania" c o m m e n c e d o n a previo u s l y u m m a g i n e d scale. F r o m 1837 t o 1842 o n l y 155 a d d i t i o n a l m i l e s h a d b e e n a u t h o r i z e d , a n d in 1 8 4 2 - 4 3 a f u r t h e r 146 w e r e a u t h o r i z e d , b u t m t h e f o l l o w i n g f o u r y e a r s a f u r t h e r 9,463 m i l e s w e r e a u t h o r i z e d , w t t h p e a k s o f 2,816 a d d i t i o n a l m i l e s in 1844, a n d 4,541 a d d i t i o n a l m i l e s m 1845 (MttcheU, 1969). W h a t h a d c a u s e d this rem a r k a b l e revival o f p u b l i c e n t h u s i a s m for railw a y s ; Certainly, as a c o n t e m p o r a r y e c o n o m i s t n o t e d , e c o n o m i c c o n d i t i o n s w e r e favourable: Early m 1844, when the restored prosperity of trade was no longer doubtful, and the rate of mterest had for about a year and a half, been under 3 per cent, the attention of the pubhc was strongly attracted to the favourable results of the mvestments made m the prmctpal hnes of ratlway then m operatton That the system mtght be extended wtth equal profit seemed htghly probable, parttcularly when regard was had to the unusually low prtces of tron, and other needful matertals, and when tt was also constdered that the expermnce gamed m the construetton of extstmg hnes had suggested tmprovements hkely to reduce, constderably, for the future, the outlay m the first instance Accordmgly, durmg the sprmg and summer of that year, whtle the shares m most of the old hnes rose considerably m value, many new compantes were projected (Tooke, 1848, pp 63-64) However, while favourable economtc condit i o n s w e r e p e r h a p s a n e c e s s a r y c o n d i t i o n for m o r e i n v e s t m e n t in railways, t h e y w e r e c l e a r l y n o t suliScient b e c a u s e t h e p r e v i o u s " d e p r e s s t o n " h a d b o t t o m e d in 1 8 4 1 - 2 , a n d d u r i n g 1843 bustness activtty h a d g r o w n b y n e a r l y 10%. G a y e r et a l classify t h e c y c l e o f b u s i n e s s acttvtty f r o m 1837 to 1842 as a " m i n o r cycle" w i t h a l o w p o i n t o n t h e i r m d e x o f 126 7 ( 1 8 2 1 - 5 = 1 0 0 ) m 1842, w h i c h to that t i m e was t h e fifth h t g h e s t - e v e r level, o n l y b e i n g b e a t e n b y t h e e x c e p t t o n a l l y g o o d y e a r s o f 1836, 1838, 1839 a n d 1 8 4 0 ( 1953, vol. 1, p p 355--6)t T h e r e f o r e , it is m o r e a c c u r a t e t o d e s c r i b e this p e r i o d as a p a u s e m o t h e r w i s e u n i n t e r r u p t e d g r o w t h . F r o m 1820 to 1842 business a c t i v i t y h a d i n c r e a s e d b y n e a r l y 60% Yet tt w a s n o t until m i d - 1 8 4 4 , w h e n b u s m e s s activity w a s at its h i g h e s t - e v e r level, that p u b l i c m t e r e s t a n d s h a r e p r i c e s s u d d e n l y revived. F u r t h e r m o r e , as t h e s h a r p i n c r e a s e s in P a r l i a m e n t a r y n o t i c e s for s c h e m e s o c c u r r e d in t h e w m t e r o f 1843, tt

THE "RAILWAYMANIA"OF 1845 a p p e a r s that "The f a r - s e e m g c o u l d a l r e a d y f o r e t e l l .. t h e l i k e l i h o o d o f s o m e r e c u r r e n c e o f r a i l w a y s p e c u l a t i o n stmilar t o t h a t w h m h h a d afflicted t h e c o u n t r y in 1836" (Lambert, 1934, p.

98). It is c o m m o n l y a c c e p t e d that t h e t u r n i n g point came when the Government unexpect e d l y r e v e a l e d a k e e n i n t e r e s t in r a i l w a y s after y e a r s o f i n d i f f e r e n c e a n d o c c a s t o n a l o p e n hostility, t h e r e b y s t i m u l a t i n g t h e "mania" Thus, t h e k e y q u e s t i o n is w h e t h e r , as Pollins claims, t h e G o v e r n m e n t ". inadvertently., h e l p e d to f o s t e r t h e m a m a " ( 1 9 7 1 , p 35, e m p h a s i s a d d e d ) or, as Francis p u t s at, ". t h e l e g t s l a n v e b o d y . commatt e d t h e mistake o f c o n v e r t i n g t h e k i n g d o m i n t o a g r e a t s t o c k e x c h a n g e ." ( 1 8 5 1 , v o l 2, p 165, e m p h a s e s a d d e d ) ; o r w h e t h e r it d i d so deliber[ately~ N e i t h e r Francts n o r Pollins p r o v i d e s a n y t e v i d e n c e that t h e G o v e r n m e n t ' s a c t i o n s w e r e " i n a d v e r t e n t " o r "mtstaken" A l t h o u g h it m a y b e i m p o s s i b l e t o p r o v i d e an u n e q m v o c a l a n s w e r , t h e vaew that t h e G o v e r n m e n t d i d d e l i b e r a t e l y sramulate t h e "mania" is, w e shall see, at least a c o h e r e n t e x p l a n a t i o n o f s o m e o t h e r w i s e ine x p l i c a b l e b e h a v i o u r As t h e r e p r e s e n t a t i v e o f the London wealthy, the Government had every m o t i v e for w a n t i n g o t h e r s to c o n t i n u e to p a y for w h a t w a s g o i n g t o b e a v e r y e x p e n s i v e , a n d still risky, set o f investments.t9 The Times r e p o r t e d in A u g u s t 1845 that t h e p r o p o s a l s for that y e a r alone equalled the annual value of the whole of British e x p o r t s , a n d w e r e g r e a t e r t h a n t o t a l p u b lic r e v e n u e ( L a m b e r t , 1934, p 1 6 4 ) F u r t h e r m o r e , little l o v e w a s lost b e t w e e n t h e L o n d o n w e a l t h y a n d t h e n o u v e a u riche£ As Francis, e r h a p s r a t h e r c o l o u r f u l l y , p u t it

~ i

The capttahsts of Manchester founded famthes, built churches, sent law-gtvers to the senate, rmngled thetr blood wtth the aristocracy, and bequeathed princely fortunes to thetr sons At first a chque, gathered m parttculax locahttes for a parttcular purpose, desptsed by the great landed artstocracy as the founders ofthetr own for-

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tunes, they expanded to a class ahke antagomsuc and dangerous to that power winch once refused to recoguse them (1851, vol 1, pp 75-6) In 1844 o n l y lust o v e r a t h i r d o f t h e b a s i c s y s t e m h a d b e e n b u i l t By 1850 t h e r a i l w a y s i n v e s t e d t h e m o d e r n e q u i v a l e n t o f a f u r t h e r £ 8 6 b i l l i o n 2o As n o t e d above, an tssue r a i s e d b y p o h t i c a l e c o n o m i s t s m t h e e a r l y 184Os w a s w h e t h e r t h e n a u o n c o u l d afford m o r e i n v e s t m e n t in r a i l w a y s However, another question may have entered s o m e minds, w o u l d "the natron" p a y for it~ Up to 1844, at least, it a p p e a r s that t h e L o n d o n w e a l t h y d i d n o t i n t e n d that they s h o u l d p a y for it As Frana s says, The London merchants had doubted the practlcahty of the non way, they had dertded the notion of the locomottve, they had scarcely adventured m the shares Contentmg themselves voth watchmg tts progress, they were ready to rejotce m thetr prudence, or to benefit by tts success(1851, vol 1,p 180) Exactly how the "London merchants" would "benefit" if t h e o p p o r t u n i t y p r e s e n t e d itself, Francis leaves unanswered

FOSTERING THE "MANIA" The ruthless exploitation of their monopoly p o w e r b y canal c o m p a n i e s h a d m a d e c l o s e p u b lic r e g u l a t t o n o f t h e r a i l w a y s s e e m o b v t o u s e v e n to m a n y o f its e a r l y p r o m o t e r s , a n d h a d s o m e v e r y v o c a l s u p p o r t e r s in t h e H o u s e o f C o m m o n s , particularly amongst the provincial merchants and manufacturers However, parhamentary s u p p o r t for p u b l i c r e g u l a t i o n e v a p o r a t e d in 1836 w h e n a bill p r o p o s i n g to h m i t r a i l w a y div i d e n d s a n d tolls w a s s t o p p e d , its a u t h o r c o n c l u d e d , b y " .. d o u b t s ... in high q u a r t e r s as to t h e advisableness of interfering with new undertakhags, b y w h i c h capitalists m t g h t b e d e t e r r e d from e m b a r k i n g in t h e m . . . " (Francis, 1851, vol. 1, p

19As Jeffreys says of the 184Os and 185Os, " the House of Commons tended to represent the mvestlng classes rather than the big manufacturers "( 1938, p 52) Arnstem calculates that 93% of the cabmet at thts ttme were "arlstocratm", and hence very wealthy ( 1973, p 210) 2o f

k

£224m-£79m &224m

x £133bn )

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IL A BRYER

279) With railway investment m the doldrums from 1837 to 1843, the question of public regulation seemed a dead Issue. Furthermore, m 1841 Sir Robert Peel became prtme mimster Sir Robert Peel was a Conservative, known to be tn favour of private enterprise in general, and ". very well disposed towards railway enterprise. ", in particular (Clapham, 1964, p. 391) Also well disposed to railway enterprise was his President of the Board of Trade, and future Liberal Prime Mmister, William Gladstone Although only tn his early thtrties, he was already influential and dynamtc. His family was known to have substantial mvestments in railway shares 25 William Gladstone was an outspoken advocate of "railway enterprtse" and was widely considered a well-informed insider (Clapham, 1964, p 418; Reed, 1975, p 237). As Hyde says, "His whole work had been msplred by his encouragement of private enterprise. His last desire was that the Enghsh railways should be under the immediate hand of Government. " ( 1934, p. 173). As Gladstone himself wrote on the 3rd July 1844: "I am most hostile to Government management, and as friendly to the principle that we should discountenance any notion of either superceding or damping it by the meddling of the State. And further I am not conscious of having at any m o m e n t thought or spoken differently " ( q u o t e d in Hyde, 1934, p 173) Wilham Gladstone was also a vocal advocate of tmproved railway services for the mass of railway travellers (improved safety, comfort and c o n v e m e n c e ) and lower fares However, Hyde makes it clear that, apart from any desire Gladstone may have had to appear impartial towards the railway interest, he advocated cheap trains as a committed believer that marginal cost pricing and high traffic volumes would obviate the need for "ruinous competition", and would allow the companies to earn as good if not better profits ( 1934, pp 1 6 2 - 8 ) Clearly, as Hyde says, in addttion to any philanthropy, "Gladstone's

'Parliamentary train' was the o u t c o m e of serious investigation and profound thought" (1934, p 162) Gladstone's motives were summarized in a letter written by him m December 1843 "Parhament is, as I thmk, reasonably averse to interference with railway companies tn their efforts to turn their capital to best account But there are hmits to this principle. " ( q u o t e d m Hyde, 1934, pp 167-8). In short, " . Gladstone wished the railways to b e c o m e a source of gilt-edged security, while at the same time affording sausfactlon to every class of passenger w h o wished to use them" (Hyde, 1934, p. 168) Thus, m February 1844 when Gladstone " . thought that speculation m railways would shortly c o m e on again " (Cleveland-Stevens, 1915, p 102), and proposed a Select Committee to consider m what ways, if any, the railways should be publicly regulated, a free-enterprise outcome seemed a foregone conclusion. The anticipation of thts result can only have been strengthened when, in May 1844, the level of deposit reqmred by Parliament was reduced from 10% of the nominal value of the capital to 5%. The 10% deposit had been exphcltly introduced in 1837 to ". curb railway expansion .. "(Evans, 1936, p. 100). Gladstone was perfectly clear about the reason for reducing tt. It was, he satd, because ". in times of prosperity [railways] were projected tn multitudes, and m periods of commercial depresston few were undertaken." It followed, he concluded, that " it was desirable during the latter season not to oppress speculation by a dtfficulty of ratsmg capital" ( q u o t e d m Francis, 1851, vol 2, p 97) In evidence to the Committee the railway directors confidently argued against competitton, for the large companies to be given preference In buildlng any extensions, for mergers to be allowed to create territorial monopolies, and share prices rose apparently in anttcipation that they would have their way. Thus is caused a sensatton when, m June 1844,

21 Hts Father, Sir John Gladstone, a hverpool cotton merchant, shipper and sugar plantatton owner, played a major role m promoting the Iaverpooland Manchesterand GrandJunctton Railways "By 1843John Gladstone held no less than £ 170,000 m railwaystock He was a major shareholder m the GrandJunction, havmg£95,400 mvested" (Checldand, 1971, p 339) Wtlham Gladstone'sbrother, Robertson,was a director of the GrandJunctton, and was acttveJymvolvedm tts amalgamatton wtth the laverpool and Manchester (Check,land, 1971, p 349)

THE "RAILWAYMANIA"OF 1845 Gladstone p r o d u c e d a Bill for the R e g u l a t i o n o f R a i l w a y s proposing that Parliament eventually consider taking p o w e r to give the State a direct control. Although the Bill did not Itself give the p o w e r of purchase, "Popular theory had it that the Bill gave to the Board of Trade " p o w e r to buy new railways", and that all railways coming to Parliament for additional help were to c o m e under the same liabilities as n e w railways" (Hyde, 1934, p. 170). The railway interest were taken aback, and the proposals provoked an immediate, nation-wide campaign of resistance At first it was strongly countered by the Government on the grounds that p u b h c regulation was requtred to subdue the obvious evils of m o n o p o l y power. Even the Prime Minister, Sir Robert Peel, publicly defended Gladstone's Bill by expressing in Parliament ".. his firm belief that it was absolutely essential to the welfare of the country to adopt the measure before the House" (Francis, 1851, vol. 2, p 115). But this argument appeared to merely re-emphasize the profit potential which railways would possess if unchecked, and further fuelled public resistance Share prices continued to rise, apparently confident m " the not ill-founded feeling abroad that Gladstone was rushing parliament and the country" (Clapham, 1964, p 410) It was, therefore, an occasion of great public rejoining w h e n in July 1844 the Government suddenly and unexpectedly gave way Gladstone's Bill had proposed that at the end of fifteen years if the rate of return on paid-up capital equalled 10% or more the Government could rewse fares, and also that the State would then decide whether to purchase railway companies for 25 times thetr rate of return on paid-up capital to a maximum of 10% If the rate of return was less than 10%, the purchase price was to be fixed by "arbitration" The Bill had a profound Impact on the public's expectations of the returns likely fi'om railways As William Chaplin MP, Director of the South Western, told the House of Lords Select Commtttee on the Audit of Railway Accounts of 1849 (the Monteagle Committee), "Mr Gladstone's Bill, in which he made provistons consequent upon our arriving at 10 per cent, made the p u b h c feel that more than 10

453

per cent was available, and that was the onset of this extraordinary speculation" (Monteagle, 1849, p 329) As Polhn says, ".. the figure of 10 per cent return, enshnned in an Act of Parliament, became a symbol of the government's view that railway property would appreciate to that amount" (1971, p 36). Cleveland-Stevens explains why the p u b h c took this vtew: "It was unnecessary to make defimte terms for the few companies earning 10 per cent. and over, and for no others And further tt was m i s c h i e v o u s l y m i s l e a d i n g for as it stood the Act suggested that railway enterprtse might be expected to be reaplng 10 per cent in twenty years' ttme, and that smaller profits would be the exceptton, not the rule" (1915, pp 110-11, emphasis added) When the Government gave way on Gladstone's bill," the Press w with few honourable excepuons - - did everything in tts p o w e r to fan the flames of speculatton" (Lambert, 1934, p. 165) Whatever the motives, John Francts had httle doubt about the effect: The press fostered the excttement It saw a great power, it recogmsed a great good, and it welcomed tt Paragraphs and essays ahke dilated on the powers and properttes of tad, and the people were tmenstbly "led by the nose as asses are" (1851, vol 2, p 138, emphasis added) Why did the Government give way~ Durmg the first and second reading debates on his Bill Gladstone argued strongly for the principle of public regulation, and was ".. uncompromtsingly critical of the opposition and of the attitude of the companies" (Hyde, 1934, p 177) Prior to the second reading, Peel and Gladstone had refused the request of a deputation of all leading railway du'ectors to postpone the purchase option:" . the ministers remained adamant" (Lambert, 1934, p. 103) However, whereas at the second reading Gladstone had been "bold, uncompromising and severely cntmal of the railway mterest", at the third reading in July he was "yteldmg, complaisant, and weak" (ClevelandStevens, 1915, p 116). The clauses dealing with the purchase o p u o n and price controls were gone. Now, he said, the arguments of the railway directors" .. so convinced him that he consented

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R. A BRYER

at once" (Hyde, 1934, p 178). The supporters of Gladstone's Bill were at a loss to understand w h y the Government gave way Htstorians have also found it difficult to explam. Clapham concludes that "What happened in the departments during the middle of July is not known The bill got an easy second reading [ 186 in favour and 98 opposmg], but its drasttc clauses were transformed by Gladstone himself for the third" (1964, p. 420) He surmlzes that "Either he or Peel had recognized that the railway opposstion was too strong for them" (Clapham, 1964, p. 420). Hyde disagrees, at least as regards Gladstone In his view, tt m unltkely that he surrendered tamely to the wdl of the railway interest Gladstone was not a man to be mttmtdated by the strength of any opposltton His later prouncements behe any generally-accepted theory that he was forced to agree to a rewsion of thts Bill at the hands of the railway magnates (Hyde, 1934, p 178) In early July Gladstone was ready for "a trial of strength" (Hyde, 1934, p. 177) and, with the railway interest in Parliament of perhaps 5 0 - 8 0 MPs at most (Alderman, 1973), in the light of the second reading majority he appeared to have some groundsfor confidence. In Hyde's view it was Peel, not Gladstone, w h o " .. began to feel anxious at the course events w e r e taking. At so critical a m o m e n t in the life of his Ministry, an adverse vote might have had serious results" (1934, pp. 179-80). What had happened between the second readmg on 8 July and 22 July to convince Peel that the Government would no longer receive majortty support for the Railway Bill, or why it would lose more general support, ts not explained. The campaign against the Bill had run unabated since the first announcement, and the ".. popular resentment, not only against the Bill, but also against the men w h o had the framing of it", was recognized by Gladstone on July 9th (Hyde, 1934, p 179) Certainly, the Government was under pressure on other issues, but nothing ts known for certam about h o w Peel was reading these events because, on thts "struggle", Gladstone's manuscripts are "scanty" (Hyde, 1934, p 179), and Peel's contam nothing at all

(Clapham, 1964, p 420) Furthermore,while a watering down or modification of the proposals might be explained on the grounds that " Gladstone went further than the Prime Minister intended .." (Cleveland-Stevens, 1915, p. 116); or that Gladstone ".. had yet to convince Peel and the rest of the members of the Cabinet of the efficacy of the measure" (Hyde, 1934, p 179); or that, even though Gladstone had ctrculated a m e m o r a n d u m to the Cabinet and collected their opinions, he went further than thetr support allowed, because "It was a personal rather than departmental measure" (Parris, 1965, p 5 5 - 6 ) , the fact that " . it was passed mto law a mutilated fragment of the original proposal" cannot be so explained (Parris, 1965, p 177, emphasis added). Unless, that is, we are prepared to accept that Gladstone was so obsessed with appearing independent from the railway interest that he genuioely misunderstood the level of support available for hts measures. No evidence has been provided to support thlS view, andprimafacie it seems much more likely that, as Clapham says, "No doubt [Peel] had sanctioned Gladstone's tactics without committing himself to the whole bill; and so far his h o n o u r was revolved" ( 1964, p 419). The question thus arises, to what extent was Peel an "honourable" man~ Sigmficantly from the point of view of the swindle hypothesis, both Cleveland-Stevens and Hyde ultimately rationalize Peel's decision to back d o w n as a consequence ofh~s initiallack of c o m m i t m e n t to the Bill! As Hyde pomts out, although Peel went a r o u n d " openly supporting Gladstone and the Bill ", h e " did his utmost to appease the alarmed directors ", and "made it known" that in his opinion Parliament would never sanction the purchase of the railways (1934, p. 180, emphasis added) Or, as ClevelandStevens puts it, although in the light of the second reading majority "It is a httle difficult to understand the change...", he "solves the difficulty" by "... suggesting that while Gladstone was hurling defiance at the railway interest, Peel was conciliating them, and persuading them to vote for the second reading, on the understanding that the Bill should be modified subsequently" (1915, p 116) However, ff Peel intended to

THE "RAILWAYMANIA"OF 1845 "modify" (mutilate?) the Bill all along, w h y should he have wanted to put Gladstone m a position from whtch he w o u l d have to climb down, and leave htm there to the last possible moment? No-one has so far offered an explanation. The swindle hypothesis suggests one. While we may never know for certain, from the point o f v t e w of the swindle hypothesis the Bill appears as pure Parliamentary "hype", a political drama destgned (perhaps with Gladstone's active involvement) to convince the public that the railways would be a safe and profitable investment 22 In September 1844 the "mania" was also given a boost when the Bank of England declared a m m t m u m lending rate of 2.5%, and held it there below market rates, although w h y a profit-seeking organization should have done so has not been explained Nevertheless, as Ward-Perkins says, "There is little doubt that this n e w active and expansionist line ensured that the era of cheap m o n e y was extended, and this developed in 1845 into an orgy of speculative activity" (1950, p 76) From the point of vtew of the swindle hypothests also to be explained is the cause, in December 1844, o f " the two Houses ... to sudden[ ly] change from one extreme of determined rejection or dilatory acqutescence, to the opposite extreme of unlimited concession, [thus giving] a powerful stimulus to the spirit of speculation .. turn[ing] nearly the whole nation into gamblers"7 (Francts, 1851, vol 2, p 163, insertions added) The "stimulus" was the unexpected decision by Parliament, led by Peel, to reject the carefully constructed recommendations of the first Board of Trade inquiry on the merits o f competing railway proposals by Lord Dalhousie, and their decision that in future all

455

railway business would be transacted by a Committee of Parliament itself(Parris, 1965, pp 8 7 8) Beliewng that he had the support of Peel (Parrts, 1965, p 85), Lord Daihousie was less than amused, and he ". afterwards accused Peel of deliberate lack of support in carrying out the provtstons of the Bill" (Hyde, 1934, p 180, emphasis added) The effect of the change m p o h c y was that Parhament had, by opening the door to the proliferation of ratlway schemes, appeared to stgnal that almost any and all ratlways would be profitable As Captain Laws, Managing Director of the Lancashire and Yorkshire, told the Monteagle Committee, " . when Lord Dalhouste's Reports were treated in the way that they were by Parliament..; when we had submitted our plans to an tmpartlal tribunal .., when, instead of those reports being adopted, every attorney w h o could get credit enough to make an advertisement in the country papers could bring out another scheme " (Monteagle, 1849, p 349) 23 The Monteagie Committee itself concluded t h a t " many of the difficulties which at present exist, may be traced to the rash and illconsidered Legislature of 1845 and 1846, when the construction of no less than 7,238 additional miles of Railway were authorized .. " In their view, "No course could have been pursued more calculated to excite a bold spirit of adventure and speculation" (1849, p. xviii). However, apart from very favourable economic and political environments, from the point of view of the swindle hypothesis the distinctive feature of the origin of the railway "mania" was, as Francis puts it, that unlike others (e.g the tulip frenzy of Holland, the South Sea Bubble) ". the railway was "a great fact", and n o o n e c o u l d demonstrate

t h a t the m o s t u n l i k e l y s c h e m e s

22Gladstone resigned from Peel's cabinet m early 1845 Hts motivesfor restgmngat flus point have not been deeply probed by htstonans Althougha plausible reason was, as he told Sir Robert Peel, " the involvement of his father and brother m railway promotion made radway busmess at the Board of Trade an embarrassment for htm', the reason he gave was far removed from "rmlwaybusiness" Gladstone had been strongly and pubhcy antv~Cathohc,and against givingGovernment grants to Catholic seminaries m Ireland Now he changed hts mmdLAlthoughhts change of heart was reputedly the result of Peel's influence, Gladstone apparently felt the mere fact he had changed his mind so impugned his "honour", that he had t o resign1 Unexpectedly, lus father wholly approved of hk~ resignataon (Checkland, 1971, pp 350-51) 25See also the evidence of Samuel Lamg. Chairman and Managing Director of the Brighton Railway Company, and past member of the RattwayBoard (Monteagle, 1849, qq 3031, 3044)

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w o u l d n o t pay.., a f a i r c o m m e r c t a l dividend..." ( v o l 1, pp. 2 5 4 - 5 , e m p h a s i s a d d e d ) H o w e v e r , h i g h d i v t d e n d s w e r e p r o m i s e d a n d sustained, some observers thought, by the overstatement of profits which suddenly emerged.

A C C O U N T I N G FOR RAILWAYS DURING THE SECOND "MANIA" As w e s a w earlier, b y t h e early 1840s t h e accounting practices of many companies were b e g m n i n g t o r e f l e c t t h e i r e m e r g m g s t e a d y states. Thts t r e n d w a s a b r u p t l y r e v e r s e d m t h e mid1840s as t h e "mania" g o t u n d e r w a y O n t h e basis o f his r e v m w o f t h e r a i l w a y a c c o u n t s o f t h e p e r i o d , Pollins c o n c l u d e s t h a t " [ d ] u r i n g t h e mania, a n d for a few y e a r s after it, a c c o u n t m g for d e p r e c i a t i o n s e e m s to h a v e b e e n d r o p p e d b y s o m e c o m p a n i e s , p r e s u m a b l y in o r d e r that t h e revenue account should be reheved of charges so that c h v i d e n d rates c o u l d m o r e eastly b e maint a m e d " ( 1 9 6 9 , p. 153, s e e also p p 1 5 9 - 6 0 ) From the vtewlx)mt of the swindle hypothesis this s u d d e n r e v e r s a l o f a c c o u n t i n g p o l i c y c o u l d b e i n t e r p r e t e d as an a t t e m p t to l u r e t h e naive i n t o i n v e s t m g m railways. H o w e v e r , w h i l s t Polhns a p p e a r s to s u p p o r t this v i e w b y d e s c r i b i n g tt as a " d e l i b e r a t e o v e r s t a t e m e n t " o f c u r r e n t profits d u r m g t h e m a m a , his e x p l a n a t i o n is t h a t direct o r s s u c c u m b e d , tn t h e a b s e n c e o f "a g e n e r a l l y a c c e p t e d b o d y o f a c c o u n t m g d o c t r m e " , to t h e d e m a n d s o f m v e s t o r s for htgh d t v i d e n d s ( 1969, p. 1 6 0 ) E d w a r d s c o n c u r s "It is p r o b a b l y right t o

view the abandonment of depreciation accountm g p r m c i p a l l y as a c a s u a l t y o f t h e d e m a n d for dtw d e n d s ...", a n d suggests as an a d d i t i o n a l "imp o r t a n t i n f l u e n c e .. t h e a b s e n c e o f a c o n s e n s u s regarding the need to charge depreciation" ( 1 9 8 6 , p. 255). 24 W h a t e v i d e n c e is t h e r e for t h e s e claims~ Pollins p r o v i d e s n o e v i d e n c e at all Edwards claims "There are numerous examples o f r a i l w a y s h a r e h o l d e r s v o c i f e r o u s in t h e i r d e m a n d s for h i g h e r d t v i d e n d s ...". H o w e v e r , t h e o n l y e v i d e n c e h e p r o v i d e s is t h e e x a m p l e o f Lond o n a n d N o r t h W e s t e r n in 1841, a n d an e d t t o r t a l o f The Times in 1866 o n t h e " t e m p t a t i o n " dtrectors f a c e d to " m a k e things l o o k p l e a s a n t t o t h e t r p r o p r i e t o r s " ( E d w a r d s , 1986, p 255 ) Nexther o f t h e s e pxeces o f e v i d e n c e refers to t h e q u e s t i o n at issue: d i d r a i l w a y i n v e s t o r s during the m a n t a a n d f o r s o m e years after d e m a n d that d t v t d e n d s be paid from attributable profit before deprectat i o n or, in o t h e r w o r d s , that d l v t d e n d s b e p a i d f r o m capttal? T h e p a y m e n t o f d t v i d e n d s f r o m capttal d u r m g t h e "mania" w a s a c e n t r a l issue e x a m m e d b y t h e M o n t e a g l e C o m m t t t e e in e a r l y 1849 T h e c o n s e n s u s v i e w w a s that this p r a c t i c e arose, n o t from shareholder-induced mantpulatlon of the a c c o u n t s , b u t i n v e s t o r t g n o r a n c e o f a n d / o r acquiescence m the accounting manipulations of d i r e c t o r s , at least until d i v i d e n d s b e g a n t o fall m late 1847. F o r e x a m p l e , City A c c o u n t a n t W t l l i a m Q u i l t e r r e p o r t e d t o t h e C o m m i t t e e , o n t h e basts o f his " o w n k n o w l e d g e " , that r m l w a y s - h a d p a i d d i v i d e n d s f r o m capital ( M o n t e a g l e , 1849, q 2 2 3 3 - 4 ) . In his vtew, t h e " p r a c t m a l c o n s e q u e n c e is 2s that t h e p u r c h a s e r w h o b u y s shares

24While Edwards suggests as further mtIuences "the fact that ratiway compames were extremely capital mtenstve, prevadmg tax regulauons, and the fact that the balance at the credtt of the "deprectatton fund" was regarded, to some extent, as akin to disposable profit" (1986, p 255), capital mtenslty and the dlSpOSabflttyof deprectatton provtstons are presupposed by mvestors demandmg higher dtvtdends than would be lUSttfiedby accrual-based profit Hence, they are subsumed within the latter explanatton As for the possible mfluence of tax pohcy, whtch only allowed the deduction of actual expendttures on repmrs and renewals from taxable income, Edwards' argument LSmerely that tbts gave no postttve "encouragement" to deprectatton accounting ( 1986, p 258) On the other hand, as the law dtd not requtre repatrs and renewals accountmg In the financtal reports for tax rehefto be avadable, tt provtded no dtscouragement etther Whtle Edwards also surmtses that "No doubt part of the problem was lack of experttse "( 1986, p 255), Pollms points out that whtle "It ts possible that atfirst lack of expertence may have been partly responsible for changes tn the accounting treatment, for example, ofdeprectatton later changes m accountmg pohcy [t e droppmg deprectatton during the "manta"] cannot be explained m these terms" ( 1969, p 159, emphasts and mseruon added) 2s Although Qudter, m common voth several other votnesses, ts reluctant to name names, and dtseretely talks m the abstract present tense, m the context he ts clearly desertbmg the ratlway expertence of the prevtous few years

THE "RAILWAYMANIA"OF 1845 d o e s s o m ignorance o f t h e t r u e state o f t h e C o m p a n y ' s affairs, a n d is l e d to g i v e a h i g h e r p r i c e t h a n t h e t h i n g is w o r t h , u n d e r t h e b e l i e f that t h e d i v i d e n d s d e c l a r e d c o m e b o n a f i d e o u t o f p r o f i t s ... a n d b y that m e a n s deceiving the p u b lic" ( M o n t e a g l e , 1849, p. 215, e m p h a s e s a d d e d ) As Mihill S l a u g h t e r o f t h e Stock E x c h a n g e explained, a major reason why the public had b e e n d e c e i v e d w a s t h a t " .. m this c o u n t r y a v e r y large class o f i n v e s t o r s a r e t r a d e s m e n w h o h a v e a c c u m u l a t e d profits, a n d i n v e s t e d t h e m in Railw a y shares, p e r s o n s w h o h a v e a c e r t a i n a m o u n t o f i n t e l l i g e n c e , b u t o n l y a c e r t a i n a m o u n t .. " ( M o n t e a g l e , 1849, p 9 6 ) Thus, as e x - C l t y acc o u n t a n t a n d Official A s s i g n e e o f Bristol, T h o m a s H u t t o n , t o l d t h e C o m m i t t e e , d u r i n g the "mania", w h e n h i g h d i v i d e n d s w e r e p a i d a n d t h e m i d d l e classes i n v e s t e d , " , f e w p e r s o n s take t h e t r o u b l e to i n s p e c t Railway statements; all t h e y l o o k t o is t h e d i v i d e n d that a n y p a r t i c u l a r r a i l w a y pays" ( M o n t e a g l e , 1849, p. 481 ) 26 T h e C o m m i t t e e a c c e p t e d t h e s e views. It c o n c l u d e d that "Shareholders, in p a s t y e a ~ h a v e p r o v e d b u t t o o r e a d y to acquiesce in a n y c o u r s e o f p o l i c y which produces a probable augmentation of D i v i d e n d " ( M o n t e a g l e , 1849, T h i r d R e p o r t , p p x-xi, emphases added). N o s u p p o r t is, t h e r e f o r e , to b e f o u n d in t h e M o n t e a g l e C o m m i t t e e r e p o r t s o r m i n u t e s o f evid e n c e for t h e v i e w that during the "mania" it w a s investors w h o d e m a n d e d h i g h d i v i d e n d s O n t h e o t h e r hand, m u c h c a n b e f o u n d w h i c h s u g g e s t s that d u r i n g t h e "mania" it w a s directors w h o h a d c h o s e n to p a y d i v i d e n d s o u t o f capital. A l t h o u g h it m a y b e a r g u e d that, if t h e y d i d so, d i r e c t o r s

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w e r e a n t i c i p a t i n g latent i n v e s t o r p o w e r , t h e consensus view of the Monteagle Committee a n d its w i t n e s s e s w a s that d u r i n g t h e "mania" at least, r a i l w a y d i r e c t o r s w e r e f i r m l y in charge. 27 Although m most companies the auditors were r e q u i r e d to b e s h a r e h o l d e r s , t h e y w e r e a l m o s t i n v a r i a b l y n o m i n a t e d b y t h e d i r e c t o r s A n d alt h o u g h t h e C o m m i t t e e s e a r c h e d d i l i g e n t l y for examples of shareholder auditors manipulating t h e a c c o u n t s to p a y d i v i d e n d s f r o m capital, n o n e w e r e r e v e a l e d In a n y event, as J o h n H e r a p a t h p o i n t e d o u t , " t h e A u d i t o r s at p r e s e n t a r e p r a c tically a p p o i n t e d b y t h e D i r e c t o r s , n o t b y t h e s h a r e h o l d e r s , a n d in e v e r y c a s e t h e y a r e o n t h e side o f t h e D i r e c t o r s " ( M o n t e a g l e , 1849, p 5 7 ) T h e C o m m i t t e e c o n c l u d e d that before the "cons i d e r a b l e fall" in t h e v a l u e o f r a i l w a y shares, " f r o m t h e p o w e r a n d i n f l u e n c e o f t h e Dn.ectors, f r o m t h e n u m b e r o f p r o x i e s at then" d i s p o s a l .. a c o n t e s t w i t h t h e d i r e c t o r s is o n e in w h i c h priv a t e i n d i v i d u a l s a r e unable, or, r e l u c t a n t t o eng a g e . . " ( M o n t e a g l e , 1849, T h i r d Report, p xi). 2s T h e r e was, t h e y said, ". v e s t e d in t h e m a n a g e r s o f Railways a p o w e r , if t h e y c h o s e to e x e r c i s e it, o f striking w h a t e v e r b a l a n c e t h e y t h i n k fit, a n d o f d e c l a r i n g w h a t e v e r d i v i d e n d suits then. i n t e r e s t " ( M o n t e a g l e , 1849, p. 472, e m p h a s i s a d d e d ; s e e also. H e r a p a t h q. 6 3 8 ) H o w e v e r , w h i l e this evid e n c e is c o n s i s t e n t w i t h t h e v i e w that d u r m g t h e "mania" d i r e c t o r s c h o s e , w i t h o u t p r e s s u r e f r o m s h a r e h o l d e r s , t o p a y h i g h d i v i d e n d s o u t o f capital, t h e y m a y stdl h a v e d o n e so b e c a u s e t h e r e w a s n o " c o n s e n s u s " that d e p r e c i a t i o n w a s " n e c e s s a r y " 29 It is n o t c l e a r e x a c t l y w h a t E d w a r d s m e a n s

26Further ewdence that the tmual mvestors did not understand radway accounts Rscotxstdered later 27 It is significant fi'om the pomt of view of the swindle hypothesis that tt was only after the "manta" that investor power emerged As the Committee noted," increased vigilance and mtelhgence have been most usefully and creditably exercised by Shareholders, more especially in later times "(Monteagle, 1849, Third Report, pp x-xt ) Although the Committee maphed that tt was the same shareholders who had pre~ously been ignorant and acquiescent, that later became intelligent and vigilant, we shall consider evidence suggesting that, after share prices fell. the shareholder conststuency changed Out went a substantial proportion of the middle classes, Northern merchants and manufacturers, and m came the London wealthy 28Although shareholders had the right under the Companies Clauses Consohdatton Act 1845 to respect the accounts, this was only for a hmtted period either side of the annual general meetmg, and a refusal by the "bookkeeper', on whom the duty was placed, led to only a £5 fine for each refusal No penalty was imposed on the directors and, not surprtsmgly, witnesses to the Monteagle Committee reported instances where this effectual tmmumty was abused 29 Some might be tempted to suggest that radway directors were simply "experimenting" with accounting techniques However, frammg the question tfus way merely raises another what was the hypothests~

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w h e n h e says that t h e r e w a s n o c o n s e n s u s a b o u t t h e " n e e d " to c h a r g e d e p r e c m t i o n H e c o u l d m e a n t h e logical n e e d if i n c o m e w a s to b e repr e s e n t e d c o r r e c t l y , a c c o r d i n g to t h e a c c r u a l s m o d e l . Alternatively, h e m i g h t m e a n thepractical n e e d to set a s i d e cash t o finance c u r r e n t a n d f u t u r e f i x e d asset e x p e n d i t u r e s W h i l e it is t r u e that o p i n i o n s v a r i e d o n h o w f i x e d assets s h o u l d b e financed, o n t h e basis o f t h e v i e w s o f t h e Monteagle C o m m i t t e e a n d t h e i r w i t n e s s e s , t h e r e w a s an o v e r w h e l m i n g c o n s e n s u s that a d e p r e c i a t m n a c c r u a l w a s logically n e c e s s a r y t o e n a b l e investors to judge whether dividends were paid from capital, w h e t h e r t h e c h a r g e w a s f u n d e d o r n o t As E d w a r d s h i m s e l f notes, a l t h o u g h " E v i d e n c e p r e s e n t e d to t h e C o m m i t t e e s h o w s t h a t t h e mc l u s i o n o f a d e p r e c i a t i o n c h a r g e w a s an e x c e p tional e v e n t .. t h e r e w a s also a l m o s t c o m p l e t e u n a n i m i t y r e g a r d i n g t h e n e e d for a " d e p r e c i a t i o n fund" t o a v o i d "killing t h e g o o s e for t h e egg" .. a n d for t h e c h a r g e t o b e d e b i t e d t o t h e r e v e n u e account: " n o t a f u n d set a s i d e f r o m t h e e x c e s s o f r e v e n u e b e f o r e y o u arrive at t h e b a l a n c e " ( 1 9 8 6 , p 2 5 5 ) C o n s i d e r also t h e f o l l o w i n g s t a t e m e n t s to t h e M o n t e a g l e C o m m i t t e e : ( i ) b y City A c c o u n t a n t T h o m a s H u t t o n that u n l e s s a c o m p a n y m a k e s " a l l o w a n c e for its d e p r e c i a t i o n for w e a r a n d tear, it ts u t t e r l y i m p o s s i b l e t o k n o w w h e t h e r t h e d i v i d e n d w h i c h y o u a r e rec e i v m g is t h e c o r r e c t o n e o r not" ( 1849, p. 4 8 0 ) ; ( i i ) o r b y t h e C o m m i t t e e t o W i l l i a m Spackman: "Is n o t o n e o f t h e first a n d t h e m a m o b j e c t s t o b e attained, t h e striking o f a t r u e b a l a n c e , o u t o f w h i c h t h e d i v i d e n d is to b e declared~" S p a c k m a n a g r e e d ( 1 8 4 9 , p 118), Off) o r b y J a m e s C a p e l that tt w a s " n e c e s s a r y that t h e c a p i t a l a c c o u n t s h o u l d b e k e p t s e p a r a t e f r o m t h e o r d i n a r y income and expenditure account that y o u m a y k n o w w h a t d i v i d e n d is t o b e p a i d u p o n , a n d that y o u m a y n o t b e p a y m g d i v i d e n d s o u t o f capital" (1849, p 77) These views are consistent with t h e e a r n m g p o w e r i n t e r p r e t a t i o n o f a c c r u a l ac-

c o u n t i n g , i n c o m e is a s t e a d y state e s t i m a t e o f l o n g - r u n a v e r a g e n e t cash flow, i e d i v i d e n d s . As also a r e t h e qualifications b y s e v e r a l w i t n e s s e s o f t h e usefulness o f p u b l i s h e d a c c o u n t s for valuat i o n o n t h e g r o u n d , as C h a r l e s Russell, C h a i r m a n o f t h e G r e a t W e s t e r n , p u t it," b e c a u s e t h o s e acc o u n t s r e l a t e to actual e x p e n d i t u r e o r r e c e i p t s o f a p a s t p e r i o d , a n d do not pretend to f u r m s h p r o s p e c t i v e e s t i m a t e s o f w h a t is t o b e e x p e c t e d o r r e c e i v e d .." ( M o n t e a g l e , 1849, p 174, e m phasis a d d e d See also, Wolfe, q 2327; Chaplin, q 2858). Central to the earnmg power view of a c c r u a l a c c o u n t i n g ts its c o n c e p t u a l i s a t i o n as a s t e a d y state mode~ a b a s e - h n e p r o j e c t i o n , w h i c h must be i n t e r p r e t e d m t h e light o f e x p l i c i t expectations. W h i l e t h e r e w a s a c l e a r t e n d e n c y , r e f l e c t e d in the system of standardized railway accounts p r o p o s e d b y t h e M o n t e a g l e C o m m i t t e e , t o prefer d e p r e c i a t i o n f u n d i n g ( E d w a r d s , 1986, p p 252, 2 5 6 ) , this s e e m s to b e m e r e l y a r e f l e c t i o n o f t h e p r e v a i l i n g v i e w after t h e m a n t a t h a t r a i l w a y m a n a g e m e n t s h o u l d I m p o s e a s e l f - d e n y m g ordinance on further expansion or diversification T h e fact that d e p r e c i a t i o n f u n d i n g is a d v o c a t e d m no way compromises a conceptual unders t a n d i n g o f its p u r p o s e 3o Thus, a l t h o u g h t h e C o m m i t t e e a d v o c a t e d "The c r e a t i o n o f a Reserve or Depreciation Fund as a m a t t e r o f n e c e s s a r y p r e c a u t i o n a n d p r u d e n c e ", b e c a u s e " W i t h o u t s u c h f u n d t h e r e ts a c o n s t a n t t e m p t a t i o n to m i s a p p l y C a p i t a l . ", t h e o v e r r i d i n g purp o s e w a s t o e n s u r e "an a d e q u a t e p r o v i s i o n . for t h e m a m t e n a n c e o f Railways m a d u e state o f effic i e n c y . " ( M o n t e a g l e , 1849, T h i r d Report, p p i x - x ) . 31 In t h e c o n t e x t o f t h e C o m m i t t e e ' s abidmg concern with accounting income measurem e n t , tt s e e m s u n h k e l y that b y " d u e state o f effic i e n c y " t h e y a r e r e f e r r i n g h e r e s o l e l y to t e c h n i cal efficiency In that c o n t e x t it s e e m s m u c h m o r e likely that the C o m m i t t e e h a d a financial capital m a i n t e n a n c e c o n c e p t m mind, w i t h i n

~oFor example, Lardner, who clearly understood the conceptual purpose of depreclanon, was an advocate of smlang funds on the ground that it was a "financial expedient" ( 1850, p 65) ~t In fact, although the Committee advocated depreciation funding, their proposals did not strictly reqmre this They only required the disclosure of"The receipts and expenditures of such a fund, where tt has been established "(Monteagle, 1849, Third Report, p x, emphasis added)

THE "RAILWAYMANIA"OF 1845 w h m h a level o f t e c h n i c a l efficiency is a n e c e s sary c o n d i t i o n . E d w a r d s finds t h e c o n j u n c t i o n o f t h e aband o n m e n t o f d e p r e c i a t i o n a c c o u n t i n g dutang t h e "mania" w i t h its e v i d e n t t h e o r e t i c a l u n d e r s t a n d ing " c u r i o u s " 32 H o w e v e r , f r o m t h e p o i n t o f v i e w o f t h e s w i n d l e h y p o t h e s i s it is s i m p l y e x p l a i n e d b y t h e fact that d e p r e c i a t i o n was " e x c e p t i o n a l " during the "mania" so that d i r e c t o r s c o u l d p a y d i v i d e n d s f r o m capital. O n t h e basis o f t h e evidence provided by the Monteagle Committee t h e r e w a s a c l e a r c o n s e n s u s that d e p r e c i a u o n as an a c c r u a l w a s theoretically n e c e s s a r y 33 N e i t h e r t h e w i t n e s s e s , n o r t h e C o m m i t t e e give a n y i n d i c a t i o n that this w a s a r e c e n t mstght. T h e y m v a r i a b l y t h o u g h t , as t h e C o m m i t t e e p u t it, that an a d e q u a t e p r o v i s i o n w a s " o b v i o u s " ( M o n t e a g l e , 1849, p ix; e.g Q u i l t e r , q. 2 2 5 5 ) . If w e a s s u m e that t h e v i e w s o f t h e M o n t e a g l e C o m m i t t e e a n d its w i t n e s s e s h a d n o t s u d d e n l y m a t e r i a l i z e d m 1849 ( w e h a v e s e e n e v i d e n c e suggesting that t h e c o n c e p t o f d e p r e c i a t i o n was u n d e r s t o o d in t h e early 1840s), and that t h e r e f o r e d e p r e c i a t i o n w a s u n d e r s t o o d d u r i n g t h e "mania" to b e a logically accrual, an "absolute debit", tt s e e m s reasonable to c o n c l u d e that it was d e l i b e r a t e l y abandoned. From the point of view of the swindle hypot h e s i s it also a p p e a r s significant t h a t o n l y a f e w y e a r s earlier, in 1845, T h e C o m p a n i e s Clauses C o n s o l i d a t i o n A c t p r o w d e d n o d e t a i l e d guida n c e for t h e d e t e r m m a t z o n o f legally d i s t r i b u t a b l e i n c o m e , a n d s p e c i f i c a l l y left t h e p r o v i s i o n o f d e p r e c i a t i o n to t h e d i r e c t o r s ' d i s c r e t i o n (See-

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tion 1 2 2 ) As Pollins says, e v e n t h o u g h this obvio u s l y left a " g r e a t d e a l o f l a t i t u d e ... to t h e c o m p a n i e s in t h e c a l c u l a t i o n o f profit, w i t h little power of control by auditors or the government, [t]his was realised a t the t i m e " ( 1969, p 145, e m p h a s i s a d d e d ) 34 F o r e x a m p l e , t h e Select Committee on Joint Stock Companies ( " G l a d s t o n e ' s C o m m i t t e e ) 1841--4 h a d d r a w n a t t e n t i o n to t h e p r a c t i c e o f ".. d e c l a r i n g div i d e n d s o u t o f capital, o n a false r e p r e s e n t a t i o n o f p r o f i t r e a h s e d " (Francis, 1851, vol 2, p 1 3 0 ) H o w e v e r , u n l i k e t h e M o n t e a g l e C o m m i t t e e (as w e shall s e e in s o m e d e t a i l later), G l a d s t o n e ' s C o m m i t t e e d i d n o t b e l i e v e it w a s p o s s i b l e to s p e c i f y t h e c o n t e n t o f t h e a c c o u n t s to p r e v e n t t h e d i s t r i b u t i o n o f c a p i t a l ( P a n i t p a k d i , 1955, p 8). Instead, t h e y e n u n c i a t e d t h e p h i l o s o p h y o f " i n v e s t o r b e w a r e " As P a n i t p a k d i p o i n t s out, m c h o o s i n g n o t t o s p e c i f y t h e c o n t e n t o f t h e acc o u n t s " . it w a s r e a h s e d that o n l y a handful o f shareholders m any company possessed the necessary knowledge, expermnce, and interest to b e a b l e t o a p p r e c i a t e t h e significance o f a balance sheet [and that] .. [i]t w a s u p o n s u c h m e n that t h e C o m m i t t e e .. r e l i e d to take t h e initiative in b r i n g i n g a b o u t t h e d o w n f a l l o f fraudulent or incompetent management" (1955, p 8) By i m p l i c a t i o n , if t h e s e " m e n o f business" w e r e n o t f o r t h c o m i n g , t h e s h a r e h o l d e r s w o u l d b e at the mercy of the directors and promoters From the pomt of view of the swmdle hypothesis, o n e r e a s o n w h y t h e G o v e r n m e n t m a y n o t h a v e w i s h e d to r e s t r i c t t h e m a n i p u l a t i o n o f rep o r t e d profits is t h a t this u n d o u b t e d l y h e l p e d to fuel t h e s e c o n d r a i l w a y "mania". As t h e Mon-

32He concludes that "The sharp contrast between theory and pracuce mtght be explained on the ground that none of the witnesses referred to above [Hutton, q 3400, Quilter, qq 2254-9; Easthope, qq 2635-8, lOng, q 2748, Slaughter, q 1108], except Easthope, were currently faced with the job of manasm 8 a radway" (Edwards, 1986, p 256) Unfortunately, whereas Sir John Easthope was not then a radway director ("I was a Dh-x'ctorand Chatrmau of a Radway for some years, l am not now" (Monteagle, 1849, p 295), other witnesses who were radway directors strongly favoured deprectaUon accountm 8 (Montea#e, 1849 Basshaw, qq 2898-9, Laws, q 2970) ~ The fact that the Committee, and several of its wnnesses, went on to advocate replacement accounting (defined later) m

pracUce, and that later this advice was vodely followed, Is examined later On the powers of shareholders and auchtors granted by the Company Clauses Consohdauon Act 1845 the Monteagle Commmee concluded " the largest powers are given, where they are least hkely to be profitably exercised, and restncUons are apphed where the fullest powers of investigation are mdtspensable" (Monteagle, 1849, Third Report, p m) Consequently, during the "manta" railway audits were variously described as, amongst other things, "a moonshine", "the greatest farce possible", "nominal", "arithmetmal rather than ludtcal" and "a mere child's play"

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teagie C o m m i t t e e m a d e clear, if the Governm e n t had w a n t e d to force railway c o m p a n i e s to dtsclose partacular items in thetr a c c o u n t s o r thetr a c c o u n t i n g polictes, o r to have restrtcted thetr dividends to net profit based o n a prescribed accrual a c c o u n t i n g system, they c o u l d have d o n e so In the C o m m i t t e e ' s o p m i o n , "A m o s t serious omtsston m the present Law is admttted b y almost all the Witnesses e x a m m e d , to be the w a n t o f any p r e s c r i b e d system o f A c c o u n t " (Monteagle, 1849, Thtrd Report, p.tti). While s o m e wttnesses saw the n e e d for s o m e fiextbility, the C o m m i t t e e firmly c o n c l u d e d that tt "... does not appear, a c c o r d m g to p e r s o n s o f the greatest expertence, that there w o u l d be m u c h dttiiculty m p r o v t d m g o r enforcing such a uniform system" (Monteagle, 1849, Third Report, p.vi), and they a c c e p t e d the widely-held v i e w that auditors w o u l d have "no great difiiculty" m "separatmg Capttal f r o m I n c o m e " (Monteagle, 1849, Third Report, p xv) As the Committee pointed out, w i t h o u t uniformity m published accounts, no set'tom investment analysis was posstble "The result is, that no adequate means are afforded to c o m p a r e the financtal affairs of any t w o Railways, o r even to c o m p a r e the A c c o u n t s o f the same Railway from time to time [whtch] deprives capttalists, seekm g mvestments, of all p o w e r o f ascertaining the relative credtt o f the several Companies f r o m a c o m p a r t s o n o f t h e t r A c c o u n t s . [and] leaves the shareholders w t t h o u t any c h e c k u p o n the governing b o d y " (Monteagle, 1849, Third Report, p. v ) However, from the point of view of the swindle hypothesis, this was precisely the intentionV While PoUms may b e c o r r e c t that the aband o n m e n t of deprectatlon a c c o u n t i n g d u r m g the "manta" shows that the " majority [of c o m pantes] w e r e cavalier m their attitude to railway finance and accounts" (1969, p 145), it is a mistake to conclude, as a c c o u n t i n g historians mvariably have, that everybody was fooled Many naive investors w e r e undoubtedly fooled b e c a u s e a c c o u n t i n g practices varted, and s o m e c o n t e m p o r a r t e s clearly found the a c c o u n t s "intrtcately framed" It may even be true that the "main b o d y o f ratlway shareholders w e r e easily

deluded" (Edwards, 1985, p 2 7 ) However, tt does n o t follow, as Chatfield maintams, that all actual and potential ".. stockholders w e r e mrsled as to actual m c o m e , future earnings potential, and managerial effictency" (1977, p 9 5 ) Lardner was d e a r l y not fooled, pointing to the logical absurdtty o f the c o m p a n i e s a r g u m g that deprectation was not necessary for "movable capital" w h o s e " , existence ts perennial, and it ts m a c o n s t a n t state o f r e j u v e n e s c e n c e " (1850, p 115), whilst n o t writing back the a c c u m u l a t e d depreciation to distributable reserves. As he c o n c l u d e d , tronically,

Thts pomt having been conclusively estabhshed, the companies very properly dlscontmued to set astde from revenue any fund for the future reproduction of stock, but they would have been justtfied m strict equtty, m going further, and m taking back from the capttal, and placmg to the credtt of revenue, all the sums whtch, m prevtous years, they had erroneously brought to the credtt of capital, to represent a deterioration wfuch did not exist, and to pay for a future want whmh can never artse (lardner, 1850, p 115)1

Furthermore, although Edwards claims that after " . the massive decline in railway shares [g]reater disclosure followed in an attempt to allay panic .. " (1985, p 34), m William Spackman's v i e w "The general effect was a restoration o f c o n f i d e n c e in particular hnes; m others it was a confirmatton o f the prevtous bad opinions w h i c h the p u b h c had o f them" (Monteagle, 1849, p. 113) In o t h e r words, m the majortty o f cases t h e y a d d e d v e r y httle to w h a t was already known. Greater disclosure started in O c t o b e r 1848 w h e n the L o n d o n and N o r t h W e s t e r n voluntarily p u b h s h e d a m o r e detailed set o f accounts, w h i c h w e r e taken b y the o t h e r large c o m p a m e s as a m o d e l for dtsclosure. H o w e v e r , as Charles Russell o f the Great W e s t e r n p u t it, "The statement r e n d e r e d at the ttme m e r e l y collected dispersed informatton, w h t c h any individual shareholder might have collected if he had b e e n at the pains [and was] .. conversant with the a c c o u n t s " (Monteagle, 1849, p

THE "RAILWAYMANIA"OF 1845 1 7 6 ) 35 P r i o r t o t h e s e d i s c l o s u r e s s o p h i s t i c a t e d investors, p a r t i c u l a r l y t h o s e w t t h a c c e s s to p r o fessional advice, w o u l d n o t h a v e b e e n w i l d l y misled. T h e a c c o u n t i n g p r a c t i c e s a n d f i n a n o a l performance of the railway companies had been extensively discussed m the burgeonmg railway press, 36 a n d r a i l w a y a c c o u n t s o f t e n g a v e l e n g t h y e x p l a n a t i o n s a n d justifications o f t h e p r a c t i c e s t h e y w e r e using. W h e r e t h e y d i d not, t h e persist e n t a n d w e B - c o n n e c t e d analyst c o u l d s t m p l y ask t h e d i r e c t o r s ( e g , Herapath, q 677; Chaplin, q 2 7 9 8 ) . Also, as G e o r g e Gray, D e p u t y A c c o u n tant at t h e Bank o f England, t o l d t h e M o n t e a g l e Committee, there were now". gentlemen who f o r m an i m p o r t a n t p r o f e s s i o n a l class m L o n d o n , n o w t e r m e d a c c o u n t a n t s .. r e p u t e d to u n d e r stand accounts " ( M o n t e a g l e , 1849, p. 2 0 9 ) , w h o c o u l d b e consulted, b y t h o s e w i t h access, o n q u e s u o n s o f p r i n c i p l e a n d t e c h n i c a l detail. F o r t h e k n o w l e d g e a b l e e x p e r t , s u c h as Mihill S l a u g h t e r o f t h e Statistical Office o f t h e S t o c k E x c h a n g e , t h e k e y p r o b l e m in a n a l y s i n g r a i l w a y a c c o u n t s a r i s m g f r o m t h e i r " w a n t o f uniformity", was merely The practw.a/tnconvenmcce that you, as tt were have to learn a fresh lesson every ttme you take up a balancesheet ofa dtfferent Company They all have m common a capttal and a revenue account, but the want of uniformity of arrangement ts atfirst sightpuzzlin~ and revolves a waste of ttrne (Monteagle, 1849, p 95, emphases added) As s h a r e - b r o k e r Lewis W o l f e t o l d t h e C o m m i t tee, a l t h o u g h s o m e r a i l w a y a c c o u n t s ".. a r e c l e a r e r t h a n others", h e h a d "... s e e n a c c o u n t s a n a l y s e d b y m d i v i d u a l s , m a k i n g it b e a u t i f u l l y clear, but, o f c o u r s e , v e r y v o l u m i n o u s " ( M o n teagle, 1849, p 222). T h a t is, as h e l a t e r m a d e

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clear, in his o p i m o n "The g r e a t difficulty m exam m m g t h e a c c o u n t s is t h e t i m e r e q u i r e d a n d t h e n u m b e r o f p e r s o n s to b e e m p l o y e d " ( M o n t e a g l e , 1849, p. 225). W i l l i a m S p a c k m a n h a d a stmllar view. H e t h o u g h t that a l t h o u g h r a i l w a y a c c o u n t s " . differ in s o m e r e s p e c t s t h e y a r e all m a d e u p o n o n e p r l n o p l e " , a n d m his o p i m o n t h e m a j o r p r o b l e m m i n t e r p r e t i n g t h e m w a s s i m p l y that " . t h e y dtffer as to t h e e x t e n t o f d e t a i l t o w h i c h t h e y c a r r y t h e i r a c c o u n t s " H e c l e a r l y felt that this div e r s i t y p r e s e n t e d n o i n s u r m o u n t a b l e o b s t a c l e to m e a n i n g f u l analysis. H e h a d b e e n a b l e ". o n v e r y m a n y o c c a s i o n s [to] i n v e s t i g a t e t h e a c c o u n t s of o u r different Railway C o m p a n i e s " ( M o n t e a g l e , 1849, p 1 1 3 ) M r S l a u g h t e r f r o m t h e Stock Exc h a n g e felt h e c o u l d d o t h e s a m e for, a l t h o u g h m c o m m o n w i t h o t h e r analysts h e w a n t e d m a n y more disclosures, he would not accept the Comm i t t e e ' s s u g g e s t i o n that e v e n w h e r e a c o m p a n y c h a n g e d its a c c o u n t i n g p r a c t i c e s d u r i n g t h e y e a r it w o u l d b e " difficult to c o m p a r e t h e p r o g r e s s o r r e t r o g r e s s i o n o f a n y C o m p a n y m itself?. I d o n o t k n o w that I s h o u l d b e justified m s a y i n g that" ( M o n t e a g l e , 1849, p 1 1 3 ) H o w e v e r , a l t h o u g h t h e s e s o p h i s t i c a t e d analysts t h o u g h t t h e y c o u l d usefully a n a l y s e r a i l w a y a c c o u n t s , n o n e o f t h e m t h o u g h t t h e initial investors c o u l d Mr S l a u g h t e r h a d b e e n s t u d y i n g railw a y a c c o u n t s for t h e L o n d o n Stock E x c h a n g e for t h e p r e w o u s t h r e e y e a r s for s u c h i m p o r t a n t details as w h e t h e r d e p r e c i a t i o n w a s f u n d e d , a n d a g r e e d w i t h t h e C o m m i t t e e that " . o r d i n a r y s h a r e h o l d e r s o f t h e class to w h o m y o u h a v e alluded, c o m m o n t r a d e s m e n a n d p e r s o n s m h u m b l e r w a l k s o f life, m i g h t pass tt o v e r u n o b s e r v e d " ( M o n t e a g l e , 1849, p 1 0 2 ) W i l l i a m Q u i l t e r also a g r e e d that, a l t h o u g h h e w a s "... a b l e to u n r a v e l a l m o s t a n y a c c o u n t s if t h e y a r e t r u e ....

,s Although the Committee appeared to beheve that the mcreased dtsclosures had increased share prtces, no clear evtdence was found to support this, and most wRnesses were scepttcal For example, m an early "market reactton study", Charles Russell produced a table for five of Great Western's securtttes comparing their prices 15, 10 and 5 days before and after the pubhcatton of their statement m the Ttmes on 1lth November 1848, wtth the prices on that day As he concluded, "tt produced some trtflmg effect m ratsmg them upon the day ofpubhcatton, but certainly not so much permanent effect as was expected at the time" (Monteagle, 1849, p 177) The movement on the day he attrtbuted to "share-lobbing" Furthermore, as James Capel wisely pomted out, m interpreting the share prme movement of the North Western," the altered condttton of the money market must be taken mto constderatton as well "(Monteagle, 1849, p 76) ~6As Edwards says," there was a wealth ofmatertal available concerning the accounting practices of railway compames, tn the numerous ratlway journals whtch began pubhcatton m the 1830s and 1840s" ( 1985, p 39)

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a mere merchant or tradesman .. would find great difficulty .. to ascertain at once the real results of Railway accounts, even supposing them to be truly kept" (Monteagle, 1849, p. 221) It was not simply a question of mtelhgence AS John Herapath, editor of the most widely read railway newspaper pointed o u t , " w h e r e things are split and divided, such a thing applied to capital, and such a portton to dividend, it requires a very experienced accountant, and one well versed m railway matters, to judge the truth of such accounts." Thus, he confessed, "IfI had not had long expermnce, I should not be able to detect the w h y and wherefore of those sphttmgs and dividings" (Monteagle, 1849, p 58). However, he did, and this enabled him to recognize that " .. m several of the accounts that I have seen there are certain things placed to capital that I k n o w ought to go to revenue" (Monteagle, 1849, p 60, emphasis added) Thus, although there are grounds for believing that many of the initial mvestors in railways were fooled by the published accounts, it appears equally that well-informed experts were not. In any event, the London capitahsts seem not to have been "mtsled" into actually b u y m g railway shares From 1823 through 1845 they clearly bought very few, and It appears that this trend continued through the "manta"

RAILWAY INVESTORS FROM 1845 AS the vast majority of the schemes brought forward m 1844 and 1845 were from the exlstmg large compames w h o appealed to their initial shareholders for more funds, it is reasonable to assume that, desptte their bad experiences in 1837, at least a stmdar proportion of the middle classes were n o w again prepared to subscribe to these tssues Unfortunately, nothing is currently knowable with certamty because, as Reed laments, although "The most obvious sources are the share regtsters of the various ratlways, which

companies were obliged to maintmn under the terms of their Acts, and which had to be produced and sealed at each general meeting ... most registers have been destroyed, presumably etther in wartime or at nattonalization, and the series of lists which would have permitted systematic study of indtvidual companies over a long period are no longer extant" (1975, pp. 100-1). It is not clear whether these records were destroyed accidentally or, as the swindle hypothesis might suggest, by future class representatives m the name ofdtscretton. Nevertheless, Reed firmly concludes that because of both the " evtdence that railways drew a considerable proportion of thetr funds from sources which had not previously participated sn the formal capital market, until then based in London, [and] ... [t]he tmportance of other provinctal centres m the railway b o o m of the 1840s,.. this tendency was continued" (1975, p 262, emphasts added) This is certamly the picture pamted by contemporaries As Franos pointed out, ". tt hardly need be repeated that individuals entered into these speculations whose means were ludicrously dtsproporttoned to the responsibiltty .." (1851, vol 1, p 179), and quotes the prophetic words of "a local journal" warning of the consequences that would follow from a collapse ofratlway share prices ". the prospect becomes sertous w h e n it ~s dtscovered in what feeble hands great masses of thts speculation rest, m what manifold ways the mischtef has descended through all classes of soctety, to h o w many persons a reverse will be utter rum " ( 1 8 5 1 , v o l 1,p 187) That the London capitalists were still not investmg signfficandy m railways Is suggested by the fact that it was still ". found very difficult to procure really responsible names to the contracts" (Francts, 1851, vol 1, p 167) (Presumably, the wealthier the investor, the more "responsible" s/be is ) This appears to have been Francis's view As he puts it, although "In the heat of the moment our merchantocracy37 ... joined the crowd the frenzy . scarcely [ie. only

~7 By "merchantocracy" Francts appears to mean the merchants typtlied by those from Iaverpooi and Manchester

THE "RAILWAYMANIA"OF 1845 just?] spared the few faithful in the city" ( 1851, vol. 1, p. 181, insertion added). From the middle of 1845 then" newspapers had warned them often enough: "Many warnings were given, especially in The Times newspaper, that a crisis was inevitable after the remarkable b o o m ..." (Cleveland-Stevens, 1915, p 159), and was "... supported by sober reasoning of The Economist ..." (Morter Evans, 1849, p. 13) which, in O c t o b e r 1845 decided to double its size and include withm its covers The R a i l w a y Monitor. In its first issue it warned that although the railways would "ultimately [be] one of the most advantageous investments", initial subscription was not advisable. As it pointed out, u n d e r the current law the initial subscribers were liable for calls even if they had sold their shares, if the ultimate purchaser was unable to meet them As it wisely foresaw, "In future,., if such cases occur, and especially if a time comes w h e n they are numerous, w e have reason to believe that (hrectors will be obliged to go back to the original shareholders . " (The Economist, 18 October, 1845, p. 1014). In the following issue it warned that the share prides of many railways were based ".. not on the opinion as to the ultimate success of the undertakmg~ but rather ... the pubhc appetite for speculauon", and contemplated the possible consequences of"a derangement of the share market" ( The Economist, 25 October, 1845, p 1045). It felt able to reassure its readers that, apart from " . some inconvenience, by injuring private credit, and raising fair d o u b t of the safety of some securities as an investment, and thus causing a large amount of capital for a time to be unemployed", If we must have a period of speculation, we know of no way m whmhit could lesspreludmtallyexhaust stseffthan m the ideal rise and fall of shares Inchwdualsmay be ruined, and others maymake fortunes, but the general effect upon the trade and the avadablecapital of the country cannot be very tmportant or permanent (The Economist, 1845, p 1046) Such reasonings were unlikely to encourage the wealthy to invest in railways in 1845 Thus, we have to be generous in our interpretation of Evans' much quoted view that "The local charac-

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ter of the railways seems to have been dominant until a b o u t [t] 1844 [and] ... the listing of shares on the London Stock Exchange and the entry of the London capitalists into this field of enterprise" (1936, p.10, emphasis added) As Evans says, the London capitalists did "enter" into this field of enterprise, but apparently not as initial subscribers From a strictly logical point of view, it must be the case that i f the London Capitalists did not enter via the n e w issue market, they m u s t have moved in via the secondary market. (Evidence consistent with the latter is presented later ) If so, to maximize their returns would require careful timing to ensure that railway securities were secured at the lowest possible price. And if prices seemed too high, there were many things the Government and other interested parties could do to encourage lower ones One important factor would be w h e t h e r companies would still have access to emergency debt finance.

RESTRICTIONS ON DEBT FINANCE The Government was well aware that many companies had only been able to finance the completion of the first expansion of railways by raising substantially more debt than their statutes allowed (typically a third of their total capital). If such practices were curtailed and capital overruns occurred again, many companies would be forced to make heavy calls on their shareholders to enable them to complete their investment programmes. With railway shareholders under pressure, share prices would be as well. The Government knew that ".. by the end of 1842 the amount of loan capital raised was quite d e a r l y beyond the legal powers of the companies", and that "Much of the increase was due to the issue of various forms of temporary loans, such as loan notes, [their] .. issue was not checked by the government until 1845" (Hawke & Reed, 1969, p 282). Loan notes were simply unsecured promissory notes carrying a fixed rate of interest for which the directors were personaily responsible. Many were given conver-

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ston options, and w e r e actively traded. Although strictly loan n o t e s w e r e ultra vires, most felt that in issuing them " . . the law prohibiting railways from b o r r o w i n g m o r e than one-third of their share capital on mortgages or bonds was evaded although not violated" (Wang, 1918, p. 83). Loan notes had attracted little criticism and, as Wang says, although "... efforts w e r e made, during the forties, to urge Parliament to abolish, or at least broaden the limit ... [n]othing was done to r e m e d y the situation The law was neither modified nor enforced Like many other stringent laws, tt was consistently disregarded" (Wang, 1918, p. 8 4 ) Thus, it was quite u n e x p e c t e d w h e n the Select Committee on Railways in 1844 p r o p o s e d making the issue of loan notes a criminal offence carrying a mandatory fine equal to the value of the notes, particularly w h e n the G o v e r n m e n t law officers had suggested that public awareness that these notes w e r e ultra vires would ".. sufficiently operate as a check .." (Parris, 1965, p. 15)) As Wang puts it, "The worst effect was that the public did not understand clearly that such 'loan notes w e r e illegal, and w e r e astonished w h e n it was declared by the select c o m m i t t e e of the House of Commons, 1844, that these notes w e r e "absolutely invalid", and that the lenders had no means whatever of enforcing the repaym e n t of their money" (1918, p 84). However, the c o m m i t t e e also accepted that ". because of the publicity given to railway accounts the "substantiai validity" of loan notes was greater than that of almost any other description of security" (Reed, 1975, p 234) Thus, as "The contracts w e r e entered into without a distinct knowledge of the illegality" (Wang, 1918, p 85), the committee agreed that existing notes should be enforceable Why loan notes should have previously b e e n tolerated, and n o w made criminally illegal has not b e e n explamed. However, from the vtewp o m t of the swindle hypothesis it appears significant that loan notes w e r e a very successful form of e m e r g e n c y finance which had relieved shareholders from the necessity of financing exHudson's remarkable career ts briefly considered later

penditure overruns and, without a specific check, might do so again. Although existing notes w e r e allowed to be reissued for up to five years, this would be of little help in financing f o r t h c o m m g levels of capital expenditure. Because of this restriction, the aggregate railway gearing ratio (loans and debentures divided by total paid-in capital) fell sharply from 1844, just as capital expenditure levels began to rise sharply (Hawke & Reed, 1969, Fig 2). Suspicion of malicious intent by the London wealthy towards railways shareholders is also aroused by the fact that, although the Bank of England had purchased substantial amounts of railway debentures from 1842, the debt crisis facing the railways was mtensLfied in 1846 w h e n it decided that it would purchase no m o r e (Morgan, 1940, p 337) After the crisis was over, the Bank of England agam resumed purchasmg railway debentures (Reed, 1975, pp 2 4 2 - 3 ) The financial logic underlymg this investment strategy has also not b e e n explained. From the viewpoint of the swindle hypothesis these restrictions could be interpreted as a concerted attempt to ensure that access to e m e r g e n c y finance was blocked. Although in the early phase of the "mania" the restrictions did not appear to act as a disincentive to equity mvestment, to the initiated they ought to have meant that if the railways got into further financial difficulty, heavy calls would be made on ordinary shareholders, with potentially disastrous consequences.

BUSTING THE BOOM Perhaps one reason w h y the "City faithful" invested so little in railways during the second "mama" was that they w e r e aware of, and took seriously, the forecasts of George Hudson, "The Railway King", 38 w h o told Gladstone's Select C o m m i t t e e m March 1844 that "He fully anticipated that the b o o m n o w beginning would end

THE "RAILWAYMANIA"OF 1845 in d i s i l l u s i o n m e n t " . "I think there wdl be a reaction m the course of two or three years," [and] declared prophencally, ~that the anractpattons of speculators will be dtsappomted, and there will be a reaction as wolent as the other, even supposing the money market contznues tn its present state" (Lambert, 1934, p 99, emphamsadded) By his final r e m a r k s H u d s o n s e e m s to b e suggestm g that " d i s a p p o i n t m e n t " was c o n t i n g e n t o n the "state o f the m o n e y market." T h e "City faithful" w o u l d have b e e n w e l l aware that this c o u l d b e m a n i p u l a t e d T h e v u l n e r a b i h t y o f railway s h a r e h o l d e r s to the state o f the m o n e y m a r k e t was r e v e a l e d m O c t o b e r 1845 w h e n , a p p a r e n t l y m r e s p o n s e to a n e x p e c t e d loss o f b u l l i o n from an i n c r e a s e i n t h e cost o f c o t t o n i m p o r t s c a u s e d b y a p o o r A m e r i c a n crop, the Bank o f E n g l a n d rinsed t h e rate o f interest: The news passed from the capital to every prownce m the emptre, that there was a pamc m the share markeL From London to lavetlx~l and from Ltverpool to Edinburgh the intelligence spread Money was scarce, the price of stock and scrip lowered, the confidence of the people was broken, and the vision of a dark future on every face (Franos, 1851, vol 2, p 191) It Was w i d e l y r u m o u r e d that "... acting u p o n s o m e smaster h i n t of the G o v e r n m e n t , the directors [of the Bank of England] m i g h t have b e e n ind u c e d to m a k e m o n e y s c a r c e r b y t h e a d o p t i o n of a h i g h e r rate o f i n t e r e s t ... w i t h a v i e w to checkm g the h i t h e r t o u n c u r b e d v i o l e n c e o f t h e mania" ( M o r i e r Evans, 1849, p 17) As t h e Leeds corresp o n d e n t of T h e E c o n o m i s t p u t it, the i m p a c t o f the " r e c e n t m e a s u r e s o f t h e Bank o f England" o n share p r i c e s was "... n o t so m u c h ... its t e n d e n c y to make m o n e y t m m e d i a t e l y dearer, as ... its ind u c i n g distrust a n d shaking c o n f i d e n c e i n the future s t a b i h t y o f o u r m o n e t a r y r e l a t i o n s ..7 ( 2 5 O c t o b e r , p 1049, e m p h a s i s a d d e d ) , p r e s u m a b l y w i t h L o n d o n T w o w e e k s later T h e E c o n o m i s t farsightedly w a r n e d its readers that insofar as %.. the p r e s e n t crisis .. is to b e r e f e r r e d to a n inc r e a s e d value of m o n e y , o r as far as it m a y b e c o n t i n u e d b y a f u r t h e r a d v a n c e m the rate o f in-

465

terest, 'we c a n h o l d o u t little h o p e o f an early change" ( 8 N o v e m b e r 1845, p. 1109) For those w h o h e l d the "best class" of s e c u r i t y as p e r m a n e n t i n v e s t m e n t s in c o m p l e t e d lines, tt r e c o m m e n d e d a passive strategy to m i n n ' n i z e transactions costs For o t h e r s it advised a b s t e n t i o n : "It ts a g o o d rule to observe, to d o n o t h i n g w h e r e t h e r e is n o t a clear a n d e v i d e n t o b j e c t to b e g a i n e d b y acting; a n d thts is m o r e t r u e at a u m e of unusual excitement or depression" (The E c o n o m i s t , 22 N o v e m b e r 1845, p. 1173). A l t h o u g h the i n c r e a s e m i n t e r e s t rates m Oct o b e r was n o t large, a c o u n t r y - w i d e c r e d i t s q u e e z e f o l l o w e d because, in practice, the Bank c h a r g e d u p to d o u b l e the m i n i m u m rate, a n d had b e g u n to acttvely ".. discriminat[e] against u n d e sirable types of p a p e r .7 (Morgan, 1940, p. 3 3 7 ) H o w e v e r , the L o n d o n d i s c o u n t m a r k e t rem a i n e d unaffected. O n l y a v e r y small n u m b e r o f trade bills w e r e a c c e p t a b l e o n the L o n d o n disc o u n t market, a n d almost n o i n l a n d bills, w h i c h w e r e d i s c o u n t e d b y the joint-stock a n d private b a n k s Thus, w h e n the reserves o f these banks fell sharply from 1845 u n d e r the p r e s s u r e of railw a y calls, w t t h n o access to the L o n d o n m o n e y m a r k e t s they w e r e o b l i g e d to r e d u c e their adv a n c e s to industrialists a n d e n d o r s e f e w e r bills 39 Also, these b a n k s w o u l d have b e e n m o r e reluctant, e i t h e r to l e n d to railway s h a r e h o l d e r s so that they c o u l d m e e t t h e i r calls, particularly as the s h a r e h o l d e r s c o u l d n o l o n g e r b e g u a r a n t e e d a n m c o m e to service a loan, o r to l e n d to the railw a y c o m p a n i e s , in w h i c h they w e r e often inv o l v e d as b o t h s u b s t a n t i a l s h o r t - t e r m financiers a n d s h a r e h o l d e r s (Reed, 1975, c h a p t e r X). As W a r d - P e r k i n s says, ". the m e e t i n g s of railway calls m u s t have e m b a r r a s s e d m a n y individuals, i n v o l v i n g s u m s o f £ 1 0 0 m i l l i o n a n d o v e r i n the years 1846--8" ( 1 9 5 0 , p 86). In these circ u m s t a n c e s , it is hard to disagree w i t h Morgan's c o n c l u s i o n that share prices w e r e forced d o w n from the e n d of 1845 b y The system by whtch shares were subsalbed for and only

~9Calls up to February 1846 were for prelmamaryexpenses and, most tmportantly, the now reinstated 10% deposit (Morgan, 1940, p 332 ), whtch alone amounted to £ 12m As this money had to be deposited wtth the Bankof England tt was effecttvely out ofctrculatton unttl the btll was passed and the radway company etther deposited tt In a bank or spent tt

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m small part paid up, leaving the holder vath large liabilities m the more or less remote future, but offering the chance of immediate profit should the market price of the shares go up, was such as to greatly tempt the small investor to take up more commitments than he could afford Both to avoid further calls, and to meet such calls o n the shares he retained, the investor would be driven to sell at a loss This w a s recogmsed as a cause o f the w e a k . hess o f the r a i l w a y share m a r k e t f o r so long after the breaking o f the b o o m tn October 1845 If we assume, as

IS only reasonable, that this new and hazardous venture attracted a different type of investor from the one who supported the market for Government securities, we have an adequate explanation also of the firmness of thts market at the same tune (1940, p 334, emphasis added) A l t h o u g h t h e c r e d i t crisis h a d c l e a r l y w e a k e n e d p u b l i c e n t h u s i a s m for railways, tt h a d n o t y e t b r o k e n it, a n d late in J a n u a r y 1846 Sir R o b e r t Peel, a n x i o u s to pass as m a n y r a i l w a y bills as q u l c l d y as possible, p r o p o s e d a Select C o m m i t t e e to find w a y s o f e x p e d i t i n g t h e large v o l u m e o f s c h e m e s w h i c h h a d b e e n d e p o s i t e d . *° By 17 F e b r u a r y t h e C o m m i t t e e h a d p r o d u c e d its t h i r d r e p o r t . It r e c o m m e n d e d r a t i o n a l i z i n g Parhamentary procedures and waiwng the necessity o f p r o v i d i n g e v i d e n c e o f suflicmnt traffic, a n d " .. h o p e d , b y a d o p t i n g t h e s e r e c o m m e n d a u o n s in t h e f o r m o f r e s o l u t i o n s o f t h e House, a n d b y i n t e n s i v e w o r k . that t h e r a i l w a y b u s i n e s s o f t h e s e s s i o n m i g h t b e c o m p l e t e d " (Lewin, 1936, p. 1 1 7 ) In 1846 P a r l i a m e n t c o m p l e t e d a r e c o r d a m o u n t o f r a i l w a y business. Historians have n o t e x p l a i n e d this s u d d e n e n t h u s i a s m for m a x i m i z ing t h e flow o f bills t h r o u g h t h e House. T h e s w m d i e h y p o t h e s i s suggests o n e r e a s o n , it w a s m the interests of the London wealthy that the maximum number of subscriptions be made before the boom was busted F r o m April 1846 e v i d e n c e t h a t t h e r a i l w a y s w e r e again o v e r s p e n d i n g t h e i r capital e s t i m a t e s was b e g i n n i n g to e m e r g e (Lewin, 1936, p 119), a n d r a i l w a y s h a r e p r i c e s d r i f t e d l o w e r as t h e credit shortage and pressure on railway investors c o n t i n u e d H o w e v e r , in early 1847 as r a i l w a y

spending mounted, this

in itself h e l p e d t o ease c r e d i t , a n d "... c o n t r i b u t e d for a s h o r t whale t o t h e g e n e r a l b o o m c o n d i t i o n at t h e b e g i n m n g o f 1 8 4 7 . " ( M o r g a n , 1940, p. 339). F r o m May t o J u l y 1847 r a i l w a y s h a r e p r i c e s s t a g e d t h e i r first s u s t a i n e d rally s i n c e t h e p e a k o f J u n e 1845, a n d ".. m t h e e a r l y p a r t o f t h e y e a r [ t h e r e w e r e ] . n o less t h a n 329 p e t i t i o n s for Acts" (Lewin, 1936, p 283). This w a s t o b e t h e final s h o w o f p u b h c faith in i n v e s t m e n t in railways, a n d it is a r e m a r k a b l e t e s t i m o n y to its r e s i l i e n c e that it o c c u r r e d tn t h e face o f a rise in m i n i m u m b a n k r a t e to 5% in April 1847, a n d n o w " s e v e r e rationing" o f t h e bills w h i c h t h e Bank o f England w o u l d a c c e p t ( W a r d Perkins, 1950, p 7 8 ) T h e s e m e a s u r e s again app e a r e d to b e i m p o s e d o n t h e Bank to a v o i d an ant i c t p a t e d loss o f b u l l i o n s t e m m i n g f r o m a n o t h e r p o o r c o t t o n c r o p in 1846 w h i c h , w i t h s t o c k s n o w low, w o u l d hit t e x t i l e e x p o r t s In addition, 1846 h a d s e e n a r e l a t i v e l y p o o r w h e a t h a r v e s t tn all o f W e s t e r n E u r o p e . Extra i m p o r t s o f w h e a t w e r e a n t i c i p a t e d to r e l i e v e t h e Irish p o t a t o famine, at a b n o r m a l l y h i g h p r i c e s H o w e v e r , a l t h o u g h d u r i n g t h e first t h r e e m o n t h s o f 1847 t h e Bank lost n e a r l y a t h i r d o f its b u l l i o n r e s e r v e s ( d o w n to £ 9 3 m f r o m £ 1 3 . 4 m ) , t h e e x t e r n a l d r a i n q u t c l d y m o d e r a t e d o f ItS o w n a c c o r d as g o o d h a r v e s t p r o s p e c t s e m e r g e d in W e s t e r n E u r o p e , a n d large s u p p l i e s o f c h e a p corn from North America unexpectedly became available. T h e loss o f c o t t o n e x p o r t s was, o f c o u r s e , s u b s t a n t i a l l y m a t c h e d b y t h e d r o p In imp o r t s o f c o t t o n staple, a n d t h e g o o d h a r v e s t s m e a n t that less w h e a t w o u l d n e e d to b e imp o r t e d F u r t h e r m o r e , t h e d r a i n o f b u l l i o n to N o r t h A m e r i c a , a p a r t f r o m b e i n g less t h a n anticip a t e d , w o u l d b e t e m p o r a r y , for tt w o u l d und o u b t e d l y q u i c k l y r e t u r n as U.K. e x p o r t s o f manu f a c t u r e d g o o d s t o A m e r i c a i n c r e a s e d 4~ Thus, a l t h o u g h t h e Bank o f England's b u l l i o n reserves were temporarily depleted, no serious crisis e m e r g e d , a n d at n o t i m e d i d t h e Bank o f England's b u l l i o n r e s e r v e fall b e l o w £ 8 m , al-

4o On 26 January 1846 Sir Robert Peel told the House that 815 schemes had been deposited proposing to construct 20,675 redes at an estimated capital cost of£350m (Lewm, 1936, p 116) 4~ The Umted States was the smgle biggest market for U K. exports, m 1836 takmg a quarter of the total (Mathtas, 1985, p 268)

THE "RAILWAYMANIA"OF 1845 though it had been as low as £ 2 m in the currency crisis of 1839 (Ward-Perkins, 1950, p. 80). By July 1847 the bullion crisis was over, and railway share prices had risen for the third m o n t h in succession, perhaps in anticipation of a cut in interest rates and a further easing of credit As Lewin says, ". so little was the impending financial crisis foreseen in the early part of that year .. that. Acts . involving n e w capital powers to the extent of £124,000,000, were presented to Parliament for consideration in the 1847 session" ( 1936, p. 283). It was quite unexpected, therefore, when on the 5 August the Bank of England raised minimum bank rate to 5 5%, sharply intensifying the internal credit crisis and the difficulty with which railway shareholders could meet their calls. The cause was the apparently mysterious Commercial Crisis of 1847 THE COMMERCIAL CRISIS OF 1847 The ostensible reason for the Bank raising interest rates yet again was the loss o f banking reserves This time it was to relieve the financial embarrassment of corn speculators w h o had purchased large amounts of corn futures in anticipation of a shortage, whereas prices had fallen sharply w h e n large amounts of cheap American gram unexpectedly became available. When these contracts began to unwind in the face of low corn prices, both the speculators and their financiers turned to the Bank of England for credit. Although it was prepared to make advances to help the speculators in distress, perversely it only did so at the price of intensifymg the crisis for everyone else Dutang September 1847 the Bank talked of "dwindling" internal reserves and again raised interest rates, to 6% (in practme charging up to 9% ) It was"rumoured" that the Banking Department's reserve of Bank Notes was becoming exhausted In anticipation of further rises in interest rates, there was a scramble for liquidity, and P u n c h saw '%. no alternative but resorting to

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an exchange of commodities, since transactions for cash have b e c o m e almost impossible" (9 October, 1847) With the credit crisis threatening to disrupt the economy, on 25 O c t o b e r the Government at last decided that the Bank of England could continue to act as lender of last resort, but only if minimum bank rate was raised to a record 9%, and in practice the bank charged up to 15% ! As P u n c h put it, "The effect was magical" (9 October, 1847) The "liquidity crisis" disappeared for those w h o could pay the higher rates, but for many railway shareholders the crisis was thereby further intensified The railw a y s " experienc[ed] more and more ditticulty in obtaining capital to complete and shareholders [found] . calls more and more difficult to meet" (Ward-Perkins, 1950, pp 7 7 - 7 8 ) Share prices fell to pre-"mania" levels and, adding to the downward pressure, at the half-yearly shareholder meetings, which took place during August and September of 1847, the directors of many companies suddenly decided to warn investors that although ". dividends had been maintained ... this would be impossible for a period in the near future, owing to so m u c h capital expenditure on extensions etc., being unfruitful until traffic had had time to develop" (Lewin, 1936, p. 286). Although the changed outlook for dividends was to have a continuing impact on railway share prices, suggesting that many investors had been misled by the systematic overstatement of reported profits, the actions of the Bank had clearly played the decisive role in brealong the "mania" Thus, as Lewin says, although "It has been held in some quarters that the "railway mania" was responsible for the disastrous financial Cl'lSiSwhich undoubtedly o c c u r r e d towards the end of the year 1847 .. [i]t would be giving a truer estimate to state that the progress of railway promotion and construction in this country was checked, and brought for the time being nearly to a standstill, by events quite unc o n n e c t e d with the railway industry ." (1936, p. 282).42 Thus, although the c o m m o n view is, as

This was also Marx's vtew "The actual reduction m avadahle money capital through crop failures, corn imports, and gold exports constituted, naturally, an event that had nothing to do with the railwayswindle" ( 1981, p 486) 42

468

1~ A BRYER

L e w i n p u t s it, t h a t t h e c o m m e r c i a l crisis j u s t " h a p p e n e d t o o c c u r at a c r u c i a l p e r i o d o f t h e development of the railway system" (1936, p 2 8 2 ) , n o c o n v m c i n g e x p l a n a t i o n o f t t s o r i g m has y e t b e e n given. Both Houses of Parliament held Committees o f I n q u i r y into t h e c a u s e s o f t h e crisis. By p o p u lar d e m a n d , t h e Bank o f England w a s m t h e dock. However, a majority of the House of Commons a c q u i t t e d it o f a n y b l a m e , w h i c h "... w a s lard p r i m a r i l y o n t h e d e f i c i e n t h a r v e s t s as b e i n g r e s p o n s i b l e for d e r a n g e m e n t o f t h e b a l a n c e o f p a y m e n t s .." ( W a r d - P e r k i n s , 1950, p. 7 9 ) H o w ever, w e h a v e s e e n that any e x t e r n a l crisis w a s o v e r b y J u l y 1847, a n d W a r d - P e r k i n s d e s c r i b e s t h e i r r e p o r t a s " . singularly u n c r i t i c a l a n d unill u m t n a t i n g .. little b u t a " w h i t e w a s h i n g " d o c u m e n t .. " ( 1950, p. 7 9 ) H o w e v e r , in t h e s e c r e t rep o r t o f t h e H o u s e o f Lords, 43 w h t c h W a r d - P e r kins d e s c r i b e s as ".. m u c h m o r e tmpresstve", %.. the distinctton between external and internal d r a m s o f c u r r e n c y w a s stressed, a n d t h e n e e d for a different c e n t r a l b a n k i n g p o l i c y t o b e a d o p t e d tn e i t h e r case" ( 1 9 5 0 , p. 79). In o t h e r w o r d s , it r e c o g n i z e d t h e o b v i o u s fact that h i g h i n t e r e s t r a t e s a r e a p p r o p r t a t e to m a i n t a i n t h e e x c h a n g e rate, b u t n o t to c u r e an i n t e r n a l c r e d i t crisis. Thus, in e v i d e n c e to t h e C o m m i t t e e t h e wellk n o w n Political E c o n o m t s t , T h o m a s T o o k e , c o m p l a i n e d that t h e Bank h a d ". a p p l [ i e d ] a credit s t r i n g e n c y e v e n w h e n t h e [Foreign] Exc h a n g e s w e r e favourable, w h e n in fact w h a t w a s wanted was a conditional and judicious support o f t h e m a r k e t " ( W a r d - P e r k i n s , 1950, p. 8 1 ) . M a r x a g r e e d . As h e p o i n t e d o u t , " for e v e r y £ 5 that flows a b r o a d , a £ 5 n o t e ts w t t h d r a w n f r o m c t r c u l a u o n at h o m e , so that t h e a m o u n t o f m e a n s o f c i r c u l a t i o n ts r e d u c e d at t h e v e r y m o m e n t w h e n it is m o s t r e q u i r e d , a n d w i t h t h e g r e a t e s t u r g e n c y at that" As M a r x p u t it, t h e 1844 Act dtrectly provokes the enttre world of commerce into meetmg the outbreak of a crisis by putting astde a reserve stock of banknotes, thereby acceleratmg and mtensffymg the crtsts And by thts arttfictal mtenstfication of the demand for monetary accommodatton at the same time as the supply ts dechmng, tt drtves up the interest rate 43The evidence taken was not made public untd 1857

m crtsls tames up to a prevtously unheard of level ( 1981, p 689) A l t h o u g h T o o k e s u g g e s t e d that t h e s e p a r a t i o n o f the responsibilities of the banking department f r o m t h e issue d e p a r t m e n t b y t h e Bank C h a r t e r Act o f 1844 h a d "forced" t h e Bank m t o an unjustiffed c r e d i t s q u e e z e to p r o t e c t its b a n k i n g reserves, figures f r o m M o r g a n ( 1 9 4 0 , T a b l e V) s h o w that fears t h a t t h e s e w e r e b e c o m i n g exhausted were exaggerated because, although t h e y fell f r o m £ 6 m to £ 4 m b y t h e s e c o n d quart e r o f 1847, t h e y a c t u a l l y m c r e a s e d d u r i n g t h e t h i r d q u a r t e r to £ 4 . 3 m , a n d o n l y fell b a c k to £ 4 . 1 m m t h e final q u a r t e r By contrast, in t h e app a r e n t l y less s e v e r e crisis o f 1841, b a n k i n g res e r v e s h a d fallen to a l o w o f £ 1 . 2 m m t h e t h i r d q u a r t e r o f t h a t y e a r Even t h e Bank's s u p p o r t e r s a c c e p t e d that ".. s o m e t h m g h a d g o n e s e r i o u s l y w r o n g .. " ( W a r d - P e r k i n s , 1950, p 80). A l t h o u g h there was a great deal of technical discusston of banking procedures, no changes of policy were made and few were advocated For Marx the c a u s e s o f t h e crtsts w e r e clear. Taking Overs t o n e ' s e v i d e n c e to t h e C o m m t t t e e s o f I n q u i r y again as his foil, h e c o n c l u d e s What Overstone ts trying to prove is that the crtsts of 1847, and the high rate of interest that accompanted tt, had nothing to do wtth the "quanttty of money" present, t e with the prowstons of the 1844 Bank Act which he had msptred, although tt actually dtd have something to do with tt, as soon as fear of exhaustton of the Bank's re. serve (and thts was a creation of Overstone's) added monetary panic to the 1847-8 cnsts (Marx, 1981, p 55o) A l t h o u g h W a r d - P e r k i n s finds n e i t h e r t e c h n i c a l n o r c i r c u m s t a n t i a l e x p l a n a t i o n s sattsfactory, a n d a c c e p t s that it w a s t h e Bank o f England's p o l i c y w h i c h c a u s e d t h e crists, h e e x p l a i n s this as t h e p r o d u c t o f its i g n o r a n c e a n d l a c k o f p o w e r . In his v t e w "It w o u l d t a k e t w o m o r e c r i s e s b e f o r e . t h e Bank h a d g a m e d t h e n e c e s s a r y e x p e r t e n c e a n d a u t h o r i t y t o c o n t r o l t h e situation" ( W a r d - P e r kins, 1950, p. 9 0 ) . Thts e x p l a n a t t o n is unsatisfactory, h o w e v e r , b e c a u s e a l t h o u g h t h e Bank Chart e r Act f o r b a d e t h e Bank o f England f r o m in-

THE "RAILWAY MANIA" OF 1845

creasing the fiduciary issue, the discretionary p o w e r for a c o m m i t t e e of three ministers to do so was incorporated in the original draft proposals, implying the p o t e n t i a l need was well-understood on the basis of previous experience, and the actual need in 1847 was clear enough. From the viewpoint of the swindle hypothesis it is possible to speculate that by removing any discretionary p o w e r Sir Robert Peel ensured that the decision to suspend the Act could only c o m e after a severe crisis had ensued. From the point of view of the swindle hypothesis it is also curious that, although from the middle of 1844 to the end of 1846 the Governm e n t had reserved p o w e r s in the C o m p a n i e s Clauses C o n s o l i d a t i o n A c t of 1845 to establish Standing Orders to c u r b the issue of securities which could revolve the p a y m e n t of dividends from capital, it only decided to use t h e m in 1847 to curb "excessive speculation"! As Wang puts it, "Before 1847 considerable laxity .. prevailed in the manner of framing the provisions governing the raising of capital" (p. 17) After 1847 explicit restrictions w e r e placed on the issue of preference and guaranteed shares, which had g r o w n as an attractive form of e m e r g e n c y financing from the late 1830s, and which leapt ahead as capital expenditures m o u n t e d and the restrictions on loan and guaranteed equity financing began to bite Evans shows that b e t w e e n 1837 and 1845 the railways had issued s o m e £ 1 0 . 5 m of preference shares, whereas in 1846 alone they issued a further £ 1 0 3m ( 1936, Table VII). As he points out, it was only in July 1847 that, by establishing Standmg Orders, "the House of C o m m o n s again took steps to curb speculation in the railway in-

469

dustry N e w roads and branch l ~ e s for old railways w e r e absorbing too m u c h of the market's capital . The industry's pace was too rapid". Although it had k n o w n about these devices all along, it was only now, as Evans puts it, that while Parhament dad not object to the sale of ordinary shares w h e n the purchasers were rolling to wait for a return until the project should be able to pay dtwdends from earnings tt w a s oppos e d to the use o f such $ t t m u l a n t $ as the p a y m e n t o f interest or dzvulends on or dt t m r y or preference shares o u t o f c a p t t a ~ the guarantee of a preference dividend by a road w h o s e ortgmal lane was not open for traffic and the guarantee of dtvadends on the shares of one railway by another wfuch was not completely open Excesstve speculatson w a s to be c u r b e d ( 1936, p 102, emphases added)

And it was. The railway p r o m o t i o n b o o m was over From 1848 no n e w major schemes w e r e launched WINNERS AND LOSERS Although m i n i m u m bank rate c a m e d o w n alm o s t as quickly as It w e n t up, railway share prices continued to fall to reach their lowest point in O c t o b e r 1849 as dividends fell, heavy calls continued, and great publicity was given to the fact that m a n y railway companies had b e e n "paying dividends from capital". Share prices decline because sellers e x c e e d buyers. It is clear that m u c h of the selling of railway shares after 1845 was distress selling by the middle classes. As Francis noted "It is the conviction of those w h o are best informed that no other panic was ever so fatal to the middle class" (1851, vol. 2, p. 195). 44 This was certainly The Economists view.

44 However, tt appears the panic was not fatal to all initial investors The far-seeing would want to sell out as near to the peak as they could One of them appears to have been Str John Gladstone who, m 1845" began to fear a general collapse, for he was fully aware that w h e n those w h o had subscribed for ratlway shares were required to meet the calls for cash, the money market would suddenly go very taght" Wath share prices at thear pe0k, m the Autumn of 1845 he began to sell hutsrailway shares Although Checkland says that "He made ,some reduction m has holdings of railway shares but at was mapossable to

hquidate so large a set of mvestments "(Checldand, 1971, p 341, emphas~sadded), that as, presumably, to sell them all, SirJohn must have `soldat least 46% In October 1843 he held a share portfoho with a total market value of £213,150, of wfuch £ 1 6 9 , 7 0 0 w a s m tin/ways In Novcmlx~ 1848 has$1mreportfoho had a totalmarket value of£78,854 The railwaysimre index was 95 4 in October 1843 and 8 7 8 m November 1848 ([£169,700 x 8 7 8 - 95 4 -- £78,854] -- £169,700 = 0.46) Thus, the collapse of railway share prtces was certainly riot fatal to Sir John Gladstone Between October 1843 and November 1848 the net r ~ h ~ b l e value offus total wealth increased from £690,300 to £745,679, even though he paid annual allowances to has sons of £11,000 p e r a n n u m from 1844, which reduced "his p o w e r to accumulate", and had been reqmred to sell fus sugar plantations and sustain a capttal loss of some ;g125.000 to £150,000 (Cheddand, 1971, p 339, Appendix II 1, PIP 4 1 4 - 1 5 )

470

R. A BRYER

"... g reat n u m b e r s o f t r a d e r s o f all classes, w h o h a v e n o t o n l y g o n e o u t o f t h e i r o w n business, b u t m u c h o u t o f t h e i r d e p t h in t h e i r h a s t e t o b e r i c h . . . " ( 2 1 O c t o b e r 1848, p. 1187). A l t h o u g h f r o m "all classes", t h e s e "traders" w e r e c l e a r l y n o t t h e "rich". As W a r d - P e r k i n s p u t s it," . t h e bitter e x p e r i e n c e g a m e d m e a n t that t h e g e n e r a l p u b l i c was n e v e r again so c o m p l e t e l y g u l l e d as 1t h ad b e e n m 1845" ( 1 9 5 0 , p. 85, e m p h a s e s added) F r o m a strictly logical p o i n t o f v ie w , as it w a s t h e r e l a t i v e l y less r i c h i n v e s t o r s w h o w e r e in difficulty, an d w h o w e r e t h e r e f o r e sellers, t h e buyers m u s t have been the London wealthy That b y 1849 t h e r e h a d b e e n a m a j o r c h a n g e m t h e n a t u r e o f railway s h a r e h o l d e r s lS c l e a r f r o m the following exchange b e t w e e n The Monteagle C o m m i t t e e a n d J o h n Swift, S o h c i t o r to t h e Lond o n and N o r t h W e s t e r n - " D o y o u t h i n k . that t h e part i es w h o h a v e i n v e s t e d m Railway s e c u r t t i e s are n o w m o r e o f a p e r m a n e n t nature, and less o f a s p e c u l a t i v e nature, t h a n t h e y w e r e at t h e o u t s e t o f t h e u n d e r t a k i n g ? C e r t a i n l y ..." ( 1 8 4 9 , p. 244). A l t h o u g h t h e r e lS o t h e r e v i d e n c e s u g g e s t i n g a large-scale transfer o f shares to t h e L o n d o n w e a lthy in t h e latter p a r t o f t h e 18408, e x a c t l y w h e n t h e y m a d e t h et r p e r m a n e n t i n v e s t m e n t s m railw a y shares is u n c l e a r E v i d e n c e that L o n d o n s t o c k b r o k e r s w e r e b e g m m n g t o p u s h railway shares in early 1847 is p r o v i d e d by a p a m p h l e t p u b h s h e d by J o h n W h s t e h e a d He w a s u n c o m p r o m i s i n g in his beh e f that, b e c a u s e o f t h e artificially h i g h i n t e r e s t rates, railway shares w e r e bargain p u r c h a s e s . A more favourable ttme than the present for the constderatton of the quesnon thus brought prommenfly under nonce, could not have occurred, every descrtpnon of securtty at the investor's command being, through the extstmg monetary pressure, at a prtce beyond precedent This state of things cannot continue, the pressure once passed, and abundance, ff not plethora, occupying its place, a considerable enhancement tn the value of all Railway Stocks must follow [pp 4-5] It is for those who have the means, to avail themselves of the golden opportunity now offered Procrastination will only lead to re-

gret Pnces may, before matters right themselves, go even lower than they are at present, but the mvestment once made m a juchctously chosen hne, regret ought not to ensue (Whitehead, 1847, p 6) While John Whitehead was mamly c o n c e r n e d w i t h selling " G u a r a n t e e d Stocks", o n t h e g r o u n d that t h e y o f f e r e d m u c h h i g h e r r e t u r n s ( h e suggests o v e r 25% m o r e , see p. 8 ) for a rtsk equiv a l e n t t o that u n d e r l y i n g t h e r e t u r n f r o m consols, 4~ h e also cl ear l y t h o u g h t o r d i n a r y shares were undervalued. That almost every ratlway whmh, to the present ttme, has received the sanctton of the Legislature, will sooner or later prove to be a fatr and remunerattve property, there can be httle doubt Manypossess, of course, very supertor merits over others, and I feel persuaded that, wtth care and seleetton, purchases made m the present state of the money market, would ulttmately turn out very well IT]he non-guaranteed offer ample scopefor favourable observation (Whttehead, 1847, p 5, emphasts added ) Also, as h e p o i n t e d out, an i m p o r t a n t p a r t o f t h e a t t r a c t i o n o f m a n y o f t h e g u a r a n t e e d stocks w as t h e e x p e c t a t i o n o f p a r t i c i p a t i o n in "surplus profits". There are two classes of Guaranteed stocks, the one partakang of a fixed unalterable chvtdend, or per centage, the other having a mtmmum mterest guaranteed, and parttctpatton m surplus profits added In some cases, this prospectave advantage vail prove of much worth [p 5] [S]ome of the Guaranteed Radway Stocks, besides the mmtmum per centage winch they are sure ever to recetve, may, and m some cases must, get considerably more from paructpataon m surplus profits There are many instances of th~s class open to the investor, and if he is satisfied weth the certain~F of recezwng the minimum guaranteed he has the prospect of being a considerable ga~ner by the contingency (Whttehead, 1847, p 8, emphasts added) Evans c o m m e n t s that " if t h e a u t h o r ' s o p i n i o n o f his w o r k is t o b e taken at full v a l u e .. t h e influe n c e o f thts p a m p h l e t o n t h e [ L o n d o n Stock] m a r k e t w a s large" ( 1 9 3 6 , p 1 3 9 ) A l t h o u g h Evans d o e s n o t a t t e m p t to r e b u t W h i t e h e a d ' s

45 He quotes approvmgly the vtew of The Monthly Railway Record on Aprd 1847, that" no conjuncture of events, s a v e m that of extreme convulsion need permanent danger be apprehended to the sacred rights of the pubhc credttor, [E]very kind of securtty whtch the funded investment offers ts possessed by the ratlway "(Whttehead, 1847, p 9)

THE "RAILWAYMANIA"OF 1845 claim, he rightly cautions that, "As a m e m b e r of the firm of Carden and Whitehead, stockbrokers, John Whitehead was not necessarily an unbtased advocate of the purchase of preference and guaranteed shares" (1936, p. 139). As the pamphlet was a marketing document, his claims to success may be open to some doubt. However, from the point of view of the swindle hypothesis his mtended audtence is of interest. Whitehead endorses the conclusion of The Monthly Railway Record that " those plain truths that can be judged in then" mtegrity by every intelligent man .. may bring much benefit to the monied .. interests" (1847, p. 9) In the thtrd edition Whitehead clmmed that, on the strength of his pamphlet, "... very considerable investments have been made in Guaranteed Railway Stocks, which would otherwise .. have been placed in the Funds"( 1847, p. 139) The London wealthy, the "monied interest", were the major investors m the Funds, and would have been the major chents of London stockbrokers. ~ Thus, if John Whitehead is to be believed, the London wealthy may have made permanent investments in railway shares during 1847 Evidence from stockbroker James Capel to the Monteagie Committee suggests that permanent investments were made as late as the end of 1848, during which period the index had fallen decisively below 100, after reaching a low in O c t o b e r 1848 of 79.7. As he put it, "... before the reduction of Railway dividends came, which has lessened the eagerness of the public, there was a great transfer of funded property into Railway shares, but that has ceased a good deal lately" (Monteagle, 1849, p. 73). Although dividend reducttons were announced in late 1847, they "came" in late 1848 (Lewin, 1936, Table IX) This tmplms that the transfer could have taken place up to late 1848. Pollins also concludes that the nature of railway investors changed after

471

1847: "... 1t ts likely that there had been a reduction in the n u m b e r of short-term speculative holdmgs of the shares of railway companies in the crtsis of 1847 and the subsequent slump, and that the remaining shareholders were mvestors w h o were interested in the long-term prospects of the companies .." (1969, p 160, emphasts added) It was the middle classes that were notortous as the "speculators" during the second ratlway "mania" (Spencer, 1854) H o w much permanent investment had occurred by early 1849 is not known However, it is clear that the Monteagle Committee and many of tts witnesses wanted more Thus, although the Commtttee had heard evidence that investors with access to sophtsttcated advice should not have been fooled by railway accounts during the "mania", it constantly stressed that more uniform accounts, fuller dtsclosure, and an independent audit would, as they put it to William Quilter," increase the number of purchasers for investment .. ", rather than "purchases for speculation" (Monteagle, 1849, p 221, emphasis added) Or, as John Bagshaw put it, "... tt would give confidence to the monied public, leading them to invest their funds ..." (Monteagle, 1849, p. 333) The Committee whole.heartedly agreed with Sir John Easthope that ".. an immense number of capstalists now refuse to embark in Railway property, from the uncertainty that there is as to the real condition of the concerns" (Monteagie, 1849, p 295, emphasis added) On the other hand he was sure that if railway accounts were improved ". it would generally increase the permanent investments" (Monteagle, 1849, p 296) because, as William Quilter put it, railway shares ".. would be just as good as Consols" (Monteagle, 1849, p 220). 47 Railway shares could presumably only be as good as consols to s o m e o n e w h o would otherwise invest in consols.

46AsJeffreyssays, m the mtd-mneteenth century there was" a non-entreprenurtal class tn the btg commerctaland trading centres hke London,whlch was rather isolatedfrom the industrial developmentsof the North The wealth and size of this class ts shown first of all by the size and dispersion of its holdingsof the National Debt This group of about a quarter of a milhon people form as tt were a sohd base of the Victorian investment market "( 1938, p 44) 47 We shall see later that ffQudter was correct m his assessment of the level of relative risk of radwayinvestment, all types of railway shares appeared to provide permanent investors m the late 1840swith a satisfactorylong-term investment

472

R. A BRYER

While this evidence suggests that the London in to railways from as late as May 1849 and through 1850 - - during which period the index fell below 80, to reach a low of 60 5 in O c t o b e r 1 8 4 9 - - exactly w h e n the bulk of permanent investment occurred remains unclear. Although there were clear losers from the railway "mania", in the popular view there were no wmners because over-investment meant low profitabiltty. For example, Hobsbawm suggests that "... many of the railways actually constructed were and remained qutte trrational by any transport criterion, and consequently never paid more than the most modest profit, ff they paid any at all" (1969, p 111 ). Mathias also believes that the early U K. railways were burdened with "... the liability of over-investment, w h e n capital was cheap and the expectations of shareholders uncritically optimistic" (1983, p. 105) We turn in the final section to the question whether the return to "permanent" investors in railways was as poor as these remarks tmply. However, on the basis of reported profits the popular vtew is fully justified because, as Polhns points out, although "The industry expanded raptdly ... tt was not particularly profitable. On average net profits were m the region of ~- /.'.5 per cent of paid-up capital" (1971, pp. 6 5 - 6 ) . However, we shall see that on the basis of Pollin's own work and other evidence, it appears that the reported profits of railways were deliberately understated from the late 1840s. If so, from the point ofvtew of the swmdle hypothesis, this could be interpreted as an attempt to use published accounts to "cool-the-mark-out". The concept of "cooling-the-mark-out" is b o r r o w e d from Erving Goffman ( 1 9 6 2 ) w h o analysed h o w North American confidence tricksters managed relations with their vtctim, "the mark" After the "stmg", there is much to be gained by persuading the mark to feel "sadder but wtser" This is "cooling-the-mark-out"

wealthymay have m o v e d

ACCOUNTING FOR RAILWAYS AFTER 1847 The Monteagle Committee concluded that 48

the continuing fall in railway shares in 1848 and the early part of 1849 was "... attributed by almost all the Witnesses exammed to a want of confidence in the representations made by Railway Companies of their financial condition" (1849, Third Report, p.iit). For example, in the opinion of Captain Laws, Managing Director of the Lancashire and Yorkshire, '~¢ant of confidence" in the accounts was "the great cause of the crippling of commercial people w h o had so largely embarked m Railways two years ago" (Monteagle, 1849, p 353) Great publicity was n o w given to the fact that during the "manta" dividends had been paid from capttal, and the leading companies began ~ssumg ". a sort of apologia p r o vita s u a 48 .. with the tdea oftakmg the shareholders more into their confidence" (Lewin, 1936, p. 350). After the commercial crisis of 1847, railway companies began to re-introduce deprectation on rolling stock and, for the first time, depreciation on the track. Although m the early 1840s there was, perhaps, some excuse for the prevalent view that with proper repatr and maintenance the track was indestructible, from 1845, in the vmw of The Economist, there was none: There has been a great deal ofdtscusstonand speculatton during the last two years as to the probable duratton of rmlroad tron when exposed to heavytraffic,and there are few subjects on whtch the optmon of practtcal men have differed more We have, however, at last, the means of forming a very safe estimate of the durabthty of a 56 pounds to the yard edge rml,when well laid, on even and well adjusted track The questton ts Whateffecthas tonnage produced¢ Is the raft vtsibly injured by It~ (25 October, 1845, p 1048) On the basts of the experience of the U S Lowell radway, which had opened in 1838, it clearly was. "The durability of this rail may ... be set down at 500,000 tons". At $5,OOOper mile for replacement," we obtain one c e n t p e r m i l e for the value of the wear of tron on thts road" (The Economist, 25 October, 1845, p. 1048). This company's expertence was not unique: 'q'he lowest esttrnate w e have ever seen of the p o w e r of a good edge rail, is 1,000,000 tons" (The

laterally, an "apologyon behalfof a life" or, as an accountantwould say,an account of stewardshtp

THE "RAILWAYMANIA"OF 1845 25 October, 1845, p. 1048). Furthermore, with the rapid completion of the Belgian national railway network in the early 1840s, Lardner implies (1850, chapter iv) that systematm data reveahng high rates of deterioration were avaihhle which showed the idea of rail mdestructibility to be a myth. He also imphes that the same conclusion should have been evident to U.K. companies as rails, sleepers, fixings and track beds all had to be rapidly upgraded as the power, weight, speed and frequency of the traffic increased. "Yet strange to say, the prevalent o p i m o n . , was, until a later period .. that the wear and tear of the rails was so utterly msensv ble, that for all practical, financial and economical purposes, it might be totally disregarded" (Lardner, 1850, p 56). From the viewpoint of the swindle hypothesis, given that data were widely available w h i c h refuted this opinion, the recogmtion of depreciation on the track after the "mania" appears very conveniently timed. However, Pollins shows that accounting for the depreclaUon of track and rolling stock was rapidly ousted by replacement accounting (charging the full cost of fixed assets against current revenue w h e n they were replaced), and even by debiting capital extensions against revenue (1969, pp. 154-9; see also Edwards, 1986, p. 255) Debiting capital expenditures to the profit and loss account clearly causes an understatement of profit In periods of heavy replacement expenditure, replacement accounting also understates reported income (Brief, 1965) 49 Railways were engaged in heavy replacement expenditures during the late 1840s and early 1850s, and again throughout the 1860s (Hawke, 1970, p. 199 and Table VIII.O1 ). Was the adoption of replacement accounting a d e l i b e r a t e move to understate profits? Lardner appeared to think that this was a distinct possibility

Economist,

The pubhc has of late been ¢xcated m an extraordinary by certain reported malpracUces m railway management, by whach the value of shares has been raased to a spurious prace an the market by unacknowdegree

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ledged drafts of revenue on capital [t e overstatingprofit], and, as usual when pubhc excitement operates, a clamour has been raised which would hurry railway directors into the other extreme It e understatmgprofit] They have been even urged on all hands to close the capttai account vath all practicable expedatton, a measure which, ttts easyto demonstrate, would be utterly lmpracucal, unless :t were deliberately mtended In future to feed capital a t the expense o f revenue (1850, p 116, emphases and insertions added) "Closing the capital account" refers to the "double account" system used by the railway companies w h e r e b y the balance sheet was partiuoned into a "capital" section, which included the fixed assets and the paid-in capital representing them, and a "general" section with all other assets, liabilities and reserves (Edwards, 1985) Closing the capital account meant, therefore, that if companies continued to invest, unless additional capital was raised, all future capital expenditures would be written-off against revenue Profit would quite clearly be understated! Lardner had no doubt about the correct course. "It is manifest that the total cost of the permanent way, the stations, workshops, the furniture, tools, and machinery, and the entire amount of rolling stock, m u s t b e c h a r g e d t o c a p i t a l " (1850, p. 117, emphasis added) As he pointed out, "To charge . the annual increase [in the movable stock necessary to work a gradually increasing traffic] would be to debit revenue with capstal, or, what is the same, to make unacknowledged drafts on revenue in favour of capital" (Lardner, 1850, p. 117) This view was acknowledged to be theoretmally correct even by those w h o in practice chose to ignore tt For example, in answer to a question from the Monteagle Committee about h o w improvements in fixed assets should be accounted for, Peter Blackburn, Chairman of the Edinburgh and Glasgow Railway, recognized that replacement accounting was a deviation from treatment required by accrual accounting. 3259 Take as an example that you had occasion to re-

49Replacementaccounting ts a clear violation of accrual accounting(see Mosmh& Larsen, 1982,p 494) Fromthe earmng power perspecuve, the "income" reported using replacement accounting will only by chance provide an estimate of the steady state distributable surplus

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place rails, but that, m consequence of an increased amount of traffic, you felt tt necessary to double the|r weight and strength, m that case, ffyou had unexhausted capital, you would then charge the replacement rads upon that7 For my own part, I should be mclmed to say it should come out of revenue, but I am aware that, strictly and in theory, you may charge the difference m the weight of rafts on capital (Monteagle, 1849, p 469, emphasis added) so

M e r e l y u n d e r s t a n d i n g t h e t h e o r y o f a c c r u a l acc o u n t i n g d o e s n o t m e a n its strict a p p h c a t i o n . In t h e i r last half-year a c c o u n t s t h e E d i n b u r g h a n d G l a s g o w m f o r m e d its s h a r e h o l d e r s that t h e c o m p a n y h a d d e c i d e d to a d o p t t h e " s y s t e m f o l l o w e d b y a l m o s t all o t h e r g r e a t p u b l i c C o m p a n i e s " , to b o t h "lay aside a r e s e r v e d fund, p r o p o r t i o n a t e to t h e i r capital," a n d "to c l o s e t h e c a p i t a l a c c o u n t at t h e t e r m i n a t i o n o f t h e c u r r e n t half-year, and thenceforeward to meet every expense o u t o f t h e c u r r e n t r e v e n u e " ( M o n t e a g l e , 1849, p 4 6 9 ) . This m o v e w a s s u p p o r t e d b y m a n y other witnesses. T h e d e m a n d t o c l o s e t h e capital a c c o u n t bec a m e t h e slogan o f t h e C o m m i t t e e s o f Investigat i o n w h i c h s p r a n g u p in 1848. T h e M o n t e a g l e C o m m i t t e e a n d many, b u t n o t all, o f t h e i r Witn e s s e s r e c o m m e n d e d it. st S o m e r e c o g n i z e d that, w i t h c o n t i n u e d capital i n v e s t m e n t , t h e a d o p t i o n of replacement accounting would grossly distort r e p o r t e d m c o m e s2 F r o m t h e p o i n t o f v i e w o f t h e s w i n d l e h y p o t h e s i s , it a p p e a r s significant that L a r d n e r s e e s t h e d e m a n d to c l o s e t h e c a p i t a l acc o u n t as an e x p r e s s i o n o f t h e "... c o n f l i c t that has a r i s e n b e t w e e n t h o s e w h o , o n t h e o n e hand, are i n t e r e s t e d in t h e m a i n t e n a n c e o f capital, and, o n t h e o t h e r , in s e c u r i n g p r e s e n t large d i v i d e n d s ..." ( 1 8 5 0 , p 1 1 7 ) T h e f o r m e r g r o u p l o o k e d forw a r d to a " p e r m a n e n t i n v e s t m e n t " w i t h f u t u r e

d i v i d e n d s p r o v i d i n g " p e r m a n e n t c u r r e n t inc o m e " , w h i l s t for t h e latter, t h e "speculators", those who purchased "with the prospect of their re-sale at a d v a n t a g e o u s prices", r a i l w a y s h a r e s were merely a "temporary investment" (Lard. ner, 1 8 5 0 , p . 1 1 5 ) W h i l e Pollins also c o n c l u d e s that t h e introduction of replacement accounting and other write-offs o f capital t o r e v e n u e l e d m a n y r a i l w a y c o m p a m e s to ".. s u b s t i t u t e deliberate unders t a t e m e n t o f c u r r e n t profits for t h e deliberate overstatement which had been prevalent during t h e p r e c e d i n g mania" ( 1 9 6 9 , p 160, e m p h a s e s a d d e d ) , h e m a k e s n o c o n n e c t i o n b e t w e e n this and the wmners and losers from these practmes. Instead, h e e x p l a m s t h e m as a r e s p o n s e t o t h e desire o f " m a n y r a i l w a y d i r e c t o r s as w e l l as s h a r e h o l d e r s ... t o have a r e g u l a r r a t h e r t h a n fluct u a t i n g d i v i d e n d s , a n d . a r e c o r d o f stable earnlngs a n d d i v i d e n d s " (Pollins, 1969, p 160). H o w e v e r , w h i l s t t h e initial r e - i n t r o d u c t i o n o f depreciation accounting could be explained by the d e s i r e to r e p o r t i n c o m e to ". i n v e s t o r s w h o were interested m the long-term prospects of t h e c o m p a n i e s a n d w i l l i n g to f o r e g o c u r r e n t div i d e n d s in o r d e r to safeguard f u t u r e d i v i d e n d s " (Polhns, 1969, p. 160), its r a p i d s u b s t i t u t i o n b y r e p l a c e m e n t a c c o u n t i n g a n d capital wrlte-offs t o understate reported income clearly cannot be Pollins a p p e a r s to a c c e p t this b y offering t h r e e additional explanations Firstly, h e suggests t h a t " t h e a d o p t i o n o f dep r e c i a t i o n f r o m t h e late forties d i d n o t last l o n g . d u e to t h e i n c r e a s e m traffic in t h e fifties a n d sixties, w h e n c o m p a n i e s f o u n d that t h e i r p a s t a l l o c a t i o n s to d e p r e c i a t i o n r e s e r v e s w e r e i n a d e q u a t e [and] [i]ncreasingly .. t u r n e d to t h e p r a c t i c e o f n o t p r o v i d i n g d e p r e c i a t i o n as s u c h b u t o f d e b i t i n g t h e actual e x p e n d i t u r e s o n

s°Wdham Qudter (q 2304), Wdham Spackman (q 1263) and Captain Laws (q 2992) also gave the same, theoretically correct, answer st For example, George King, a retired railway director, castigated the capital wnte-offs proposed by the Committee of Investigation into the Eastern Counties Railway In his view, It showed that" they do not seem to have the least Idea of the division or separation " o f capital from Income (Monteagle, 1849, p 309) s2 For example, William Chaplin, Chairman of the South Western, doubted the fairness of closing the capital account iffurther investment was contemplated ~I hardly know that It would be fair that it should come out of revenue, ff you wanted new butldmgs and new goods sheds "(Monteagle, 1849, p 330)

THE "RAILWAYMANIA"OF 1845 maintenance and renewals to the periodic revenue accounts" (Pollins, 1969, {J. 155) Only a non.accounting specialist could suggest this as an explanation. By "depreciation reserves" Pollins appears to be referring to cash funds set aside to finance maintenance and renewals The fact that these, w h e r e they existed, w e r e insufficient to finance renewals as they o c c u r r e d could not provide grounds for discontinuing the recognition of a b o o k provision for depreciation. As anyone w h o understands accrual accounting knows, and m a n y c o n n e c t e d with the railways clearly did, h o w fixed assets are financed has no implications for their accounting treatment. However, depending on a c o m p a n y ' s pattern of renewals and other capital expenditures, it is possible that the adoption of depreciation on their existing fixed assets a n d r e p l a c e m e n t accounting, which appears to have b e e n a comm o n scheme, imposed intolerable strains for s o m e c o m p a n m s on their r e p o r t e d distributable incomes - - and cash flows w h e r e depreciation was funded n and this m a y explain Edwards' finding that several major companies abandoned depreciation accounting and funding as renewals mcreased in the early 1850s ( 1986, pp. 253-4). Secondly, PoUms later adds t h a t " .. stringency in the capital market and an attitude of caution s e e m to have b e e n responsible for highly conservative treatment of important items (in the sense of understating profits) in the years following the mama" ( 1969, p.160) He appears to imply b y this suggestion that it was necessary for directors to understate profits to conserve cash and so avoid raising additional capital to finance necessary capital expenditures. If shareholders exp e c t e d all reported profits to be paid as dividends, a n d raising further capital is constrained, it could have made sense for directors to understate profits to limit the cash drain from diwdends. However, it is not at all d e a r that after the "mania" investors did want all attributable profits to be dmtributed. Firstly, from the following exchange b e t w e e n the Monteagle Commit-

475

tee and William Quilter it appears that simply retaining earnings to finance capital expenditure was not unheard of: "2257. You are aware that it has generally b e e n the custom of the Companies to have what they call a rest? They do not divide [attributable earnings?] q m t e close, I believe; a sufficient rest would answer the same purpose [i.e. financing replacement rails], and would, in fact, be a depreciation account under another name" (Monteagle, 1849, p 217, insertions added). Secondly, it was the p e r m a n e n t mvestors and their agents that w e r e p r o m i n e n t in calling for the closure of the capital accounts, and for replacement accounting (Edwards, 1985, p 28) 53 This behaviour is not consistent with naive investors w h o demand current dividends at all costs Finally, neither ts the fact that between 1850 and 1870 the U.K. railways m o r e than doubled their paid-in capital ( H a w k e & Reed, 1969, p 271). Thirdly, Pollins speaks for m a n y accounting historians w h e n he argued that "The fact t h a t . . there was not yet a generally accepted body of accounting doctrine, made it easy for the preparation of the final accounts of even the most conscientiously c o n d u c t e d c o m p a n y to be influenced by considerations of management policy" ( 1969, p 160; see also Lee, 1975, p. 21, and Chatfield, 1977, p. 95). This explanation is unconvincing for two reasons Firstly, w e have seen that the fundamental "accounting doctrine", accrual accounting, w a s widely accepted, if not always practised Secondly, Pollins' explanation suggests that in manipulating the accounts, railway directors w e r e simply pursuing their o w n interests The motives of railway directors in manipulating the accounts have yet to b e researched. Certainly, as p r o m o t e r s and insiders, directors personally benefited from the inflated share values which the manipulations helped to create However, the swindle hypothesis suggests that these manipulations w e r e also in the interests of the London wealthy, to whose viewpoint and interests the railway directors at least w e r e exposed during the railway "mania" as

53Examples from evidence to the Monteagle Committee are James Capei, Stockbroker, q 849, Mihtll Slaughter, Stock Exchange Statistical Office, q 1110-11, Lewis Wolfe, Share-broker, q 2350)

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they became fully mtegrated into London soctety Many were Members of Parliament and men of affairs The most successful bought stately homes and, with one interesting exception, they kept them The exception ts George Hudson, "The Ratlway King", whose devotion to the London wealthy was remarkable. Hudson's early successes m promoting and amalgamating railway companies earned him public adulation and great wealth Although from humble origins he became an MP and, during the "mania", he was the toast of the London society His ". children were the compamons of peers" (Francis, 1851, vol 2, p. 219) After the crash Hudson's fall from grace was spectacular and complete He was accused of insider-dealing, breaches of fiduciary duty, and paymg dividends from capital, and became subject to protracted and intensive public vihficatton. He was shunned and reviled by London society Creditors and dtsgruntled shareholders sued, harrted and eventually ruined him. Hudson consistently protested his "innocence". He had done nothing many others had not also done. Therefore, as Carlyle asked m 1849, "Why should thts, the chief terrier among them, be set upon by all the dog fraternity" (Lambert, 1934, p 275). An explanation is suggested by the swmdle hypothesis As Lambert concludes, "His r u m . was not due primarily to the detectton of his sharp practmes; it was due to socmty's desire to find a s c a p e g o a t " (1934, p 18, emphasis added, see also Francis, 1851, vol 2, p. 241) Finding a scapegoat is often an effective way to "cool-the-mark-out" Although Hudson bore his misfortune with remarkable dignity, he hinted there were hmtts In "denymg" he had threatened m Court to name ". certain persons of influence connected with the landed interest and Parhament .. " w h o had accepted his brtbes, he gave m Parhament what may have appeared to some an ominous defence. l say my positron has been one of mtsfortuoe, I have been morally rtght, but legally wrong I have known what tt ts to hve m populartty, and to enloy the smiles and the confidence of the world And ! have had a bitter reverse to bear I hope 1bear it with the fortttude of a man

who ts consctousof his innocence should bear tt I am ready to unravel and unfold everything

(lambert,

1934, p 288) He made it plain "... if he were called on to tell w h o had profited by him, names would appear of which the world little dreams" (Lambert, 1934, p 276). Hudson could almost certainly have implicated important people in hts dealings. However, gtven his prominence m the railway "mania" he may have also had much to unravel and unfold about the "great railway swindle". Sigmficantly, for Hudson the real villain was "the system", by which he meant, as he told a stonily disapproving House of Commons, P a r l i a m e n t ' s failure to define distributable profits. "I think, if the House will determine what ts capital and what income - - what ought to go to capttal and what ought to go to revenue - - the dtrectors would have no difficulty, they would be guided by the strtct law of the House" (Mountfield, 1979, p 72). Although eventually driven to virtual destitution, Hudson never did name names or say what, if anything he knew about the ortgins of "the system", or the motives of its designers Interestmgly, however, from the viewpoint of the swindle hypothests, Hudson was eventually "freed from his financtal troubles" when "some friends" rinsed a subscription for him, enough to purchase an annutty of £ 6 0 0 a year. He retired to a house in London, and began again to frequent the conservattve Carlton Club (Lambert, 1934, pp. 2 9 7 - 8 ) What mottvated this unexpected generosity is not known. Perhaps it was the same reason that Charles Manby had loyally "stuck to htm"~ As Manby told Charles Dtckens, he remamed Hudson's friend because ". he (Hudson) had so many people in his power, and he had held his peace .." (Lambert, 1934, p 295) Thus, to sum up, from the viewpoint off the swmdle hypothests, the deliberate understatement of ratlway company profits after the crash looks suspiciously hke an attempt to fool the uninitiated mto believmg that railways were, after all, a poor mvestment If so, this provides a second reason why, m 1845, the Government chose not to restrict accounting practices to pre-

THE "RAILWAYMANIA"OF 1845 vent either the overstatement or understatem e n t of profits. They again decliiaed to do so in 1849. The Monteagle C o m m i t t e e r e c o m m e n d e d depreciation accounting, greater uniformity, fuller disclosure, that non-shareholders could be appointed as auditors, and that a public auditor be appointed, and these r e c o m m e n d a t i o n s w e r e incorporated into a Bill The proposal to appoint a public auditor was of great c o n c e r n to m a n y witnesses, largely on the ground that such a person would, as Charles Russell put it, have no "discretion" and, unlike the shareholders, could not " look to questions of e x p e d i e n c y or necessity as well as questions of rigid law .. " (Monteagle, 1849, p 188). Although Charles Russell did not elaborate, J o h n Swift, Solicitor to the London and North Western, did. He was particularly concerned with "interference" with the "revenue account" (Monteagle, 1849, p 246), and m his view w h e n r e p l a c e m e n t expenditures involved i m p r o v e m e n t s ". then would arise a question of discretion h o w m u c h of the cost belongs to capital and h o w m u c h to expenditure" (Monteagle, 1849, p 256). From the viewpoint of the swindle hypothesis it appears significant that, in apparent recognition of this argument, but in blatant contradiction to their apparent acceptance that the only useful audit ".. is one involving the higher powers of judgment" (Monteagle, 1849, p. 213), the Monteagle C o m m i t t e e "strictly defined" their public auditor's authority to include only the "truth and accuracy of the Accounts", to vouching accounting entries and verifying the legality ofpayments (1849, Third Report, p xvii) While the latter would stop the p a y m e n t of dividends from capital, tt w o u l d not p r e v e n t the understatement of profits In the C o m m i t t e e ' s scheme, the public author would not ".. acquire any p o ~ 2r whatever to interfere m the internal administration of the c o m p a n y as a commercial enterprise" (Monteagle, 1849, Third Report, p. xvii) Nevertheless, w h e n the Chairmen of the prmcipal companies " .. maintained that shareholders had quite sufficient powers to supervise their o w n property, Lf only they chose to exercise them .. ", as they had throughout their evidence to the Monteagle Committee, ".. the G o v e r n m e n t thought it prudent to let the Bill

477

drop" (Lewm, 1936, p. 355) Perhaps the G o v e r n m e n t w e r e reactitig to the e m e r g e n c e of investor p o w e r as the London wealthy m o v e d in~ As Samuel Laing, for example, told the Monteagle Committee, although before the fall in share prices, w h e n the middle classes invested, there was "far too m u c h sleepy confidence", he did ". not think that the period of unlimited confidence ever will return; the attention of the parties interested in the matter, m o r e especially of the gentlemen whose business it is to buy and sell these shares every day, I mean the gentlem e n of the Stock Exchange, isfully drawn to the subject now, and it is scarcely possible, I think, that we should have any recurrence of the old state of things" (1849, p 447, emphasis added). As it seems likely that the "gentlemen of the Stock Exchange" either were, or w e r e agents for, the London wealthy, this evidence is also consistent with the view that the London wealthy "entered" railways m the late 1840s There would have b e e n little need to understate profits ff the returns from railways really w e r e unsatisfactory. Thus, the p r i m a facie plausibility of the coohng-the-mark-out explanation depends on h o w good the returns from railways really w e r e

THE RAILWAYS AS AN INVESTMENT PROSPECT AFTER THE "MANIA" The generalview of economic historians is that the financial returns from railways w e r e disappointing. In the view of Gourvish, for example, railway" .. profits after 1850 w e r e on the whole modest", with the " unweightedaverage dividend for the leading 15 companies, 1850-75, amount[ing] to only 3.65 p e r cent" (1980a, p. 129, emphases added) However, evaluating the railways as a long-run investment requires m o r e than a subjective appraisal of the absolute level of profitability and dividends. In principle, it is necessary to c o m p a r e expected returns with those required w h e n the investment was made. This topm appears not to have been studied before, and data are scarce, particularly for the estimation of the required return All that can be

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attempted here ts a critique of the view that the returns from permanent investments in U K. railways were obviously "poor", both by exploring the tmplmattons of current data, and by highlighting key empirical questions requiring further research. Although, tn principle, we should estimate expected returns, we can use the historical record of realized returns as a surrogate for the expectations of rational investors, assuming over the long-term, that the collective expectations of investors are equal to the returns realized. In other words, the long-run average of realized returns represents what, collectively, rational investors should have expected. Given the uncertainties revolved in estimating the required return, the relatively secure base provided by realized returns will at least provide a benchmark for assessing whether these returns could reasonably have been required. To date, historians have simply measured the investment returns to railway investors as the percentage rate of dividends on paid-in capital Clearly, in principle, as John Whitehead implied, we should measure the total returns taking into consideration the "buy-in" share price, the dividends received, and any capital gains or losses. 54 However, as dividends from railways grew continuously and steadily, as a first approximation w e can estimate the total returns from railway investment as a growing perpetuity For example, Lewm points out that after 1 8 5 0 " . a steady rise took place [in] ... the price of the stocks or shares of the leading companies ..7' ( 1936, pp 367--8), implymg that rational investors should have expected a steady rise in dividends. And this ts what they received. As Gourvtsh shows: "From 1850, dividends showed a gradual but steady increase" (1980a, p. 129). To estimate the total investment return ( r ) to railway investors as a growing perpetuity requires estimates of the following variables:

d = the current dividend per share.

P --- the current share price. g --- the continuous annual c o m p o u n d rate of dividend growth d d The model says r = - - + g, where E is the P P dividend ymld when the investment was made As we have seen, exactly when permanent investments were made in railways is not clear However, whenever they were made, to calculate the dividend yield we need the stock market value of railway shares We can estimate these by applying Gayer et aLs' railway share price index to what is k n o w n of the relationship between market values and paid-in capital For example, we know from Pollins that in the 1850s "share prices remained below par" (Polhns, 1971, p. 43) Therefore w e know that an index value below 83 1 (the value at December 1850) represents a market valuation below paid-in share capital. On the same reasonmg we can infer that share values were below par from the collapse of share prices m the aftermath of the first railway manta until at least the end of 1842 when the index reached 83.6. We also know from Francis that in 1843 "railways, though depressed in value, were regarded as good as consols" w h e n the index averaged 98 2. This c o m m e n t seems to imply that by this period the railways were expected to just earn their required return and, if so, they would have had a "valuation ratio" of around 1, and their market value would have been around par The valuation ratio is market valuation of a company divided by the replacement cost of its net total assets It represents the incentive to invest A valuation ratio below 1 implies that reinvestment is not desirable, a valuation ratio greater than 1 implies that reinvestment is desirable, and a valuation ratio of I implies that investors are indifferent about reinvestment In the early 1840s investors were indifferent about further investment in railways implying that their aggregate valuation ratio was around 1. As the railways had recently acquired

s4 Recall his vmws, quoted earher, that " purchases made m the present depressed state of the money market, would ultimately turn out well ", and that " the pressure once passed a considerable enhancement of RadwayStocks must follow"(Whitehead, 1847, p 5)

THE "RAILWAYMANIA"OF 1845 t h e i r assets t h e i r h i s t o r i c c o s t s w o u l d a p p r o x i m a t e l y e q u a l t h e i r r e p l a c e m e n t c o s t s By t h e e n d o f 1843 t h e i n d e x has a v a l u e o f 105.5, a n d in e a r l y 1844 starts to rise as t h e s e c o n d r a i l w a y b o o m g e t s u n d e r w a y At this p o i n t w e m a y assume that the railways promised more than t h e r e q u i r e d r e t u r n and, if so, t h e y w o u l d h a v e a valuation ratio of greater than 1 implying thatat i n d e x v a l u e s o f a r o u n d 1 2 0 + m a r k e t v a l u e s exc e e d e d par. Thus, m a r k e t values e q u a l l e d p a r s o m e w h e r e b e t w e e n i n d e x v a l u e s o f 83 and, say, t h e a v e r a g e i n d e x for 1844 o f 121, a n d w i t h n o o t h e r i n f o r m a t i o n w e m a y s u g g e s t that p a r is r e p r e s e n t e d b y an i n d e x v a l u e o f a r o u n d 100 55 Although we do not know exactly when perm a n e n t i n v e s t m e n t s w e r e m a d e in railways, w e have seen no evidence of serious interest before t h e e a r l y p a r t o f 1847 It s e e m s r e a s o n a b l e , t h e r e f o r e , to e v a l u a t e t h e r e t u r n s f r o m p e r m a nent investments assumed to be made from mid1847 t o 1850, at w h i c h p o i n t t h e r a i l w a y s b e g a n their period of long-term, steady growth, and r a i l w a y s h a r e p r i c e s h a d c l e a r l y s t a b i h s e d . To simplify t h e calculations, w e w i l l e s t i m a t e t h e ret u r n s f r o m t h e s e i n v e s t m e n t s f r o m 1850 t o 1875, for w h i c h p e r i o d data are readily avaUable,s6 Gourvlsh estimates the annual equivalent cont m u o u s l y c o m p o u n d r a t e o f g r o w t h in d i v i d e n d s o v e r this p e r i o d o f 1.91% ( 1980b, p. 129). W h i l e

this is t h e ideal e x p o s t m e a s u r e o f g r o w t h , taking i n t o a c c o u n t all t h e data, 1t is n o t c l e a r that this is n e c e s s a r i l y t h e b e s t s u r r o g a t e for e x a n t e e x p e c tations, as it p r e s u m e s p e r f e c t i n f o r m a t i o n ts poss e s s e d b y t h e forecaster. An a l t e r n a t i v e e x p o s t m e a s u r e o f g r o w t h , w h i c h i m p o s e s less s t r i n g e n t r e f o r m a t i o n r e q m r e m e n t s , is t h e g e o m e t r i c m e a n g r o w t h r a t e This o n l y r e q u i r e s k n o w l e d g e of current and end of period dividends per share Thus, as t h e a v e r a g e r a t e o f d i v i d e n d s o n paid-in c a p i t a l w a s 2 88% in 1850 a n d 5 25% in 1875 ( G o u r v i s h , 1980b, p. 129), t h e c o m p o u n d annuM g r o w t h r a t e in d i v i d e n d p e r s h a r e w a s 2 4% ( [ 5 25/2 88] -2~ - 1) H o w e v e r , w h i c h formulation b e s t r e p r e s e n t s e x p e c t a t i o n s in 1850 rem a i n s an o p e n q u e s t i o n T o c a l c u l a t e t h e total r e t u r n s f r o m investm e n t s b e t w e e n m i d - 1 8 4 7 a n d 1850 w e n e e d t h e i r d i v i d e n d yields. To c a l c u l a t e t h e buy-in share price we apply the average railway share p r i c e i n d i c e s for t h e s e c o n d half o f 1847, a n d t h e a v e r a g e i n d i c e s for 1848, 1849 a n d 1850 ( G a y e r e t a l , 1953, T a b l e 17), to t h e total o f paid-in s h a r e capital in 1850 o f £ 1 8 7 m ( H a w k e & Reed, 1969, T a b l e 1). T o t a l d i v i d e n d s in 1850 w e r e therefore £5.4m (0.0288 x £187m). To the dividend yields thus calculated we add our estimates of the dividend growth rate to get e s t i m a t e s o f t h e a v e r a g e annual total r e t u r n f r o m 1850 a n d 1875

Investment m

Dividend yield

1847

£54m--[1 12X£187m]-

1848

£5 4m--[O 96 × £187m] --

1849

£5 4m--[O 77 X £187m]

1850

479

Growth rate

26% or 3056 or

+ + + +

=

3 8%

+

£5 4m--[O 70 X £187m] =

or 41% or

+ + +

19% 2 4% 19% 2 4%

Total return = = = =

45% 5 0% 49% 5 4%

1 9%

=

5 7%

2 4% 19% 2 4%

= 6 2% = 60% = 6 5%

ss Gayer et al's index is based at June 1840 = 100 because, they say, "The year 1840 was neither a period of depresmon nor of boom and may perhaps be designated as "normal" Although they regard this choice as of"no special stgnilicance", June 1840 represents the highest point of optimgsm m the early 1840s about the prospects for the railways in a period*of fluctuatmg opinions about their financial potential (Gayer et aL, 1953, p 364). s6 In prmeiple, the investment decision should be evaluated over the expected life of the investment However, because of the impact of dtscounung at even modest rates over long periods, extending the period beyond 25 years would have progressivelyless impact on the total return.

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C o u l d a n y o f t h e s e r e t u r n s h a v e b e e n satisfact o r y to r a t i o n a l p e r m a n e n t m v e s t o r s ; To estim a t e i n v e s t o r s ' r e q u i r e d r e t u r n r e q u i r e s as. s u m p t i o n s a b o u t h o w t h e y p r m e d risk. T h e d o m i n a n t m o d e m view, formalised as t h e capital asset p r i c i n g m o d e l (CAPM), is that i n v e s t o r s should, a n d do, v a l u e m v e s t m e n t s w i t h i n t h e c o n t e x t o f a well-dtverstfied p o r t f o h o of, in principle, all available assets. Is t h e l o g m o f t h e capital asset p t a c m g m o d e l likely t o b e a p p l i c a b l e to t h e v a l u a t i o n o f r a i l w a y s h a r e s in t h e m t d d l e o f the nineteenth century? The principle o f d i v e r s i f y i n g i n v e s t m e n t s to m i m m t z e t h e t o t a l risk t o w h m h w e a l t h is exp o s e d s e e m s t o h a v e b e e n u n d e r s t o o d for centuries. As B r a u d e l points, f r o m at least t h e fourt e e n t h c e n t u r y ".. n o f i n a n c i e r c o n f i n e d h i m s e l f e n t i r e l y to "financial" callings H e always h a d s o m e t h i n g else o n h a n d - - u s u a l l y b a n k i n g a n d that s o m e t h i n g else w o u l d b e a p a r t o f an o v e r a l l p o l i c y w h i c h m t g h t b e v e r y large a n d div e r s d i e d " ( 1 9 8 5 , vol. 2, pp. 5 3 3 - 4 ) A n d in t h e early n i n e t e e n t h c e n t u r y m B r i t a m t h e t y p m a l ". b u s m e s s m a n c o u l d b e a j a c k o f all trades; m e r chant, b a n k e r , insurer, s h i p o w n e r , industrialtst" ( B r a u d e l , 1985, v o l 3, p. 595). H o w e v e r , w h i l s t tt s e e m s r e a s o n a b l e t o a s s u m e t h a t t h e p r i n c i p l e o f d i v e r s i f i c a t i o n w a s u n d e r s t o o d b y "rational" r a i l w a y investors, a n d t h e e m e r g e n c e o f t h e mark e t for railway secutaties w o u l d h a v e i n c r e a s e d t h e s e c u r t t y m a r k e t o p p o r t u n i t i e s for a c h t e v m g dlversificat,on, t h e s e o p p o r t u m t i e s w o u l d n o t e v e n start to b e significantly d e v e l o p e d untal t h e tase o f t h e m a r k e t for i n d u s t r i a l s e c u r i t i e s m t h e 1880s (Jeffreys, 1946, K e n n e d y , 1987). Thus, t h e validity o f t h e CAPM in t h e m t d - n i n e t e e n t h century could not be tested solely usmg security m a r k e t d a t z - I n s t e a d , if t h e logic o f t h e CAPM as to b e a p p h e d t o t h e m i d - n i n e t e e n t h c e n t u r y , t h e " m a r k e t p o r t f o h o " m u s t b e d e f i n e d as t h e level o f feastble a n d cost-effecttve d i v e r s i f i c a t t o n w t t h i n t h e m s t t t u t i o n a l a r r a n g e m e n t s available, including t h e e x t e n d e d f a m i l y - - as an o w n e r - m a n a g e r m v a r i o u s b u s i n e s s e s ( i n c l u d i n g land), a n d as an m v e s t o r m assets w h t c h w e r e t h e m s e l v e s dtversifted, m g o v e r n m e n t s , b a n k s a n d o t h e r financtal restitutions F u n d a m e n t a l l y , t h e validity o f t h e CAPM re-

q u i r e s t h a t o n a v e r a g e a s s e t - p r i c i n g reflects o n l y "market-risk", t h e c o - v a r i a b i l i t y o f t h e r e t u r n s f r o m a n y asset w i t h t h e r e t u r n s available f r o m a "fully-diversified" p o r t f o l i o , w h a t e v e r that m a y m e a n in a n y h i s t o r i c a l e p o c h This n n p l i e s t h a t a c e n t r a l e m p i r i c a l issue tn i n v e s t i g a t i n g t h e vahdity o f t h e CAPM in any p e r i o d IS w h e t h e r any inv e s t o r s consistently m a d e " a b n o r m a l " r e t u r n s o r losses. Relattvely s h o r t - r u n s p e c u l a t i v e b u b b l e s , s u c h as t h e r a i l w a y "mania", d o n o t m v a l i d a t e t h e CAPM, w h i c h s t m p l y n n p h e s that in t h e l o n g - r u n rattonal i n v e s t o r s will v a l u e m d i v t d u a l mvestm e n t s s o l e l y in t e r m s o f t h e i r c o n t r i b u t t o n to t h e task o f a "well-diversified" portfolio. A l t h o u g h t h e r e ts a c l e a r n e e d for d e t a i l e d e m p t r t c a l invest i g a t i o n s o f n i n e t e e n t h c e n t u r y i n v e s t m e n t conc e p t s a n d p r a c t i c e s , m t h e early 1860s M a r x at least a p p e a r e d t o b e l i e v e that s o m e t h m g v e r y h k e t h e l o g m o f t h e CAPM u n d e r l a y "the c a p t t a h s t ' s calculattons". M a r x d e v e l o p s his analysis at l e n g t h in v o l u m e 3, a n d n o t h i n g that c o u l d d o it j u s u c e c a n b e a t t e m p t e d h e r e But consider the foUowmg remarks.

The basic notton In this connectton ts that of average pro-

fit , the tdea that capttals of equal stze must yield equal profits m the same pertod of ttme This m turn ts based on the tdea that each parttcular capRal should be vtewed sunply as a fragment of the total capttal and each capttaltst m fact as a shareholder m the whole soctal enterprtse, partaking m the overall profit m proportton to the stze of his share of capttal ts the basts of the capRahst's calcuatton An example ts how capttal mvestments that are exposed to greater risk, as m shtppmg, for instance, recetve compensatton through mcreased prtces Once capttaltst productton is properly developed, and wtth tt the insurance system, the rtsk ,s m fact the same for all spheres of productton, those more endangered stmply pay htgher insurance premmms and recetve these back tn the prtce ofthetr commodtttes (Marx, 1981, p 312)

W e a p p e a r to h a v e h e r e all t h e b a s i c e l e m e n t s o f t h e CAPM. "average profit" = " r e t u r n o n t h e m a r k e t porffoho"? "total capital" = " t h e m a r k e t portfolio"~ " c o m p e n s a t i o n for g r e a t e r risk ~ =

THE "RAILWAYMANIA" OF 1845 "risk p r e m i u m o n t h e m a r k e t " ? 57 C l e a r l y , h o w e v e r , t h e a d e q u a c y o f t h e CAPM, Of M a r x ' s analysis o f c a p i t a l i s t c a l c u l a t i o n s as a basis f o r analysing the behavlour of railway investors, raises m a n y issues w h t c h c a n n o t b e p u r s u e d h e r e . W i t h o b v i o u s c a v e a t s , I shall m e r e l y a s s u m e its v a l i d i t y t o a l l o w an i m t i a l a s s e s s m e n t o f t h e k i n d of returns whtch could have been required by a r a t i o n a l i n v e s t o r m r a i l w a y s T h e C A P M is b a s e d on the following variables. Let:R = investors' reqmred return. t = the expected risldess rate of interest. B ----t h e e x p e c t e d r e l a t i v e task o f railways, "beta". Rm = the expected return from a value w e i g h t e d i n v e s t m e n t m all assets, "the market portfolio" T h e C A P M i m p l i e s t h a t R = i + B ( R m - i ). A s all o f t h e i n d e p e n d e n t v a r i a b l e s in this e q u a t i o n represent the collective expectations of invest o r s t h e y a r e difficult, if n o t i m p o s s i b l e , t o m e a sure precisely, even today. Historical values can p r o v i d e a usefiil g u i d e , b u t t h e y c u r r e n t l y o n l y e x i s t f o r t h e "risldess" r e t u r n . As w e w a n t t o estimate the reqmred return over the long-term, the a v e r a g e y i e l d o n c o n s o l s o f 3.2% d u r i n g t h e 1 8 5 0 - 7 5 p e r i o d is o n e p o s s i b l e e s t i m a t e o f t h e

481

a p p r o p t a a t e "risldess" r a t e ( M i t c h e l l & D e a n , 1962, B a n k i n g a n d I n s u r a n c e , T a b l e 8). ss Rm - i measures the expected return on the m a r k e t p o r t f o h o in e x c e s s o f t h e e x p e c t e d riskless r a t e o f i n t e r e s t . A l t h o u g h h i s t o r i c a l estim a t e s a r e u n a v a i l a b l e , w e m a y b e g u i d e d b y res e a r c h in b o t h t h e U.K. a n d t h e U.S. w h i c h has f o u n d t h a t s i n c e t h e e a r l y p a r t o f this c e n t u r y t h e a v e r a g e g r o s s o f t a x task p r e m m m o n t h e m a r k e t has b e e n a r o u n d 8 % s9 W i t h o u t d e t m l e d estimates of the rate of return on the "market p o r t f o l i o " f o r this p e r i o d o f t h e n i n e t e e n t h c e n t u r y 1t is i m p o s s i b l e t o k n o w w h e t h e r a n 8% risk premium adequately represents investors' exp e c t a u o n s in 1 8 5 0 H o w e v e r , u s i n g it at l e a s t all o w s us t o i U u s t r a t e t h e o r d e r s o f m a g n i t u d e f o r beta whmh would have been necessary for the returns from permanent railway investments to h a v e b e e n s a t i s f a c t o r y U s i n g t h e f o r m u l a B = [r i~Rm - i] w e g e t a r a n g e o f s t o c k b e t a s f r o m 0 16 ( [ 4 5 % - 3 2% }/8%) t o 0.41 ( [ 6 5 % - 3 % ]/ 8% ) As t h e r a i l w a y s b o r r o w e d a r o u n d 2 5 % o f t h e i r p a l d - m c a p i t a l in t h e f o r m o f d e b t , t h e railw a y a s s e t b e t a m u s t b e c a l c u l a t e d as: B asset = B stock/[ 1 + ( 0 2 5 / 0 75)]. Strictly, this c a l c u l a t i o n should be based on market values of debt and equity which are unavailable. However, using n o m i n a l v a l u e Lmplies a r a n g e o f a s s e t b e t a f r o m 0 . 1 2 ( 0 16/1 3 3 ) t o 0.31 ( 0 . 4 1 / 1 . 3 3 ) . As i n t e r e s t -

s7 From the point of vtew of modern accounting and finance tt ts tempting to go further and suggest that not only is Marx recogmzmg the need for risk adlustmen L but that he Js here also suggestmg a certmnty eqmvalent approach wThe subtraction of the cost of an insurance policy from expected present value )acids the present value of a certainty eqmvalent (Sharpe, 1981, p 98) Marx certainly appears to have thought that financial securmes, whtch he calls "fictitious capttal", were valued as the present value of their expected returns "The formauon of fictmous capttal ~s known as capttabzauon Any regular penodtc mcome can be capitalized by reckoning it up, on the basts of the average rate of interest, as the sum that a capital lent out at this rate of interest, would yield" ( 1981, p 597), "The market value of [shares] ts partly ~ l a t i v e , since tt ts determined not just by the actual revenue but rather by the antmlpated revenue as reckoned m advance" ( 1981, p 598) Thus," thetr market values fluctuate vdth the level and security of the receipts to which they give legal title" (Marx, 1981, p 598)

ss Given that consols are subJeCt to mterest rate risk they are not strtcOy "nsldess" Treasury Bill rates are less subject to mterest rate task, but are too short-term for the investment under constderauon here No security is entirely risk-free However, over the long-term Btatish Government consols were probably the least rtsky securities avadable The nominal rate of interest on consols was 3% from their first tssue to 1888 (Mitchell & Deane, 1962) ~9For the U K. from 1919 to 1977 see Dtmson & Brealey (1978), for the U S from 1926 to 1981 see lbbotson & Smquefleid (1982) Although the excess return on the market should be measured as a long-run average, some shghtly earlier evadence conststent with these averages ts provtded by Kennedy's estimates of the domesttc "average rate of return on all pfoImrty" ( buth tncome and capttal measured gross of deprectation) ( Kennedy, 1987, Appendix E, Part I1) for the U IC for 1910 to 1913 whmh, m conlunctton wtth the returns on Consols for the same period from Mttcheil& Dcane (1962), suggests an average excess return on the "total market" of some 7 4% for these years

482

IZ A BRYER

rates d i d n o t rise o v e r this p e r i o d w h e r e a s d i v i d e n d s i n c r e a s e d , tt s e e m s likely that t h e m a r k e t v a l u e o f r a i l w a y e q u i t y e x c e e d e d its p a r v a l u e m o r e t h a n t h e m a r k e t v a l u e o f d e b t exc e e d e d its p a r value, a n d t h e r e f o r e this e s t t m a t e o f t h e railway's asset b e t a m a y b e an u n d e r s t a t e m e n t . It Is also c r u c i a l l y d e p e n d e n t o n o u r supposed excess return on the market, and which e s t i m a t e o f r e a l i z e d r e t u r n s is c h o s e n t o r e p r e sent the expectations of permanent investors Clearly, h o w e v e r , e v e n for an annual r e t u r n o f 6 5% t o h a v e b e e n satisfactory, t h e r a i l w a y asset b e t a w o u l d h a v e h a d t o h a v e b e e n q u i t e low. Alt h o u g h w e shall n o t g e t p r e c i s e a n s w e r s w i t h o u t t h e n e c e s s a r y e m p i r i c a l w o r k , in g e n e r a l t e r m s w h a t k i n d o f b e t a a r e t h e ratlways likely to h a v e h a d o v e r this p e r i o d ? Beta is a m e a s u r e o f t h e sensitivity o f an asset's r e t u r n t o t h e r e t u r n s o n t h e m a r k e t portfolio. W i t h n o i n f o r m a t i o n , t h e m o s t r e a s o n a b l e ass u m p t i o n is t h a t t h e r e t u r n s o n an i n v e s t m e n t correlate closely with those of the market p o r t f o l i o , giving it a v a l u e o f 1. O n t h e o t h e r hand, if t h e r e t u r n s o n an i n v e s t m e n t a r e k n o w n to c h a n g e less t h a n t h o s e o n t h e m a r k e t p o r t f o l i o t h e i n v e s t m e n t ' s b e t a w i l l b e less t h a n 1, a n d vice versa. N o e s t i m a t e s o f r a i l w a y b e t a s f r o m t h e 1850s exist, a n d t h e y c o u l d n o t b e m a d e s i m p l y b y c o r r e l a t i n g t h e r e t u r n s f r o m r a i l w a y shares w i t h t h e r e t u r n o n t h e total s t o c k m a r k e t b e c a u s e at this tame it w a s n o t r e p r e s e n t a t i v e o f the market portfoho. However, there are some r e a s o n s for b e l i e v i n g that t h e r a i l w a y asset b e t a w a s less t h a n 1. F o r e x a m p l e , as Lewin says, after 1850 ". t h e m d u s t r y again b e c a m e stabilised, v a r y i n g s o m e w h a t m s y m p a t h y to t h e usual t r a d e c y c l e s ... N o v i o l e n t u p h e a v a l ... o c c u r r e d to d t s t u r b t h e g e n e r a l p r o s p e r i t y o f t h e railways as a w h o l e until s o m e s e v e n t y y e a r s l a t e r .." ( 1936, p 368, e m p h a s i s a d d e d ) . T h e fact that t h e f o r t u n e s o f railways v a r i e d " s o m e w h a t " w t t h t h o s e o f t h e e c o n o m y suggests that its overall

b e t a m a y h a v e b e e n less t h a n 1, a n d t h e r e are s o m e specific r e a s o n s w h y this ts likely. Betas a r e i n f l u e n c e d b y o p e r a t i o n a l gearing, the ratio of fixed to variable costs -- the higher t h e r a t i o t h e h i g h e r t h e beta- A l t h o u g h t h e raftw a y s r e q u t r e d a h e a v y initial i n v e s t m e n t in f i x e d assets w h i c h r e q u i r e d m a i n t e n a n c e a n d r e n e w a l w h e n m use, in difficult tames r e n e w a l a n d e v e n maintenance could be reduced, and labour costs w e r e always f l e x i b l e As P o l l m s p o i n t s out, " t h e available figures o f r a i l w a y e m p l o y m e n t .. r e v e a l a m a r k e d l y c l o s e r e l a t i o n s h i p w i t h revenue. T h e r a i l w a y ' s l a b o u r p o l i c y w a s p r e s u m a b l y t o t r e a t l a b o u r as t h e m a j o r vartable, r e c r m t ing o r n o t a n d e v e n d i s m t s s m g a c c o r d i n g to t h e d e m a n d s o f traffic as m e a s u r e d b y r e c e i p t s " ( 1 9 7 1 , p. 6 5 ) A l t h o u g h n o d e t a i l e d b r e a k d o w n o f r a i l w a y o p e r a t i n g c o s t s a r e available, it app e a r s that l a b o u r c o s t s c o n s t i t u t e d a s i z e a b l e p r o p o r t i o n . 6° T h e r e f o r e , w h i l e m a n y o f its c o s t s m a y h a v e b e e n n o m i n a l l y "fixed", in p r a c t i c e m a n y w e r e variable, a n d t h u s a fall in f o r t u n e s could be checked "somewhat". On the other hand, u p s w i n g s m f o r t u n e s w i t h i n c r e a s i n g r a t e s o f e c o n o m m a c t i v i t y w e r e also c h e c k e d b y t h e d o w n w a r d p r e s s u r e o n p r i c e s as c o m p a n i e s att e m p t e d to a t t r a c t traffic to fully utilise t h e i r c a p a c i t i e s in a s a t u r a t e d m a r k e t (Pollins, 1971, p. 63). As G o u r v i s h says, "Railways w e r e r e l a t i v e l y u n d e r - u s e d in 1850, a n d w e r e a b l e to m c r e a s e traffic o v e r t h e n e x t t w o d e c a d e s w i t h o u t additionai h e a v y i n v e s t m e n t " ( 1 9 8 0 b , p. 28). H o w ever, "The ratlways' s e a r c h for l a r g e r traffic volu m e s after c 1845 n a t u r a l l y h a d t h e effect o f lowe r i n g t h e i r a v e r a g e rates" for b o t h p a s s e n g e r a n d freight ( G o u r v t s h , 1980b, p 3 0 ) Thus, t h e asset b e t a for U.K. railways f r o m 1850 t o 1875 m a y h a v e b e e n q u i t e l o w and, imp l i c i t l y at least, after t h e "mania" this a p p e a r s t o h a v e b e e n e x p e c t e d b y at least s o m e c o n t e m poraries For example, although John Whitehead c l e a r l y t h o u g h t g u a r a n t e e d s t o c k s w e r e "... as

6o A rough esttmate of the proportton of laixmr costs m total wort~ng expenses can be esumated as follows Mitchell (1969)

esumates that m 1847 some 250,000 men were employed m constructing the radways, and that thetr total wage bill amounted to 2-3% of the nattonal income m 1847 of £550m Th~stmphes that ratlway navvies were on average prod between £44 and £66 per annum If this average rate of pay is applicable to rmlway workers m general m 1854, when the first records of railwayworking expenses is avatlable, tt lmphes that the 74,400 workers employed m that year (Hawke, 1970, Table X 02 ) cost a total of£3 3m to £4 9m out of total workang expenses m 1854 of£8 8m

THE "RAILWAYMANIA"OF 1845 safe as Government funds" ( 1847, p 7), the reason he gave also applied to an ~ m e n t of the risk of ordinary shares: the expectation of large and relatively stable profits. Although Whitehead does not explicitly discuss the expected riskiness of ordinary shares, he was only prepared to accept that t h e y " .. m a y b e t e r m e d t h e speculative class of Railway Stocks ..." (1847, p 5, emphasis added). As he said, "The dividends on the Funds are provided for out of pubhc taxes; the Dividends on the Guaranteed Railway Stocks are provided for out of the revenue of the Guaranteeing Companies ..." (Whitehead, 1847, p 7), strongly implying that, in his opinion, the bas/s for judging the expected risk of railway "revenues" was the risk of dividends from the Funds Accountant William Quilter appeared to have a similar point in mind when, as we saw earlier, he said that if railways followed a uniform and properly audited system of accounts, "railway investment" would be "just as good as consols". Quilter makes no distinctton between guaranteed and ordinary shares. He appears to be referring to the risk of the t o t a l expected profit stream from railways. As he explained, with adequate published accounts an investor could " judge what the future prospects were likely to be, . his probable future dividends" (Monteagle, 1849, p. 220). In other words, w h e n investors understood the potential earning p o w e r of the railways, they would see a relatively secure future for their "investment", in whatever form that took. His view was accepted by the Monteagle Committee. It also appears to have been the view of Thomas Hutton, w h o also makes no distraction between guaranteed and ordinary shares. In evidence to the Committee, Hutton saw ".. no reason whatever why Railway shares should not eventually b e c o m e as marketable as Exchequer Bills" (Monteagle, 1849, p. 481 ). Consols and Exchequer Bills have a beta approaching zero. Assummg that excess returns on the market from the middle of the nineteenth century w e r e broadly equivalent to those earned in the twentroth, ifU K. railways did have a low beta average annual returns of 4.5% to 6.5% from 1850 to 1875 cannot be dismissed as obviously "poor"

483

Obviously, the lower (higher) the excess return on the ma/ket; the lower (higher) the beta, and the later (earlier) the permanent investment was made, the more satisfactory (unsatisfactory) are the returns likely to have been. However, until adequate empirical estimates of these and other variables are available which show that the returns from railway investment w e r e unsatisfactory, the swindle hypothesis cannot be dismissed on the grounds that no motive existed to deliberately understate railway profits after the "mania".

CONCLUDING REMARKS The objective of this paper has been to investigate the social and political functioning of accounting for the early U.IC railways. Several scholars have suggested that within capitalism accounting could be expected to be tmphcated in the distribution of income, wealth and power. Given the scale of the investment involved in creating the U.I¢. railway system; the extensive production and publication of financial reports; and the classes represented by the initial investors, the potentud clearly existed for major redistributions of income, wealth and p o w e r in which accounting could be maplicated. The swindle hypothesis suggests that this potential was fully realized. In short, that the accounts published by railway companies w e r e deliberately manipulated as part of an orchestrated scheme perpetrated by the "London wealthy" on the manufacturing and middle classes, w h o w e r e lured into investing in railways during the "mania", and w e r e forced to sell out at a loss. Only such a grand scheme seems to do justice to Marx's description of the railway "mania" as the "great railway swindle" However, although such evidence as is available appears consistent with the swindle hypothesis, there are many questions to which more detailed answers are required. In broad terms, there is firstly a need for research by accounting historians providing more systematic and comprehensive analyses o f ( a ) the extent and ways in which the financial reports of railway companies

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were manipulated, ( b ) the information available to, and used by, wealthy and middle class investors, ( c ) the returns required on investment in railway shares, and ( d ) the returns expected and actually achieved. Secondly, there is a need for further economic, social and polittcal research on the motives of the Government, its supporters, the London wealthy, and railway directors and promoters, and relationships between them. However, regardless of the evidence, and leaving aside the inherent difficulties of historical research, some may feel inclined to dismiss the swindle hypothesis as an inherently implausible "consptracy theory" The assumptions whtch appear to underlie such a view are (a) that largescale conspiracies are unlikely, and ( b ) ff they occur, are difficult to substantiate as the participants have incenttves to maintain secrecy. These assumptions presuppose a conspiracy of indiv/dua/s secretly co-ordinating thetr behavtour. Large numbers of inchviduals are difficult to coordmate, and small numbers of individuals can keep a secret. However, the swindle hypothests presupposes a s o c i a l conspiracy, Braudel's "active soctal hierarchy" which dominated the development of capitalism from the fourteenth century. Soctal consptracies of the type suggested by the swindle hypothesis are not only feasible but, except perhaps for the roles of key indivtduals, are not "secrets". To Braudel they are the defining characteristic of capitalism

In his view, capitalism acts consciously, and tt acts strategically. "Capitalism did not take up all the possibilittes for investment and progress that economic life offers. It was constantly watching developments in order to intervene m certain preferred areas m in other words, it was both sufficiently re_formed and matertally able to choose its sphere ofactton" (Braudel, 1985, vol 2, p 400). There is evtdence which suggests that the London wealthy were sufficiently informed about railway finances, and httle doubt t h a t " .. tts dommant soctal positron, .. the weight of tts capital resources, its communications network, and . links which create between members of a powerful minortty m however divtded tt may be by competttion m a sertes of unwritten rules and personal contacts" (Braudel, 1985, vol. 3, p 622), gave it the matertai means to acqutre the railways on favourable terms Acceptance or rejection of the swmdle hypothests may, therefore, depend more on an indivtduars conceptaons of the nature of the soctal world than on the wetght of evidence adduced. However, a more convincing alternative to the mterpretatton of accounting of the early U IC railways ts necessary before tt is rejected Although on the basts of the evtdence currently available the swmdle hypothesis could not be uneqmvocably accepted, there ts at least suffictent for tt to be on the research agenda of accounting history.

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