The railway mania of 1845-1847: Market irrationality or collusive swindle based on accounting distortions?

Abstract

The wild boom and slump of 1845-1847 was the most important of the nineteenth century railway manias, in terms both of its scale and effects on the economy as a whole. It has almost invariably been seen as a market irrationality, a view fundamentally challenged by Bryer’s theorisation of it as a deliberate and collusive device of the “London wealthy”, aided by central government, to swindle provincial middle class investors. This analysis also greatly extended previous perspectives on the rôle of accounting by asserting that accounting practices were crucial to the success of the process and were thus “deeply implicated” in a great, class-based swindle. The acceptance of such a perspective would have important implications for the way we understand the functioning of accounting and capitalism in the mid-nineteenth century, but this paper instead argues that such notions are misconceived, looking to both the evidence that was available when Bryer’s paper was written and to recently collected data on the depreciation accounting practices of the time.

Full text

Railway mania
of 1845-1847
821
Accounting, Auditing &
Accountability Journal
Vol. 16 No. 5, 2003
pp. 821-852
#MCB UP Limited
0951-3574
DOI 10.1108/09513570310505970
Received 28 March 2001
Revised 15 November
2002
Accepted 18 March 2003
The railway mania of
1845-1847
Market irrationality or collusive swindle
based on accounting distortions?
S. McCartney
Department of Accounting, Finance and Management,
University of Essex, Colchester, UK, and
A.J. Arnold
School of Business and Economics, University of Exeter,
Exeter, UK
Keywords Accounting history, Railways, Depreciation
Abstract The wild boom and slump of 1845-1847 was the most important of the nineteenth
century railway manias, in terms both of its scale and effects on the economy as a whole. It has
almost invariably been seen as a market irrationality, a view fundamentally challenged by Bryer's
theorisation of it as a deliberate and collusive device of the ``London wealthy'', aided by central
government, to swindle provincial middle class investors. This analysis also greatly extended
previous perspectives on the roà le of accounting by asserting that accounting practices were crucial
to the success of the process and were thus ``deeply implicated'' in a great, class-based swindle.
The acceptance of such a perspective would have important implications for the way we
understand the functioning of accounting and capitalism in the mid-nineteenth century, but this
paper instead argues that such notions are misconceived, looking to both the evidence that was
available when Bryer's paper was written and to recently collected data on the depreciation
accounting practices of the time.
Introduction
Investment manias were one of the most striking features of the eighteenth and
early nineteenth century British economy. The first was the South Sea Bubble
of 1719-1720, the second was the canal mania of 1791-1794, when more than 40
new inland waterways were authorized, but it was the anticipated returns of
the new railway companies that provoked most excitement, leading to
successive manias in 1824-1825, 1835-1837 and 1845-1847 (Hawke and Reed,
1969, p. 269; Mitchell, 1964, p. 315).
The mania of 1824-5 was largely a speculative ``bubble''; the emerging
technology prompted the publication of prospectuses for more than 70 lines, 40
of which reached the parliamentary stage, but the boom ended after a
commercial crisis in December 1825 dampened the enthusiasm of investors and
only one major scheme was completed (Simmons and Biddle, 1997, p. 311).
Nonetheless, the opening of the line concerned ± the Liverpool and Manchester
± in 1830 greatly encouraged further railway projects which were to transform
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The authors would like to thank the anonymous referees for their helpful comments on an
earlier version of this paper.

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the British economy and also virtually complete the UK main-line system by
1850 (Checkland, 1971, p. 36).
Most of these promotions took place in two periods, 1835-1837 and 1845-
1847, the latter being on a much larger scale and having far wider effects[1].
In 1843, railway share prices had begun rising as the economy recovered
from the slump of 1842 and high earnings were announced by a number of
the more important rail companies. For a time, the expectations of investors
were based on projects that were soundly based but, when capital gains
were being made easily in a rising market, increasingly speculative and
even fraudulent schemes were then put forward, backed up by ``glittering
appeals'' in the financial press. The ``fever of railway speculation [then]
broke out with renewed violence, affecting all savers, large and small''
(Kenwood, 1965, p. 316). The companies ``crowded to Parliament with their
projects; fought with each other for districts, as fields of enterprise, like so
many contending armies'' (Hunt, 1936, p. 104) and the promoters
spectacularly besieged the offices of the Board of Trade on 30 November
1845, the last day for the deposit of railway plans for the 1846
Parliamentary session (see Parris, 1965, pp. 87, 110-1). Many of these plans
failed to obtain Parliamentary approval and over a third of the mileage
authorized between 1844 and 1847 was never built. By April 1846, ``Glasgow
and its merchants were in a frenzy, Liverpool and its exchange in
semi-dementation ± the West Riding in a state of incipient exhaustion and
unable to carry on the wool trade and the railway trade together'' (Hunt,
1936, p. 107).
Changes in the demand for railway shares led inevitably to rapid price
changes; the index of railway shares rose from 93.3 in February 1843 to 167 in
July 1845 before falling back to 79.7 in October 1848 whereas that of joint-stock
bank shares stood at those same dates at 96, 108.1 and 91.2 respectively (Gayer
et al., 1953, p. 375). The route mileage sanctioned by parliamentary acts rose
from 805 in 1844 to 4,538 in 1846, but then collapsed to only 330 in 1848
(Clapham, 1967, p. 391). Monetary investment in the railways rose from an
average of just under £4m a year in the early 1840s to more than £30m in 1847
(when it represented about 45 per cent of total gross domestic capital
formation) before declining to less than £9m a year during the early 1850s
(Simmons and Biddle, 1997, p. 228; Gourvish, 1980a, pp. 12-13). Employment on
railway construction fell from more than 250,000 in May 1847 (4 per cent of the
occupied male population) to around 50,000 three years later (Mitchell, 1964,
pp. 323-4).
The word ``mania'' is often used to denote the elated phase of an inherently
unstable alternation between excessive optimism and pessimism and the
railway mania of 1845-7 has almost invariably been seen as a market
irrationality (Bryer, 1991, p. 439). Thus, Simmons and Biddle (1997, p. 311) have
seen it as ``the most extreme manifestation of promotional fever''; Checkland
(1971, p. 37) has described 1847 as ``the classic culmination of a domestic
investment boom'' where the sudden rush to add to the country's fixed capital

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involved amounts greatly in excess of the available savings; and Hughes (1960,
pp. 185-6) has argued that ``emphasis should be laid, at the risk of being trite, on
the fact that the wild boom in [railway] share prices in 1845 was out of reason''.
In the accounting history literature, it has often been suggested that the
accounts of the early railway companies were subject to manipulation[2]. In
large part this was a consequence of the relatively undeveloped nature of the
profit measurement concepts of the time (see Lee, 1982, p. 81) but some writers
have identified more general patterns. Thus Edwards has suggested that some
managers responded to the pressure for dividends from shareholders by
overstating profits; the ``Railway Mania was an immense speculation; generous
dividends had been forecast and were eagerly awaited'' (Edwards, 1985, p. 34;
1989, p. 167). Similarly, Pollins (1969, p. 153) has stated that, ``during the mania,
and for a few years after it, accounting for depreciation seems to have been
dropped by some companies''.
Even the ending of the mania had its effects; Pollins (1969, p. 153) suggested
that, once things settled down again, railway companies again ``recognised the
need to allow for depreciation'' and Edwards, more broadly, argued that the
railway companies of the time responded to a crisis in investor confidence by
providing far more information and by changing the conceptual basis of their
financial reporting, from cash to accruals (Edwards, 1989, p. 168; 1985, p. 31)[3].
These accepted views have since been challenged by Bryer (1991), who has
theorised the mania as a deliberate and collusive device of the ``London
wealthy'', aided by central government, to swindle provincial middle class
investors. He has also greatly extended previous perspectives on the roÃle of
accounting by asserting that accounting practices were crucial to the success of
this process and were thus ``deeply implicated'' in the ``great railway swindle''
(Bryer, 1991, p. 439).
These claims represent a sharply different explanation of the causes of the
``great'' railway mania and of the way that accounting functioned within the
social and political framework of the time. Given these ``important implications
for accepted views of the nature of capitalism and accounting in the mid-
nineteenth century'' (Bryer, 1991, p. 439), the remaining sections of this paper
accordingly identify the main parts of the ``railway swindle'' thesis and provide
a critique of both the swindle hypothesis itself and, above all, the notion that
accounting was central to the alleged swindle. In so doing, the paper discusses
both the relationship between the evidence that was available when the paper
was written and the inferences drawn thereon and considers the effects of new
evidence on the credibility of the hypothesis before drawing a number of
conclusions.
Summary of the ``railway swindle'' hypothesis (RSHo)
Bryer's RSHo paper voiced a concern that few accounting scholars had risen to
the challenge posed by Cooper and Sherer (1984) in espousing a ``political
economy of accounting'', and supported the (entirely reasonable) paradigm that
accounting should ``attempt to describe and interpret the behaviour of

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accounting and accountants in the context of the institutions, social and
political structures and cultural values of the society in which they are
historically located'' (Cooper and Sherer, 1984, p. 219; cited in Bryer, 1991,
p. 440).
Consistent with this, the paper hypothesed that the railway mania of 1845-7
was a swindle, in which, to put it crudely, provincial middle class investors
(who put up the money to build the railways) were ``taken for a ride'' by the
``London wealthy'' (who stayed aloof from railways until after the collapse of
the mania, when they were able to pick up shares cheaply). Central to the paper,
described by its author as ``a study of the functioning of accounting in the mid-
nineteenth century'', is the assertion that accounting practices were crucial to
the success of this process and were thus ``deeply implicated'' in the ``great
railway swindle'' (Bryer, 1991, p. 439).
The ``railway swindle'' hypothesis is not stated formally but, based on a
careful analysis of the text, appears to consist of three main linked assertions,
each with its own set of subordinate propositions (numbered for the
convenience of later parts of this paper)[4].
1. Ownership of the railways shifted, after the mania of 1845-1847, from the
provincial middle classes to the ``London wealthy''
1.1 The major part of the capital invested in the early UK railways came from
the merchants and entrepreneurs of the provincial middle classes (Bryer,
1991, p. 441).
1.2 The ``London wealthy'' surprisingly and ``studiously avoided investing in
railways during the initial construction phase'' (p. 441) and, even through
the mania, bought very few railway shares (p. 462).
1.3 In 1847, the coincidence of ``escalating construction costs and government
restrictions on raising debt'', which forced the railway companies to make
heavy calls on the unpaid parts of their share capital, and high interest
rates amid the ``commercial crisis'' of that year, meant that ``many of the
initial investors were forced to sell their shares at heavy losses'' (p. 441).
1.4 ``The evidence available suggests that the purchasers were the ``London
wealthy'' (p. 441). Moreover, ``from a strictly logical point of view (sic), as it
was the relatively less rich investors who were in difficulty, and who were
therefore sellers, the buyers must have been the London wealthy'' (p. 470),
who were then able to ``acquire the railways on favourable terms'' (p. 484).
1.5 The share registers that might have provided definitive information on the
patterns of share ownership were destroyed, presumably either in wartime
or at nationalisation (Reed, 1975a, pp. 100-1). ``It is not clear whether these
records were destroyed accidentally or, as the swindle hypothesis might
suggest, by future class representatives in the name of discretion'' (Bryer,
1991, p. 462).

Railway mania
of 1845-1847
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2. Contrary to established views, this was a ``swindle'' perpetrated by
government institutions on behalf of the ``London wealthy''
2.1 The mania is conventionally seen as a ``temporary aberration'' (Reed, 1975a,
p. 271) but Marx's reference to the ``great railway swindle'' implies ``an
alternative explanation'' (Bryer, 1991, p. 439) and contains the germ of an
alternative, critical view'' (p. 441).
2.2 Marx does not explain this reference, but contextual matters suggest that
he was referring to ``the role government-induced cheap credit played in
fuelling the boom in railway shares from 1845 and the government's role in
engineering the high interest rates in 1847 which undermined it'' (pp. 442,
467).
2.3 ``As the representative of the London wealthy, the government had every
motive for wanting others to continue to pay for'' such expensive and risky
investments (p. 451), as the House of Commons ``tended to represent the
investing classes rather than the big manufacturers'' and over 90 per cent
of the cabinet were aristocratic (p. 451).
2.4 ``It is commonly accepted that the turning point came when the
Government unexpectedly revealed a keen interest in railways after years
of indifference and occasional open hostility, thereby stimulating the
mania'' (p. 451). The most important intervention by the government, the
1844 Regulation of Railways Act, its initially stringent conditions and the
subsequent relaxation thereof, was ``pure Parliamentary `hype', a political
drama designed (perhaps with Gladstone's active involvement) to convince
the public that the railways would be a safe and profitable investment'' (p.
455)[5].
2.5 The Select Committee of 1846 then recommended rationalising
parliamentary procedures so that the ``railway business of the session
might be completed'' (Lewin, 1968, p. 117). The swindle hypothesis
suggests that measures were taken to maximise the flow of bills through
the House because it was ``in the interests of the London wealthy that the
maximum number of subscriptions be made before the boom was busted''
(Bryer, 1991, p. 466).
2.6 The government avoided any restrictions on the manipulation of company
profits. ``From the point of view of the swindle hypothesis it also appears
significant that only a few years earlier, in 1845, the Companies Clauses
Consolidation Act provided no detailed guidance for the determination of
legally distributable income, and specifically left the provision of
depreciation to the directors' discretion''; from this viewpoint, ``one reason
why the government may not have wished to restrict the manipulation of
reported profits is that this undoubtedly helped to fuel the second railway
`mania''' (p. 459).
3. Accounting practices were ``deeply implicated'' in the ``great railway swindle''
3.1 Depreciation accounting was established practice by the early 1840s and
was the ``modal if not necessarily the mean practice'' (1991, pp. 448-9).

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3.2 ``[D]uring the railway share boom of 1844-1845 the railway companies, after
having appeared to accept the need for conventional accrual accounting,
began to deliberately and systematically overstate their profitability in
their published accounts'' (p. 443; see also Pollins 1969, p. 153) by the
omission of depreciation charges (despite the fact it was now clear that
railway track was not indestructible). This ``sudden reversal of accounting
policy could be interpreted as an attempt to lure the naive into investing in
railways'' (p. 456).
3.3 After the mania was broken in 1847, the railway companies began to
deliberately and systematically understate their profitability in their
published accounts (p. 443), re-introducing depreciation on rolling stock
and, for the first time, depreciation on the track, in an attempt to use
published accounts to ``cool-the-mark-out'' (i.e. after the ``sting'', to make the
victims feel ``sadder but wiser''). Then from the late 1840s depreciation
accounting was abandoned in favour of replacement accounting (which
would usually lead to higher profits), but ``[r]ailways were engaged in
heavy replacement expenditures during the late 1840s and early 1850s'' (p.
473), so that exceptionally, during that period, the use of replacement
accounting would have understated profits, as compared with depreciation
accounting. Thus, ``the deliberate understatement of railway company
profits after the crash looks suspiciously like an attempt to fool the
uninitiated into believing that railways were, after all, a poor investment''
(p. 476).
3.4 The accounting practices of the railway companies were thus part of a
``deliberate design'' by an ``active hierarchy'' 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 critical interest in
the new owners, the wealthy London capitalists (p. 443).
3.5 The RSHo paper suggests that the ``accounts published by railway
companies were deliberately manipulated as part of an orchestrated
scheme perpetrated by the London wealthy on the manufacturing and
middle classes, who were lured into investing in railways during the mania
and were 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''' (p. 483).
The next two sections of the paper address these assertions and propositions.
The earlier reviews the evidence relevant to each of the three main assertions in
the swindle hypothesis that would have been available in the literature when
the paper was written, and the latter considers the implications of new evidence
(derived from research work recently funded by the ESRC) for the third, and
what we take to be the most important, assertion that accounting practices
were ``deeply implicated'' in the ``great railway swindle''[6].

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of 1845-1847
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The relationship between the available evidence and the
construction of the ``railway swindle'' hypothesis
1. Ownership of the railways shifted, after the mania of 1845-1847, from the
provincial middle classes to the London wealthy
The ``railway swindle'' hypothesis begins with an observed class divide (see 1.1,
1.2 and 1.4 above). The merchants and entrepreneurs of the provincial middle
classes put up most of the money needed by the early UK railways. The
London wealthy, who clearly knew better (hence their ``studious'' avoidance of
early investment), did not invest in the railways until 1847, after the mania,
when they were able to buy up the railways ``on favourable terms''.
There are, however, a number of problems with this connection. In the first
place, the data that are available on shareholdings in the early railways is
limited. Very few share registers have survived and most empirical studies of
railway ownership are based on subscription lists[7]. Subscription lists were
submitted to Parliament when a bill was put forward, were intended to show
that there was real financial backing, but were wholly non-enforceable and
prone to abuse and the widespread inclusion of ``men of straw'' etc.[8]. More
importantly, there was no guarantee that the original subscribers would
actually finance the railway's construction and many contemporaries took it for
granted that the subscribers before Parliamentary assent was gained, and the
investors after the Act was passed, would be two distinct classes of investor[9].
More generally, as Reed (1969, p. 164) explains:
The almost universal practice of issuing [railway] company shares for a small deposit, and
gradually calling up the remainder of the value of the share as the company's progress
demanded, produced a security which at different stages appealed to different purchasers. A
fully-paid railway share, earning a regular dividend, was a natural means of investment for a
person wishing to earn a regular return on his capital; on the other hand, the newly-issued
share, with no more than £1 called and no immediate prospect of a dividend, attracted
speculators anxious to make quick capital gains ...
Thus, the provincial middle classes/London wealthy dichotomy is evidenced
by an analysis of Reed's pioneering work on the shareholdings of the early
railway companies (Reed, 1975a, pp. 120-86), leading to the observation that
``investors from London held a weighted average over the period 1823 through
1845 of only 17 per cent of the nominal value of these [railway] companies
shares, whereas investors from Manchester and Liverpool alone held 37 per
cent'' (p. 445).
This can, however, be seen as significant only if one ignores the data
limitations (the data relate to only 11 companies, eight of which were northern/
provincial and only three of which ran into London; the data for five of the
companies, including all three London lines, relate only to the 1830s and thus
cannot evidence patterns through to 1845)[10] and the effects of early success
on regional patterns of investment (the pioneering roÃle of the Liverpool and
Manchester line, its excellent early dividend history, the consequent early
founding of stock exchanges in those cities and the expectation of Parliament
that much of the funding for new lines would come from those living in the

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areas served by those lines)[11], all of which Reed acknowledges when
discussing his results.
The swindle thesis requires the London wealthy to have abstained from
investment until 1847, when the mania was over, but Reed cites sources
claiming, in 1845: that ``within the last 18 months, the business of the Stock
Exchange has been perfectly revolutionised by the railway-share mania'' and
that the share-market, previously occupied by four or five distinct brokers
``whose means of business were very small'' had become the ``grand focus of
speculative and legitimate business''; that ``English and foreign government
securities were `quite deserted for the superior attractions of English and
foreign railway scrip''' and that ``in the great cities of Paris, Dublin and London
it [railway speculation] has rendered the market for government securities an
object of inferior interest'' (Circular to Bankers, 1845; Reed, 1969, pp. 180, 182;
Reed, 1975a, p. 211).
Another source cited in the RSHo paper is the evidence to the Monteagle
Committee in February 1849 of the London stockbroker James Capel, whose
``major clients'' were, according to Bryer, the ``London wealthy'' (p. 471). Yet this
evidence also includes the statement that the buying and selling of railway
securities had increased ``very materially within the last five years; probably in
1845 there was the largest amount of business ever done; but in 1846 there was
a very great quantity'' (Q773-Q774, p. 89).
Few would doubt that many railway shareholders sold their holdings in the
aftermath of the mania, particularly when they were unable to meet calls on the
shares (see 1.3 above) but this does not support the conclusion that this meant a
major shift in railway share ownership from the provincial middle class to the
London wealthy (see 1.4 above). Indeed, the claim that:
... from a strictly logical point of view [sic], as it was the relatively less rich investors who
were in difficulty, and who were therefore sellers, the buyers must have been the London
wealthy (1991, p. 470)
is not logically sound (unless all middle class investors had invested railways,
and all were in difficulties); the buyers might have been middle class investors
who were not in difficulties, or the wealthy from north, east, west and other
parts of the south.
Similarly, the almost tautologous proposition that after the mania there was
a change in the nature of railway shareholders from short-term speculators to
long-term investors (with the end of the rising market, the number of short-
term speculators was bound to fall) is extended to the notion that this
represented a shift in the geographical and class bases of the shareholdings
(based on the explicit identification, middle-class = speculator, London wealthy
= long-term investor)[12].
The class swindle then proceeded when the London wealthy were able to
``acquire the railways on favourable terms'' (see 1.4 above), from 1847 or even as
late as May 1849 or 1850, as ``exactly when the bulk of permanent investment
occurred remains unclear'' (Bryer, 1991, p. 472). ``Favourable terms'' is of course

Railway mania
of 1845-1847
829
a rather loose construct. Certainly there is some evidence, which the RSHo
paper provides, that London stockbrokers such as James Capel and John
Whitehead were advising their (London wealthy) clients in 1847 that the
ordinary shares of railway companies possessed ``ample scope for favourable
observation'' (1991, p. 470) but, of course, a ``swindle'' requires that gains must
have been actually achieved, in an ex post sense[13].
Gains could of course come in the form of either advances in the share values
or via the stream of dividend payments, derived in turn from the railway
companies' profits. The index of railway share prices compiled by Gayer et al.
(1953, p. 375), to which the RSHo paper refers, runs from 1827 to December
1850, although there is another index of railway share prices, covering the
period 1850-1860 (Hughes, 1960, p. 187). These are both graphed in Figure 1,
which shows that share prices fell more or less continually from a peak in mid-
1845 to lows in 1849-1850, before a gradual recovery took place to 1853. By the
end of 1855, however, prices had returned to the levels of 1849-1851.
In November 1849, for example, the Gayer index stood at 61.9, as against
120.7 in April 1847 (when Whitehead had been urging his clients to invest in
railways) and, at the end of 1855 they were little higher than in autumn
1849[14]. Thus, any of the London wealthy who acted on Whitehead's advice
and purchased railway shares in 1847 would have seen the shares lose more
than 25 per cent of their value by the end of 1855 and those members of the
``speculative middle-classes'' pressurised by the commercial crisis of 1847 into a
rapid sale in that year would have avoided this same loss in value!
If the Marxist view, as interpreted in Bryer's RSHo paper, is that the London
wealthy (alias ``financial capital'') used the main instruments of government
from 1844 to 1847 to operate a huge swindle that enabled them to buy shares
from the northern middle-classes that would show little if any rises in value in
the short-term and would then pay no more than modest dividends on into the
indefinite future, then this clearly has major implications for current
understandings of the message of Marxism!
Nor were the railways themselves very profitable. Their profitability from
1854 is well documented, as in the Mitchell and Deane series of 1962, based
upon the returns that the companies concerned had to make to the Board of
Trade. Even after making generous allowance for the effects of leverage on
equity returns and the limited risks involved, it is hard to see how one can
avoid the conclusion that railway returns were no more than modest from the
middle years of the nineteenth century onwards[15]. Whitehead's view in 1847
that almost every railway sanctioned by the legislature would ``sooner or later
prove to be a fair and remunerative property'' is entirely understandable ex
ante, but posterity has surely shown how wrong he was.
Finally, the suggestion that the railway companies share registers might
have been destroyed (in the 1940s) in order to cover up the swindle (in the
1840s) in the name of discretion by ``future class representatives'' of the London
wealthy who had strayed into the relevant sections of British Rail can only be
seen as an extreme example of the dangers of writing to a paradigm.

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Figure 1.
Share price indices
1840-1855

Railway mania
of 1845-1847
831
2. Contrary to established views, this was a ``swindle'' perpetrated by
government institutions on behalf of the ``London wealthy''
The second major assertion in the RSHo is that the alleged swindle on behalf of
the London wealthy was perpetrated by government institutions, by
presentational aspects of the introduction and modification of the 1844 Railway
Act (2.4), by the failure to define distributable profit in the Company Clauses
Consolidation Act of 1845 (2.6), by the accelerated passage of railway business
through Parliament in 1846 (2.5) and by the engineering of cheap credit in 1845
and high interest rates in 1847 (see 2.2 above).
The original version of the 1844 Railway Bill, published in June:
...proposed that at the end of 15 years if the rate of return on paid-up capital equalled 10 per
cent or more ... the State would then decide whether to purchase railway companies for 25
times their rate of return on paid-up capital to a maximum of 10 per cent. If the rate of return
was less than 10 per cent, the purchase price was to be fixed by ``arbitration''. The Bill had a
profound impact on the public's expectations of the returns likely from railways (Bryer, 1991,
p. 453).
because it induced a widespread perception that the railways were likely to
earn 10 per cent or more on shareholders' capital. At the same time, investors
were sufficiently alarmed by the threat of nationalisation to embark on a
nation-wide campaign of resistance to which, in July, the government
``suddenly and unexpectedly gave way'':
... whereas at the second reading [of the Bill] Gladstone had been ``bold, uncompromising
and severely critical of the railway interest'', at the third reading in July he was ``yielding,
complaisant, and weak'' (Cleveland-Stevens, 1915, p. 116). The clauses dealing with the
purchase option and price controls were gone (Bryer, 1991, p. 453, emphasis added).
The RSHo concludes that the Bill was ``pure Parliamentary `hype', a political
drama designed ... to convince the public that the railways would be a safe
and profitable investment'' (1991, p. 455). This conclusion is, however, clearly
mistaken, as the purchase provisions were modified and not deleted from the
Regulation of Railways Act that received the royal assent on 9 August
1844[16].
Bryer also pays due attention to the important issue of whether investors
were actually influenced by the government's actions, citing Pollins, Cleveland-
Stevens and a witness to the Monteagle Committee in this regard. Pollins (1971)
states that the government ``inadvertently ... helped to foster the mania''
because ``the figure of 10 per cent return, enshrined in an Act of Parliament,
became a symbol of the government's view that railway property would
appreciate to that amount'' (pp. 35, 36, quoted in Bryer, 1991, pp. 451, 453), but
provides no evidence that the Act had any impact whatsoever on investor
expectations, and indeed gives no source for this assertion[17].
Cleveland-Stevens explains and analyses the purchase provisions of the
original Bill and the final Act in considerable detail (see 1915, pp. 108-12) but,
by way of evidence that investors were ``misled'', provides only a footnote
which reads:

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See Morrison's criticism (``The Influence of English Railway Legislation on Trade and
Industry'', pp. 21-2). He considers that the speculating public were led by the Act to think that
railways had ``something like a Parliamentary guarantee'' of 10 per cent (Cleveland-Stevens,
1915, p. 111).
However, an inspection of Morrison's (1848) pamphlet reveals that he said
nothing of the sort. His argument was that:
There was always hanging over the heads of the Companies a danger that Parliament might
impose conditions on them, by which their dividends could have been fixed at 10 per cent, or
even reduced below that amount [but with Gladstone's Act and the company Clauses
Consolidation Act of 1845] [t]he power of interference with a view to make the 10 per cent.
condition effectual ...was thereby renounced.
Companies thus had something like a parliamentary guarantee that their
profits would not be limited to 10 per cent on share capital (Morrison, 1848,
pp. 21-2).
Finally, the RSHo paper cites the evidence of W.J. Chaplin, a director of the
London and South-Western Railway (L&SW), to the Monteagle Committee
(Bryer, 1991, p. 453), who did indeed criticise the Government's approach to the
railways:
Mr Gladstone's Bill, in which he made provisions consequent upon our arriving at 10 per cent,
made the public feel that more than 10 per cent was available; and that was the very onset of
this extraordinary speculation ...(Monteagle Committee, 1849, Q2860)
although on the very curious basis that it was Gladstone's attempt to curb
profits that fostered the mania (the exact opposite of Morrison's argument that
it was the repudiation of any curbs on profits that inflated investor
expectations). Chaplin's statement should, however, be put in its political
context; the Monteagle Committee was set up in the aftermath of the railway
mania with a view to proposing statutory obligations on railway companies in
the matter of audit, and indeed eventually produced a Bill which included
proposals to strengthen the audit function by providing for ``government
auditors'' and for a standard format for railway financial reporting[18]. Chaplin,
like other railway directors giving evidence, was most concerned to ward off
this threatened legislative interference and naturally blamed the mania, not on
the railway companies or on the workings of the free market, but on previous
attempts at legislation. What could be a better defence against further
regulation than the argument that previous, no doubt well-meaning, but
profoundly misguided legislation had had such disastrous, although to be sure,
unintended consequences ? Thus Morrison, who had long advocated greater
state control over railways, and Chaplin, who was decidedly opposed to such
control, both attributed the mania to Gladstone's legislative intervention, but
for very different reasons, in each case in accordance with their own political
preconceptions.
In fact, none of the evidence cited in the RSHo paper at this point, or their
sources are strictly contemporary, with the earliest (Morrison, 1848; Chaplin,
1849), dating from the crisis that followed the mania, when people like Chaplin,

Railway mania
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833
heavily implicated as a railway director, were trying to shift responsibility to
somebody else. Yet if tens of thousands of investors had really had their views
about the profitability of railways affected ``profoundly'' in the summer of 1844
(when dividends paid by the leading railway companies were already
averaging more than 6 per cent (see Gourvish, 1980b, p. 128)), one might have
expected some comment at the time: in the press perhaps. Surely someone
would have noticed? No such evidence was cited and the authors' own
examination of the Railway Times in the summer of 1844 provides no indication
that any major change in shareholder perceptions was taking place[19].
Moreover, the expectations of investors (and the impact of events thereon) can
be gauged fairly reliably from the pattern of share price changes. Figure 2
shows, in graph form, the Gayer et al. monthly index of railway share prices for
1844-1845. Share prices in 1844 were certainly on a rising trend, but
Gladstone's Bill, which reached its final form in July 1844, produced no obvious
change in share prices.
Bryer's thesis also suggests that other government policies were influential,
including the failure to define distributable profit in the Companies Clauses
Consolidation Act (CCCA) of 1845, the accelerated passage of railway business
through Parliament in 1846 and monetary policy in 1845 and 1847.
The failure to define distributable profits in the governmental legislation of
much of the nineteenth and twentieth centuries is of course regrettable from the
vantage point of the present day, but to suggest that the absence of definition is
consistent with the swindle thesis is effectively to suggest that the government
in 1845 had developed clear views about proper accounting practices but then
suppressed their publication in order to advantage the London wealthy. The
less dramatic possibility that government thinking on accounting practices
(including depreciation) in the 1840s was merely poorly formed is seemingly
ignored. If, however, one compares the relevant provisions of the CCCA of 1845
(that applied to statutory companies such as the railways) with those contained
in the Joint Stock Companies Act (JSCA) of 1844, governing the formation of
companies by general registration, it is clear that the former is the more
stringent of the two, even if neither is very restrictive[20].
Similarly, there are understandable reasons why parliamentary procedures
might be simplified when the legislature was faced with an unexpected volume
of business, apart from a conclusion that the motive must have been to ensnare
the representatives of the unwise, northern middle-classes. Finally, while we
see no reason to doubt that monetary and interest rate policy in 1845-1847, and
indeed throughout the nineteenth and twentieth centuries, may have been
designed to suit the interests of the City of London more than those of northern
manufacturers, equally we see no reason why this (widely-shared) general
perspective[21] should lead to the far more specific construct of the RSHo; the
general proposition is entirely tolerable but can of course take a whole series of
more detailed forms. Equally, the connection between ``real'' government
thinking and particular interest rate changes is never likely to be established
by those outside governmental circles with any certainty.

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Figure 2.
Railway share prices
(Gayer index) in 1844-
1855

Railway mania
of 1845-1847
835
There is an additional problem concerning the extent to which Bryer's RSHo is
actually consistent with Marx's writings[22]. The RSHo admits that
``unfortunately, Marx nowhere explicitly analyses exactly what `great railway
swindle' he believed had occurred'' (Bryer, 1991, p. 441) but identifies two
possibilities. The first, that Marx ``simply meant the numerous, but relatively
small-scale, frauds (false prospectuses, insider-dealing, false accountings, etc.)
which were undoubtedly perpetrated'' is seen as less likely because he makes
no mention of a number of highly notorious frauds of this sort, which he may
have seen as ``of little practical significance''. Instead, the RSHo see it as more
likely that he was referring to ``the role government-induced cheap credit
played in fuelling the boom in railway shares from 1845, and the Government's
role in engineering the high interest rates in 1847 which undermined it'' (Bryer,
1991, pp. 441-2).
Marx's references to the railway mania are cited from Volume 3 of Capital,
and these are indeed brief, but he did say a little more elsewhere. In a review
written with Engels in 1850[23], he said:
The extension of the British railway system had already begun in 1844 but did not develop
fully until 1845. In this year alone the number of registered bills for the setting up of railway
companies amounted to 1,035. In February 1846, after a vast number of these registered
projects had already been abandoned, the moneys which were required to be deposited with
the government for the remaining projects still totalled the enormous sum of £14,000,000 and
even in 1847 the sum total of moneys called for exceeded £42,000,000, of which over £36
million were for railways in Britain and over £5 million for those abroad. This speculation
had its heyday in the summer and autumn of 1845. Share prices rose continuously, and the
speculators' profits soon drew every class of society into the whirlpool. Dukes and earls vied
with merchants and manufacturers for the lucrative honour of sitting on the boards of the
various lines; the members of the Lower House, the Bar and the Church were represented in
strength on these bodies. Anyone who had a penny in savings, or who had the merest
glimmer of credit to dispose of, speculated in railway shares ...
Based on the real expansion of the British and continental railway systems and the
speculation which was bound up with it, there gradually arose during this period a
superstructure of fraud reminiscent of the time of Law and of the South Sea Company. There
were projects for hundreds of lines which had not the slightest chance of success, which their
very authors never had any intention of really carrying out, and whose sole purpose indeed
was to enable the directors to squander the deposits, and to make fraudulent profits from the
sale of the shares (Marx and Engels, 1978, pp. 491-2).
In this passage, Marx certainly does not see the London wealthy as refraining
from speculation during the mania, but instead stresses its universal nature,
and also emphasises the importance of the various frauds which the RSHo
suggests he thought unimportant. Furthermore, in the same article the authors
forecast a new bout of speculation based on the expansion of steamship
services and plans to construct a canal through the isthmus of Panama:
Over-speculation will develop very soon, and even if British capital becomes involved on a
large scale ... this time New York will remain the centre of the whole swindle and ... will be
the first to suffer when it collapses (Marx and Engels, 1977, p. 506, emphasis added).
`Swindle'' here plainly means speculation, rather than an organised fraud.
Interestingly, the emphasised phrase is, in the German, ``das Centrum des

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ganzen Schwindels'' (Marx and Engels, 1977, p. 464). Schwindels means first,
``giddiness''. ``vertigo'' and second ``swindle'' or ``cheat'' (see e.g. Harrap's
German Dictionary, 1990, p. 456) and indeed in another (and better) translation
this phrase is rendered as ``the centre of the whole bubble'' (Fernbach, 1973, p.
302)
The phrase from Capital which is translated as ``the first great railway
swindle'' is, in the original German ``dem ersten groûen Eisenbahnschwindel''
(Marx and Engels, 1964, p. 424). Prima facie, it appears that to Marx the phrase
``dem Eisenbahnschwindel'' means simply the bout of speculation based on the
construction of railways, in other words ...the railway mania !
3. Accounting practices were ``deeply implicated'' in the ``great railway swindle''
One might wonder, given the level of alleged collusion between major
governmental agencies and the London wealthy, quite why accounting needed
to be involved for the swindle to operate, but Bryer's RSHo in fact lays
considerable emphasis on the centrality of accounting practices; the paper as a
whole is no less than a ``study of the functioning of accounting in the mid-
nineteenth century'' (Bryer, 1991, p. 439).
The third main assertion is therefore that accounting practices were ``deeply
implicated'' in the ``great railway swindle''. Bryer's paper looks to the existing
literature, which is seen as providing a tolerably reliable body of evidence of
the patterns of profit misrepresentation; in the early 1840s accrual accounting
(including depreciation accounting) was established in the railway industry, in
1844-1845 profits were overstated to ``lure the naive into investing in railways''
(even though the 1844 Railway Act has already had a profound impact on
investor expectations), after the end of the mania in 1847 profits were
systematically understated (to make the victims of the class swindle feel
``sadder but wiser'') initially through (presumably excessive) depreciation
charges and then by the switch to replacement accounting (see 3.1 to 3.3 above).
Moreover, these changes were not part of the gradual evolution of a new
industry but were the result of the accounts being ``deliberately manipulated as
part of an orchestrated scheme perpetuated by the London wealthy on the
manufacturing and middle classes'' (p. 483).
The first apparent difficulty concerns the agency arrangements. The
accounting changes did not reflect changes in government regulation (see 2.6
above) and were the result of decisions by directors of the various companies.
Directors at this time were not full-time employees of the company (this was
indeed expressly prohibited), but representatives of and trustees for the body of
shareholders that elected them[24], and were usually substantial shareholders
in their own right. Under the swindle hypothesis, the London wealthy did not
invest in railways before or during the mania, so that the directors at that time
must have been drawn from the ``provincial merchants and entrepreneurs'' who
did. Why they should have been so eager to act as agents of the ``London
wealthy'' in a swindle perpetrated on themselves is a mystery that Bryer does
not explain. Instead, he merely states that:

Railway mania
of 1845-1847
837
The motives of railway directors in manipulating the accounts have yet to be researched.
Certainly, as promoters and insiders, directors personally benefited from the inflated share
values which their manipulations helped to create. However, the swindle hypothesis suggests
that these manipulations were also in the interests of the London wealthy, to whose viewpoint
and interests the railway directors were at least exposed during the railway ``mania'' as they
became fully integrated into London society. Many were Members of Parliament and men of
affairs. The most successful bought stately homes ...(Bryer, 1991, pp. 475-6).
The second problem is that, according to the RSHo, the impact of these
manipulated accounts was highly selective: the provincial middle classes were
deceived, but the London wealthy were not. A colourful description of some of
the former group is provided:
The capitalists of Manchester founded families, built churches, mingled their blood with the
aristocracy, and bequeathed princely fortunes to their sons ... (Francis, 1967, Vol. 1, p. 75;
cited in Bryer, 1991, p. 451)
although it is not clear why this group should be so easily deceived. The
alleged abandonment of depreciation during the mania is also described as ``an
attempt to lure the naõÈve into investing in railways'' (Bryer, 1991, p. 456). The
capitalists of Manchester were hardly naõÈve in matters of business, and
scarcely needed to be ``lured'' into railway investment during the mania: it was
precisely they who had been promoting and financing railways for the previous
20 years (whereas the London wealthy had far less experience of railway
investment and accounting practices).
But whilst naõÈve investors were deceived:
... sophisticated investors, particularly those with access to professional advice, would not
have been wildly misled. The accounting practices and financial performance of the railway
companies had been extensively discussed in the burgeoning railway press ... (Bryer, 1991,
p. 461).
Did the capitalists of Manchester therefore not read the railway press or have
access to professional advice?
Elsewhere, the RSHo paper argues that ``initial investors'' in railway
companies (which apparently excluded the London wealthy) were deceived by
railway accounts, citing the evidence of expert witnesses to the Monteagle
Committee. Thus
... Mihill Slaughter of the Statistical Office of the Stock Exchange [examined railway
accounts inter alia] for such important details as whether depreciation was funded [but
observed] that `` ...ordinary shareholders of the class to whom you have alluded, common
tradesmen and persons in humbler walks of life, might pass it over unobserved'' ...William
Quilter [an accountant thought that] `` ...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'' (Bryer, 1991, pp. 461-2).
The merchant princes of Liverpool and Manchester have now been conjured
away, to be replaced by ``common tradesmen and persons in humbler walks of
life''.
The third difficulty is whether such a series of changes actually took place in
so organised a fashion, within so short a period of time, in so new an industry.

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The empirical evidence for this cited by Bryer is understandably quite modest.
Thus, the claim that depreciation accounting was the ``modal'' practice by the
early 1840s (see 3.1 above) relies on Pollins (1969), who had come to this
conclusion, admittedly on ``little systematic evidence'' (Bryer, 1991, p. 449). This
still seems to overstate matters. The paper quotes (from Pollins) a statement
made by the chairman of the London and Birmingham Railway in 1841 to the
effect that their policy of depreciating rolling stock was followed by ``almost
every other Company'' (p. 448, quoting Pollins, 1969, p. 153). But Pollins inserts
a footnote at this point:
In fact, as is shown, this was not the case. Many important companies did not set aside part of
their profits (Pollins, 1969, note 15).
The RSHo paper, however, ignores this qualification.
Edwards, more cautiously, remarks that in the early 1840s ``it was quite
common practice to make some provision for the depreciation of rolling stock''
(Edwards, 1986, p. 255; cited by Bryer, 1991, p. 449). Bryer is critical of this
judgement, stating that ``Edwards provides no evidence to support his
qualification'' (Bryer, 1991, p. 449, emphasis added) but expresses no concern at
the similar lack of evidence for the initial conclusion itself.
The specific references in Pollins (1969) and Edwards (1986) to the
depreciation policies of railway companies in the period up to 1855 consist of
five companies (Grand Junction, Great Western, London and Birmingham,
Manchester and Leeds and North Union) shown as charging depreciation on
rolling stock before the mania, and three (London and South-Western, Midland
and South Eastern) that explicitly do not. Edwards' judicious comment can be
usefully contrasted with the Bryer's greater certainty, in each case based on the
identified practice of a bare majority of a non-random sample of just eight
companies.
However, Bryer's robust conclusion that railway companies ``began to
deliberately and systematically overstate their profitability'' (see 3.2 above) is
simply not supported by the evidence, as Pollins merely suggests that:
During the mania, and for a few years after it, accounting for depreciation seems to have been
dropped by some companies ...(Pollins, 1969, p. 153).
Only two companies, the Great Western and the London and North-Western
are said to have dropped depreciation during the mania period, and the latter
only came into existence in January 1846 as an amalgamation of four
companies, only two of which had had depreciation funds.
In supporting the proposition (see 3.3 above) that depreciation was
reintroduced, as part of a process of deliberately understating profitability,
Bryer cites Pollins as saying:
When the companies settled down again after the excesses of the mania they once more
recognised the need to allow for depreciation (Pollins, 1969, p. 153; cited in Bryer, 1991, p. 449,
his emphasis).

Railway mania
of 1845-1847
839
But of the three companies that Pollins cites as initiating depreciation after the
mania, two (Midland and South Eastern) were doing so for the first time. The
only company which could be described as recommencing depreciation is the
dubious example of the London and North-Western, discussed above.
The implications of new evidence for the assertion that accounting
practices were ``deeply implicated'' in the ``great railway swindle''
This section of the paper considers whether new evidence (i.e. not extant when
Bryer's paper was published, but which could have been sought at that time) on
the patterns and scale of changes in the accounting practices of the early
railway companies could help to resolve issues raised by the RSHo's third main
assertion, that accounting practices were ``deeply implicated'' in the ``great
railway swindle''. In particular, the section considers whether the alleged
changes in depreciation practices actually took place on any consistent basis
and, if so, whether or not they had effects sufficiently material to influence
investor perceptions of equity returns.
The Board of Trade required railway companies to make fairly full returns
of financial data from 1854, but reliable data on the contents of the railway
companies accounts prior to that date was very limited. With the support of the
ESRC, a search was accordingly carried out for the surviving accounting
statements of railway companies in the period 1830 to 1855 (leaving aside the
smallest, with authorised capitals of less than £50,000), for which purpose the
substantial RAIL holdings at the PRO were invaluable. In many cases, the
records had not survived, although in the case of the larger, more important
companies, most of the relevant financial reports were still in existence. The set
of companies for which half-yearly financial reports could be found was
substantial, included most of the major railway companies and covered over 70
per cent of the paid-up share capital in the industry in the period concerned[25].
The data set, as defined above, was then scrutinised for evidence of the
depreciation (and the related replacement) charges made against revenue, in
order to identify the incidence of these charges and to quantify their
significance. No evidence was found of depreciation accounting until 1838 and
the depreciation charges of the sample companies from that date until 1855 are
set out in Table I. The table shows on an annual basis the numbers of
companies in the sample set (column 1), the number making depreciation
charges (column 2), the amounts charged for depreciation of the rolling stock
and the permanent way (columns 3 and 4) and the total depreciation charge
(column 5).
Some companies made charges against revenue on a replacement basis,
although these were generally very small, and the replacement costs charged
against revenue are shown in column 6 (as a percentage of the total charge for
depreciation). Profits (after interest and preference dividends) both before and
after depreciation are shown as absolute amounts (columns 7 and 8) and as a

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percentage of equity funds at the end of each year (columns 9 and 10), in order
to reveal in various ways the materiality of the depreciation charges.
Within the period 1838-1855, depreciation accounting was almost entirely
confined to the largest companies in the data set, especially in the pre-mania
period, flatly contradicting the RSHo claim that depreciation was the ``modal''
practice at that time (see 3.1 above), where we understand ``modal'' to mean the
practice most frequently observable in a sample or population (see also Table I,
columns 1 and 2)[26]. There was a slight fall in the number of companies
charging depreciation in 1844 and 1845 (from five to four) and in the aggregate
charge (from £61,000 to £56,000 and then £46,000; see column 5) but,
particularly in the context of profit levels of £1.7 to £2.7 million (column 7) it is
difficult to see this as representing any ``systematic overstatement of
profitability'' (see 3.2 above). Further, the RSHo sees this overstatement as
beginning in the ``railway share boom of 1844-1845'', a ``sudden reversal of
accounting policy'' which was ``an attempt to lure the naive into investing in
Table I.
Depreciation charges
1838-1855
Depreciation provision Return on equity
RS PW TOT RC NP(1) NP(2) NR(1) NR(2)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
ni n2 £k £k £k % £k £k % %
1838 6 1 17 0 17 0.0 414 397 3.5 3.3
1839 13 2 31 0 31 0.0 668 637 3.8 3.6
1840 18 3 37 0 37 0.0 982 945 4.1 4.0
1841 20 6 61 0 61 3.3 1,434 1,373 5.2 5.0
1842 21 7 71 0 71 1.4 1,572 1,501 5.2 4.9
1843 19 5 61 0 61 9.8 1,696 1,635 5.8 5.6
1844 18 4 56 0 56 19.6 2,217 2,161 7.2 7.0
1845 17 4 46 0 46 23.9 2,683 2,637 6.8 6.7
1846 16 1 5 0 5 0.0 3,066 3,061 5.8 5.8
1847 20 2 1 10 11 0.0 3,623 3,612 4.6 4.6
1848 23 2 0 26 26 50.0 3,446 3,420 3.7 3.7
1849 22 10 57 194 251 0.0 3,222 2,971 3.3 3.0
1850 22 8 52 134 186 1.1 3,184 2,998 3.2 3.1
1851 22 10 99 159 258 0.8 4,037 3,779 3.9 3.7
1852 20 9 49 143 192 0.5 3,536 3,344 3.4 3.2
1853 20 7 22 122 144 0.0 4,149 4,005 4.0 3.8
1854 19 7 12 165 177 8.5 4,402 4,225 4.1 4.0
1855 19 7 12 209 221 2.3 4,535 4,314 4.2 4.0
Notes: n1 = No. of operational companies in the sample set; n2 = No. of companies with
depreciation charges in revenue account; RS = Rolling stock; PW = Permanent way;
TOT = Total of columns 3 and 4; RC =Identifiable replacement expenditure charged in
revenue account as percentage of depreciation provision in column 5; NP(1) = Net profit of
sample set of companies after interest, but before depreciation as per column 5; NP(2) = Net
profit of sample set of companies after interest, and after depreciation as per column 5;
NR(1) = NP(1) as percentage of equity of sample set companies; NR(2)= NP(2) as percentage
of equity of sample set companies
Sources: half-yearly financial reports (and other archival materials) of sample set of
companies

Railway mania
of 1845-1847
841
railways'' (again, see 3.2 above) but whilst there was a temporary abandonment
of depreciation, as Pollins had said (1969, p. 153; see Table I column 5) this took
place in 1846-1848, after the start of the mania (usually regarded as the spring
of 1845) which it was supposed to cause.
Table I does confirm that depreciation accounting reappeared after the
mania, although only from 1849, and that depreciation of the permanent way
became far more important than charges on rolling stock (particularly from
1853). The peak year for aggregate charges was 1851 (column 5) but it is again
difficult to see the somewhat lower depreciation charges from that date, or their
(modest) supplementation by replacement costs charged to profit and loss in
1854 and 1855 (column 6) as the ``abandonment of depreciation accounting from
the late 1840s in favour of replacement accounting'' (see 3.3).
However, the key issue in this area is surely materiality, as the ``railway
swindle'' hypothesises that the ``accounts published by railway companies were
deliberately manipulated as part of an orchestrated scheme perpetrated by the
`London wealthy' on the manufacturing and middle classes, who were lured
into investing in railways during the `mania' and were forced to sell out at a
loss'' (see 3.5 above). For accounting practices to be ``deeply implicated'' in such
a ``grand scheme'', the observable differences in practice clearly need to have
been both material over time and at given points in time.
The impact of depreciation charges on equity returns can be seen from a
comparison of columns 9 and 10 in Table I and it can be seen that they did not
amount to more than 0.3 per cent of returns on equity in any single year in the
period concerned!
The equity returns before and after depreciation are also shown in graph
form in Figure 3. While neither the table nor the figure can show the
depreciation that might have been charged in the years of alleged undercharge,
the notable closeness of fit of the two lines in Figure 3 does provide its own
implicit comment on the extent to which accounting practices could possibly
have been ``deeply implicated'' in a major class swindle of the mid-nineteenth
century.
Discussion and conclusions
The wild boom and slump of 1845-1847 was the most important of the early
manias. It has almost invariably been seen as a market irrationality, a view
fundamentally challenged by Bryer's (1991) theorisation of the mania as a
deliberate and collusive device of the ``London wealthy'', aided by central
government, to swindle provincial middle class investors, a device in which
(the manipulation of) accounting reports had a central roÃle. The acceptance of
this new perspective would have important implications for the way we
understand the functioning of government, accounting and the embryonic
capital markets in the mid-nineteenth century.
Prior to Bryer's paper, some contributors to the accounting history literature
had identified variations in practice both during and after the mania. Thus,
according to Pollins and Edwards, there was a decline in the charging of

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Figure 3.
Impact of depreciation
charges on equity
returns

Railway mania
of 1845-1847
843
depreciation by railway companies during the boom, the better to support the
substantial dividends that had been forecast. After things settled down again
after the slump, Pollins observed (but did not quantify) a return to depreciation
accounting and Edwards identified an increase in the volume of accounting
data and a conceptual shift, from cash-based to accruals-based, in the
information provided to investors. Bryer (1991) went much further than this
and argued instead that accounting practices had been critical to the great,
class-based swindle that was the mania.
The present paper has been motivated partly by concerns at the way the
railway mania and the functioning of government, the capital markets and
accounting in the first half of the nineteenth century are understood, and partly
by an unease about the way that writing history to a pre-selected paradigm
might work. In the same journal issue as Bryer's paper, Miller et al. noted that,
in more recent times, there may have been ``more emphasis on interpretations
being tested by facts instead of being derived from them'' (Miller et al., 1991,
p. 397). Such a process has the advantage of widening the range of historical
writing but there is a concomitant danger of selectivity, whereby ``facts'' or
evidence would be sought and cited where they supported, rather than tested
the chosen paradigm[27].
This paper has argued that all three of Bryer's main assertions are, in fact,
seriously flawed. The first major assertion of the swindle hypothesis, that
``ownership of the railways shifted, after the mania of 1845-1847, from the
provincial middle classes to the London wealthy'' relied upon data that were
limited in their coverage and subject to qualifications that were explained in the
original source, but not included in Bryer's citations thereof. Elsewhere, well-
evidenced facts were put to the service of far more controversial claims (e.g.
that the undoubted necessity for many shareholders to sell their shares in the
aftermath of the mania meant a major shift in railway share ownership from
the provincial middle classes to the London wealthy). Moreover, there was, in
existence at the time the paper was written, evidence that the London wealthy
could not have swindled anyone, as railway shares earned only modest returns
after the mania and lost rather than gained share value even over an extended
period of time (through to 1855).
Similarly, the second main assertion that this was a swindle perpetrated by
government institutions on behalf of the London wealthy was found to have
only the most tenuous connections with the writings of Marx, to rely upon
confusions between the Railway Bill of 1844 and its subsequent Act and on the
citation of sources that did not, in fact, evidence any such process. The
assertion was also not supported by any evidence that the swindle's ``profound
impact'' on investor expectations had actually excited appropriate comment in
the railway press or had had any discernible impact on the share prices of the
companies in that industry. Alternative explanations for the government's
failure to define distributable profit in the Company Clauses Consolidation Act
(CCCA) of 1845 and for the accelerated passage of railway business through

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Parliament in 1846 had been ignored, presumably because they did not fit the
paper's pre-selected paradigm.
Assertions concerning the covert realities of governmental and social
processes cannot, however, ultimately be proved one way or the other, whereas
the assertion, central to Bryer's ``study of the functioning of accounting in the
mid-nineteenth century'', that accounting practices were ``deeply implicated'' in
the alleged swindle, relates to a more public process and is accordingly more
amenable to relatively conclusive analysis.
The above critique has suggested that there were major problems with the
alleged agency arrangements (why directors drawn from provincial merchants
and entrepreneurs should have been so eager to act as agents of the ``London
wealthy'') and with the assumption that provincial entrepreneurs with
extensive experience of railway operations were essentially naõÈve and gullible.
One of the motives behind the present paper was concern at the dangers of
writing to a pre-selected paradigm, which may be responsible for Bryer's
distinct lack of scepticism that so organised and tightly sequenced a scheme
could have taken place in so new and competitive an industry. Similarly, the
search for evidence to ``test'' a pre-selected belief seemingly led to the basing of
a major and wide-ranging thesis on secondary sources that provided only the
most limited empirical support, and not to the seeking out of the substantial
archival materials that were available and which could have properly tested
out the initial hypothesis.
Accordingly, this paper also looked to new evidence, based on the financial
statements of companies covering more than 70 per cent of the capital raised by
the industry, that showed all too clearly that depreciation accounting was not
the ``modal'' practice in the early 1840s, that there was no ``systematic
overstatement of profitability'' in 1844 and 1845, that the temporary
abandonment of depreciation that did take place came in 1846-1848, after the
start of mania (and not before it) and thus could not have possibly functioned
as a device to ``lure the naive into investing in railways''.
Early writings, notably by Pollins, had suggested that there were
regularities to the depreciation recognition practices of the early railway
companies, although the evidence cited was largely unquantified and anecdotal
and provided no means of assessing the materiality of the possible effects of
depreciation practice. In fact, the substantial body of new empirical evidence
showed that the depreciation charges of the railway companies, whatever their
variabilities, never amounted to more than 0.3 per cent of returns on equity in
any single year in the period concerned and, as can be seen from Figure 3, were
never sufficiently material to have feasibly influenced investor expectations of
future returns. Thus, even if the approaches of the railway companies to
depreciation accounting had been patterned in the ways suggested by Pollins
and built upon by Bryer, they could not have had any real significance in the
unfolding of the events of the mania.
The view of the authors is that the British government provided advantages
to the railway industry in the first half of the nineteenth century, particularly

Railway mania
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845
by means of the availability of limited liability linked to parliamentary
scrutiny, that led to the provision of social capital without the need for major
increases in taxation. The reliance on private initiative, given the high returns
achieved by the earliest railway companies, led to the massive overprovision of
railway routes and to generally low, although also low-risk, returns within the
industry. The evidence also seems to suggest that ``bias'' in the geographical
patterns of investment was broadly consistent with and determined by regional
patterns of railway promotion, initially concentrated in the north of England.
Investors in the London markets appeared to be relatively slow to involve
themselves in railway promotion, perhaps because of their comparative lack of
experience in the specifics of the new technology and because they already had
a developed expertise in the supply of money to governmental and overseas
customers.
In the early stages of the railway industry's development, there were no
statutory requirements about how fixed asset consumption should be
recognised and, in any case, the level of thinking on income measurement was
still embryonic. Many of the assets used by railway companies were semi-
permanent, so that their replacement would not be necessary for many years.
The rolling stock was less durable, while the development of heavier, more
powerful engines meant that early assumptions about the permanence of the
iron rails had gradually to be revised. It also took time for railway managers
and directors to become sufficiently familiar with the new technologies as to be
able to make the forecasts of asset life that ``smoothed'' depreciation accounting
requires; in the meantime, many railway companies settled instead for the
delayed, if potentially irregular, charging of replacement capital expenditures
against profits. Although conspiracy theories can be constructed to fit almost
every set of events, the archival evidence on levels of variation in the practices
of companies, both at the same point in time and over time, flies utterly in the
face of any notion that railway company directors were systematically
manipulating their accounts in furtherance of any common agenda, let alone
one determined by the class interests of the ``London wealthy''.
These views, like all accounts of historical process, are contingent and liable
to modification and overthrow as better evidence and theorisations become
available. The authors of this paper do not share Bryer's belief that the history
of the early UK railways in general, or of the mania in particular, has yet been
``extensively researched'' and believe instead that further work is needed if we
are to really understand the causes of observable variations in the accounting
practices of the early railway companies and of the extraordinary and
seemingly irrational market processes of the ``great'' railway mania of
1845-1847.
Notes
1. In 1838, £58m of railway capital had been raised but ten years later this reached £200m.
Many of the provincial stock exchanges were formed to handle the demand for shares
generated by the mania and the number of brokers increased out of all recognition, in

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Leeds from a dozen in autumn 1844 to 2,300 by the following May (Hunt, 1936, pp. 73, 105,
107; Gourvish 1980b, pp. 130-1).
2. See Arnold and McCartney (2003) for a summary and comment upon this literature.
3. McCartney and Arnold (2002) also found evidence of consistent increases in the main parts
of the financial reports across the period 1840-1855, with marked increases in balance sheet
disclosure levels in the period 1845-1850. The evidence concerning the revenue account
was more mixed; income disclosures rose across the period 1840-1850 but, in the important
area of expense disclosure, the major advances in disclosure levels clearly took place
before, rather than after, 1845. Moreover, there was little evidence that the conceptual basis
of the reporting system of UK railway companies changed significantly between 1845 and
1850; such changes as were made were instead introduced in a gradual, piecemeal and
inconsistent way over an extended period of time (McCartney and Arnold, 2002, pp. 412-14).
4. The paper makes a number of other assertions, but the analysis has been restricted to
those that appear to be integral to the overall hypothesis.
5. William Gladstone was then President of the Board of Trade.
6. The authors gratefully acknowledge the support of the ESRC, by means of grant
R000222974.
7. Many subscription lists are in the Lords and Commons archives (see Reed, 1975a,
pp. 100-1).
8. After investigation by a Lords committee they were abolished in 1858 (Reed, 1975a, p. 99).
9. See, for example, the extract from the Scottish Railway Gazette of 1845 in Reed (1975a, p. 98)
and Lee's (1968) work on Irish railways which found a dominance of English capital in the
early, speculative stages and Irish capital as lines were built and dividends began to be
paid.
10. Note also that, in two of the lines running into London (the Great Western and the London
& Southampton), London shareholdings were 37 per cent.
11. The stock exchanges of Liverpool and Manchester were formed in 1836 and those in other
provincial cities in 1844-1845 (Reed, 1969).
12. These important (claimed) identities are also poorly evidenced in places; Spencer (1854) is
cited as support for the claim that it was the middle classes that were notorious as the
``speculators'' during the second railway ``mania'' (1991, p. 471), yet Spencer's article says
nothing of the kind and simply does not support the proposition as put forward in the
RSHo paper.
13. The quoted phrase comes from a pamphlet issued by Whitehead (1847, p. 5). The second
edition is dated April 1847.
14. In November 1849, Whitehead produced another pamphlet, entitled ``Railway prostration''
(!) in which confident predictions of an imminent rise in share prices had been replaced by
descriptions of the ``pitiable condition'' of the railway companies. Shareholders were now
urged not to invest in railways unless major reforms, such as those proposed by the
Monteagle Committee, were implemented (Whitehead 1849, pp. 7-8).
15. See for example Gourvish (1980a, p. 28; b, pp. 127-8).
16. The purchase provisions of Gladstone's Bill were as follows:
... whatever may be the rate of divisible profit of any such Railway, it shall be lawful
for the Lords of the said Committee [i.e. the Board of Trade], if they shall think fit, at any
time after the expiration of the said term of Fifteen years, to purchase such Railway ...
upon payment of a sum equal to Twenty-five Years' purchase of the said divisible
profits, estimated on the average of the Three then next preceding years: Provided
always, That if the average rate of profit of the said Three Years shall exceed the rate of
Ten Pounds in the Hundred, it shall be taken at only Ten Pounds in the Hundred, for the

Railway mania
of 1845-1847
847
purpose of calculating thereon the amount of such purchase-money (Railway Regulation
Bill, 1844, Sect. 7).
The Regulation of Railways Act included the following:
... whatever may be the Rate of divisible Profits of any such Railway, it shall be lawful
for the Lords Commissioners [i.e. of the Treasury], if they shall think fit, at any Time
after the Expiration of the said Term of Twenty-one Years, to purchase any such
Railway ... upon Payment of a Sum equal to Twenty-five Years Purchase of the said
annual divisible profits, estimated on the Average of the Three then next preceding
Years: Provided that if the average Rate of Profits for the said Three Years be less than
the Rate of Ten Pounds in the Hundred [the company, if it felt these terms were
inadequate] reference being had to the prospects thereof, to require that it shall be left to
Arbitration, in case of Difference, to determine what (if any) additional Amount of
Purchase Money shall be paid ... (Regulation of Railways Act, Sect. 2)
These terms were indeed more favourable to the companies, as:
1. the purchase option could only be exercised after 21 years, instead of 15;
2. the power to exercise the option had been shifted from the Board of Trade to the
Treasury, which presumably was less willing to spend the necessary funds;
3. the ceiling of a 10 per cent rate of profit to be used as the basis for calculating the
purchase price had disappeared. If the capital were say 100 and profits 15, the price
would have been 15 25 = 375;
4. if the average rate of profit had been less than 10 per cent, the company concerned
could have claimed greater compensation if it could have demonstrated that future
profits were expected to be higher than the specified average, and could have gone to
arbitration if agreement had not been reached.
Note also that Bryer claims (1991, p. 453) that this provision was in the original Bill, and
was removed from the final Act, the exact opposite of the facts.
17. Pollins contains no references or even a bibliography, but it does have a ``Guide to further
reading'' (1971, p. 215) that includes Cleveland-Stevens (1915), also cited by the RSHo as a
source for this belief, so it may be that this was Pollins' source also.
18. This Bill passed the Lords but was defeated in the Commons after much vocal opposition
from the railway interest (see Watts, 1979).
19. The circulation of the Railway Times, aimed at investors and dealing exclusively with
railways as an investment, was well over 100,000 in 1844 (there were other periodicals with
smaller circulations). Editorially it attacked Gladstone's Bill in the most vituperative terms:
the ``Railway plunder bill'' was an ``imminent danger which threatens the whole railway
property of the country'', a ``deadly stab [at] commercial enterprise'', etc., etc. After the
concessions to the companies had been introduced however, it pronounced that ``[t]he
serpent is now robbed of his sting'' and although still ``against the propriety of Government
ever becoming the possessors of railways ... so much has been relaxed of the original
oppressive and stringent enactments [it was] quite disposed, for the sake of peace, to avoid
quarrelling with the existence of a power which we feel pretty certain can never be put in
force''. There is no suggestion that the Bill had in any way affected investors' view of
future profitability (Railway Times, 1844, pp. 713, 737, 761, 825-6).
20. Under the CCCA of 1845, directors of statutory companies were required to balance the
books every six months:
... and forthwith on the Books being so balanced an exact Balance Sheet shall be made
up, which shall exhibit a true Statement of Capital Stock, Credits, and property of every
Description belonging to the Company, and the Debtor due by the Company at the Date
of making such Balance Sheet, and a distinct view of the Profit or Loss which shall have

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arisen on the Transactions of the Company in the course of the preceding Half Year ...
(CCCA, 1845, Sec. 116).
The Directors were to prepare a ``scheme'' showing profits and dividends for each half-
yearly meeting of shareholders (Sec. 120) and it was further provided that:
Before apportioning the Profits to be divided among the Shareholders, the Directors
may, if they think fit, set aside thereout such Sum as they may think proper to meet
contingencies or for enlarging, repairing or improving the Works connected with the
Undertaking ... (Sec 122).
The Joint Stock Companies Act (JSCA) of 1844 required only that:
...the Directors ... shall cause the Books of the Company to be balanced, and a full and
fair Balance Sheet to be made up ... (JSCA, 1844, Sec. 35).
21. See, for example Cain and Hopkins (2001).
22. These are not (merely) ideological criticisms: ``[t]here was nobody [Marx himself] despised
more than [someone] with scientific pretensions who nevertheless deliberately twists
empirical data or falsifies research results to suit some subjective purpose'' (Mandel, 1976,
p. 17).
23. In the Neue Rheinische Zeitung Revue, May-October 1850.
24. Under the Companies Clauses Consolidation Act (1845, Sect. 85).
25. Based on details of aggregate share capitals in the industry contained in Reed (1975a
pp. 35-6), Report of the House of Lords 1847-1848, pp. 1-27; Returns (of the Board of Trade)
Relating to Capital and Loans, 1848-1855. Companies that leased all their lines and were no
longer operating them have been excluded from the sample set. A list of the companies
included in the data set for 1838-1855 is set out in the Appendix.
26. In 1843, for example, of the five companies making charges, four were among the five
largest in the industry. There appears to be no evidence that large numbers of companies
too small to be in the sample set charged depreciation during this period. The small
number of companies making provisions in the early 1840s upholds Pollins' footnote
(ignored by the RSHo) that ``many important companies'' did not depreciate and also
Edward's caution in seeing it as no more than ``quite common practice'' (Edwards, 1986,
p. 255).
27. See also Tyson's criticism that the testing of interpretations by facts represents a claimed
freedom to put forward speculative arguments that ``disdain the importance of confirming
evidence'' (Tyson, 1995, p. 29).
Government papers
Companies Clauses Consolidation Act (1845) 8 & 9 Vict. c. 16.
Joint Stock Companies Act (1844) 7 & 8 Vict. c. 110.
Midland Railway Act (1844) 7 & 8 Vict. c. 18.
Railway Regulation Bill (1844) PP 1844 Vol. IV [Cmd. 397], pp. 415-32.
Regulation of Railways Act (1844) 7 & 8 Vict. c. 85.
Report of the House of Lords in 1847-1848 (PP 71 Vol. XIV, pp. 1-27).
Returns Relating to Capital and Loans ...[for the years to 31 December].
[1843-47] PP 1847-1848 Vol. XIV [Cmd. 71], pp. 1-27.
[1848] PP 1849 Vol. LI [Cmd. 535], pp. 117-35.
[1849] PP 1851 Vol. LI [Cmd. 187], pp. 179-97.
[1850] PP 1851 Vol. LI [Cmd. 623], pp. 199-221.
[1851] PP 1852-1853 Vol. XCVII [Cmd. 172], pp. 193-221.

Railway mania
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849
[1852] PP 1854 Vol. LXII [Cmd. 98], pp. 479-509.
[1853] PP 1854 Vol. LXII [Cmd. 494], pp. 517-47.
[1854] PP 1854-1855 Vol. XLVIII [Cmd. 510], pp. 591-623.
[1855] PP 1856 Vol. LIV [Cmd. 316], pp. 533-65.
Reports of the House of Lords Select (Monteagle) Committee on the Audit of Railway Accounts;
PP 1849 Vol. X [Cmd. 371].
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Appendix
Companies included in data-set:
Birkenhead, Lancashire and Cheshire
Birmingham and Derby
Birmingham and Gloucester
Bristol and Exeter
Chester and Holyhead
East Lancashire
Eastern Counties Railway
Edinburgh and Glasgow
Glasgow and South Western
Glasgow, Paisley, Kilmarnock
Great North of England
Grand Junction
Great Northern
Great Western Railway
Lancashire and Yorkshire
Lancaster and Carlisle
Leeds Northern
Liverpool and Manchester
London and Birmingham
London and Blackwall
London and Brighton
London and Croydon
London and Greenwich
London and North Western
London and South Western
London and Southampton
Manchester and Birmingham
Manchester and Leeds
Manchester, Bolton and Bury
Midland
Midland Counties
Newcastle and Carlisle
Norfolk
North British
North Eastern
North Midland
North Staffs
South Eastern and Dover
South Devon
South Wales
York, Newcastle, Berwick
York and North Midland
Companies included in main data-set for 1821-1855:
Birkenhead, Lancashire and Cheshire
Birmingham and Derby
Birmingham and Gloucester
Birmingham, Bristol and Thames
Bristol and Exeter
Caledonian
Cheltenham
Chester and Holyhead

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Durham and Sunderland
East Lancashire
Eastern Counties Railway
Edinburgh and Glasgow
Glasgow and South Western
Glasgow, Paisley, Kilmarnock
Great North of England
Grand Junction
Great Northern
Great Western Railway
Hull and Selby
Lancashire and Yorkshire
Lancaster and Carlisle
Leeds Northern
London and Croydon
London and Greenwich
London and North Western
London and South Western
London and Southampton
Manchester and Birmingham
Manchester and Leeds
Manchester Bolton and Bury
Manchester, Sheffield, Lincolnshire
Midland
Midland Counties
Newcastle Berwick
Newcastle Carlisle (possibly)
Norfolk
North British
North Eastern
North Midland
North Staffs
Northern and Eastern
South Eastern and Dover
South Devon
South Wales
Source: Railway collection (transferred from the British Railways Board in 1972) at the Public
Records Office, Kew.