The Railway Bubble vs. the AI Bubble - A Wealth of Common Sense

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Everyone is trying to put the massive AI spend by technology companies into context.

The easiest historical analogies are the telecomm buildout in the 1990s dot-com bubble and the railway bubbles of the 1800s. Each period was defined by excessive infrastructure spending, investor euphoria, and bubbles that popped but still had lasting positive effects.

I’m familiar with the railway bubble because I wrote an entire chapter about that time frame in my book Don’t Fall For It.

While the similarities between then and now are striking, there were far more nefarious activities that occurred during the 19th century.

What follows is a condensed version of what appeared in my book.

Innovation breeds change, change breeds emotion, and emotion adds fuel to the fire when making money decisions.

There’s a reason financial bubbles are called manias — they elicit heightened levels of energy, excitement, and activity. Hucksters are drawn to financial manias like moths to a flame because it’s easier to deceive people when they think humanity is entering a "new era" or "paradigm shift."

George Hudson saw the British railway bubble of the mid-19th century as an opportune time to profit from the excitement in the air. There was a wave of innovation taking place, and the emotions of the crowd who were looking to get rich quickly led to one of the more underrated historical bubbles on record.

Like most bubbles, the railway mania actually started out as a good idea that was taken too far by investors and those selling railway projects alike.

The first commuter trains appeared in the United Kingdom during the 1820s. They traveled just 12.5 miles per hour which reduced the trip from London to Glasgow to 24 hours. Without a hint of sarcasm The Railway Times asked, "What more could any reasonable man want?"

The initial railway mania hit in 1825 with the opening of the first steam engine train. An economic downturn snuffed out any speculation and by 1840, shares of the main railway companies were selling at a discount to their issue price (stocks acted more like bonds than stocks back then). At this point, 2,000 miles of track were complete, leading some to speculate that the national railway system in Britain was already finished.

Memories are short when people think there’s money to be made so this first mini-mania in railway stocks became a distant memory by the summer of 1842. That’s when Prince Albert of the Royal Family persuaded Queen Victoria to make her first train ride. That was the all-clear investors needed to hop aboard the railway-stock train. By 1844, investors viewed these companies as safe and secure, with huge upside potential. It didn’t take long for that cautious optimism to morph into reckless euphoria.

George Hudson was one of the original modern capitalists, using publicity, salesmanship, and a cult of personality to attract enormous amounts of capital and goodwill from the public. Best described by his contemporaries as energetic, abrasive, bullying, penny pinching, rule-bending and overweight, Hudson was also a shrewd businessman who knew how to persuade people.

Innovation helped trains travel further distances and carry heavier loads so Hudson pounced on the opportunity by creating his own line of railways in the 1830s. Through a series of consolidations, mergers, schemes, bribes, acquisitions, and an uncanny ability to sell, Hudson consolidated more power than anyone in the industry, eventually creating the largest railway company in Britain. By 1844, Hudson oversaw one-third of the total tracks in operation, measuring over one thousand miles in distance.

He was the embodiment of the get-rich-quick era of the railway mania.

Company heads were not paid the astronomical sums CEOs can earn today so Hudson became frustrated with how little he was earning for his work. Cutting corners was his solution to increase his wealth.

Auditing was basically non-existent at the time which allowed Hudson to go nuts. He did this by keeping his fellow directors and shareholders in the dark about the inner workings of his companies. This included a refusal to hold finance meetings, changes to accounting methods, and general obfuscation about the financial statements. When Hudson joined the board of one railway company in 1842, his first order of business was announcing an immediate change to the company’s accounting methods, proclaiming, "I will have no statistics on my railway!"

Nearly five hundred new railway companies were in existence by the summer of 1845, with stock prices in the sector up a cool 500 percent. As share prices rose during the 1840s so too did Hudson’s bank account. The palatial estate he purchased at the entrance to Hyde Park was the largest private home in all of London. His name became synonymous with success as the mere mention of his name by promoters provided enough credibility for the sale of stock on a new railway...