Causes
Britain's (and the world's) first recognisably modern inter-city railway, the Liverpool and Manchester (the L&M), opened in 1830 and proved to be highly successful for transporting both passengers and freight. However, the late 1830s and early 1840s saw the British economy slow down. Interest rates rose, making it more attractive to invest money in government bonds – the main source of investment at the time, and political and social unrest deterred banks and businesses from investing the huge sums of money required to build railways (the L&M cost £637,000 ).
However, by the mid-1840s the economy was improving vastly and the manufacturing industries were once again growing. The Bank of England cut interest rates, making government bonds less attractive investments, and existing railway companies' shares began to boom as they moved ever-increasing amounts of cargo and people, making people willing to invest in new railways.
Crucially, there were more investors in British business. The Industrial Revolution was creating a new, increasingly affluent middle class. While earlier business ventures had relied on a small number of banks, businessmen and wealthy aristocrats for investment, a prospective railway company had (on top of these sources) a large, literate section of population with savings to invest. In 1825 the government had repealed the Bubble Act, brought in after the near-disastrous South Sea Bubble of 1720 which put close limits on the formation of new business ventures and, importantly, had limited joint stock companies to a maximum of five separate investors. With these limits removed anyone could invest money (and hopefully earn a return) on a new company and railways were heavily promoted as a foolproof venture. New media such as newspapers and the emergence of the modern stock market made it easy for companies to promote themselves and provide the means for the general public to invest. Shares could be purchased for a 10% deposit with the railway company holding the right to call in the remainder at any time. The railways were so heavily promoted as a foolproof venture that thousands of investors on modest incomes bought large numbers of shares whilst only being able to afford the deposit. Many families invested their entire savings in prospective railway companies – and many of those lost everything when the bubble collapsed and the companies called in the remainder of their due payments.
The British government promoted an almost totally 'laissez-faire' system of non-regulation in the railways. Companies had to submit a Bill to Parliament to gain the right to acquire land for the line, which required the route of the proposed railway to be approved, but there were no limits on the number of companies and no real checks on the financial viability of a line. Anyone could form a company, gain investment and submit a Bill to Parliament. Since many MPs were heavy investors in such schemes, it was rare for a Bill to not pass during the peak of the Mania in 1846, although Parliament did reject schemes that were blatantly misleading or impossible to construct – at the Mania's peak there were several schemes floated for 'direct' railways which ran in vast, straight lines across swathes of countryside that would have been difficult to construct and nearly impossible for the locomotives of the day to work on.
Magnates like George Hudson developed routes in the North and Midlands by amalgamating small railway companies and rationalising routes. He was also an MP, but ultimately failed owing to his fraudulent practices of, for example, paying dividends from capital.
Read more about this topic: Railway Mania