Take a Ride on the Reading

Henry George was one of the most popular writers of 19th century America. So popular in fact, that he sparked several economic reform movements, one of which took his own name. Georgism, was the belief that people should own the value that they produce themselves, but that the economic value of land and resources should belong to all members of society.

His most famous work, Progress and Poverty sold millions of copies worldwide, one of which was purchased by a young Elizabeth Magie. She was a follower of George, and his ideas, and had invented a game to help teach his principles. She called it The Landlord’s Game, and it acted as a satire of the effects of non-value producing landowners charging rent. The game went through several versions before being purchased by Charles Darrow, who would go on to sell the game to Parker Brothers, would be credited for the games invention until recent years when Magie has finally begun to receive the credit she deserves..

Darrow made a few alterations to the game. Changing the locations to line up with Atlantic City and adding the railroad squares. Of the four railroads, three of them were real. The biter rivals B&O and Pennsylvania, as well as the Reading (pronounced redding not reading by the way) all served Atlantic City. The Short Line Railroad however, is the only property on the board known to be entirely fictional.

The inclusion of a fictitious railroad may have been done out of necessity. After all, it is hard to only have three identical squares on a board with four sides. But it may have also been a nod towards one of the biggest financial bubbles in recent memory for those alive in the early 1900’s. A bubble in which thousands of people unknowingly bought fictitious railways. Railways they paid for with cash. Not play money.

The world’s first modern railway, the Liverpool and Manchester Railway opened in 1830 and quickly proved successful and profitable in transporting both cargo and passengers between its terminals. Their success was quickly emulated as railways began springing up around the country.

To encourage more railway development the British government took a hands-off approach to regulating the railways. Aspiring companies were required to submit a bill to parliament to gain approval to buy the land, but there were no limits on the number of companies and no checks into the financial viability of each line.

In the mid 1840’s the Bank of England cut its interest rate, making government bonds much less attractive to investors, and as a result shares of railway company stocks boomed. As more and more freight and passengers moved about the country by rail, it was seen as a technology that would revolutionize the world. In many ways, those predictions were correct. Railways did completely transform society. Predictions were made that within a matter of a few years England would go from having a few thousand miles of track, to having as many as a million miles. The sky was the limit for the railways, and investors poured in the money.

So confident were investment banks in the viability of railways that they began offering investors the opportunity to buy shares of railways on what was called scrip. Buying on scrip simply meant that an investor needed only to put up 1/20th of the price of a share to own one. This made investing accessible for the rapidly expanding middle class. Buying on scrip works out well when times are good. If your share doubles in price you make 2000% on your investment. Unfortunately for those who bought on scrip, if the price declines, you are still on the hook for the entire amount of the stock you purchased. Meaning you stand to lose 20x what you invested.

As with all other bubbles, Railway Mania became a self-promoting cycle of speculation based purely on overly optimistic investors. In 1845 the Bank of England again raised their interest rates, and money began to flow back into bonds, undercutting railways. Prices for the Railway stocks slowed their growth, then leveled out, then began to fall. When prices began to fall, new investment all but stopped overnight. Investors were left with stock worth fractions of what they paid for them. And investors who had bought on scrip were left with those same stocks, and a balance due for the original purchase price.

The economic fallout devastated he middle class, who had been the primary buyers of scrip investments. Some had gone as far as investing their life savings into railways when it seemed as though the stocks could never go down. Hardest hit were investors who had purchased shares in railways which in the end never laid a mile of track. Swept up in the euphoria of railway investing, here were many who failed to even begin to analyze what they were buying. Even a quick look, would have shown them that the railways they were buying, didn’t even exist.

Unlike other bubbles, Railway Mania did leave behind tangible value. While the stocks were worth pennies compared to their prior value, the lines they operated still moved freight and passengers all over England.

Just like other bubbles, Railway mania was headlined by greed, euphoria, disinformation, and fraud.

Financial bubbles can be difficult to see while they are happening. While we can quickly look backwards and see the same pattern unfolding during the dot com boom, the roaring 20’s and the mortgage crisis, we have a difficult time seeing the ones that are right in front of our faces.

The best way to spot them is to look for the commonalties they all share. Investments that lack tangible value. Investments that are trading at prices far higher than they are intrinsically worth. A disproportional number of investors who don’t quite understanding what they are buying, or why they are buying it.

Just like your parents taught you when you are young, just because everybody else is doing it, doesn’t make it a good idea. If you can’t explain the what, where, why, and how of an investment. It may be best to avoid it all together.