A network industry which fundamentally changed the way we live, followed by a speculative bubble: but how much would you have made if you’d got in right at the start with Great Western Railways?
One of the many consequences of the tragic accident outside Paddington Station this month was the disruption to London’s transport. The closure of the city’s main western rail artery delayed travellers for two weeks. This serves as a reminder of the importance of one of Britain’s most successful infrastructure projects – the Great Western Railway, the crowning achievement of Isambard Kingdom Brunel, the greatest Victorian engineer. For decades, the GWR – God’s Wonderful Railways – was the most admired railway company in Britain, perhaps the world.
Many of those commuters who waited with resignation for shuttles from Reading or Ealing Broadway are participants in today’s infrastructure revolution, in information technology, and might have pondered the parallel. That western connection into central London is still indispensable one hundred and fifty years after it was built. The Great Western Railway owned Paddington Station, built the tracks from it, and operated all the trains that ran on them. The GWR was service provider, content provider, and network provider all rolled into one. How much money did Brunel’s backers make?
There are many similarities between the railway mania that swept Britain between 1825 and 1845 and modern internet fever. There was an initial spurt of stock market interest after George Stephenson demonstrated the first train between Stockton and Darlington. That boom collapsed as it became apparent that large scale commercialisation of this innovation was still in the industrial future. The second stock market flurry, in the mid 1830’s, financed the construction of lines which are still today Britain’s main inter-city rail links. In the mid 1840’s these routes were open and the full potential of rail transport had become apparent. Railways mania reached a peak in 1845 and subsided again: most of the lines proposed then were never built.
The Great Western Railway Company was formed in 1835 and its line to Bristol took six years to complete. Initial subscribers paid £100 for their shares. In the stock market boom the company paid a dividend of £8 per share and you could have sold the shares in August 1845 for £224. You would have been wise to do so. They were never, ever, to see that level again. Nor would you ever have received a higher dividend. If you had held your shares through to 1913 your total return over the period would have been about 5% p.a.
I do not know whether the Great Western Railway Company was the best railway investment but it was certainly one of the best. It was a well managed company which expanded steadily, consolidated other lines into its network, and increased passenger and freight traffic per miles as it did so. You might have chosen instead the more speculative Northampton and Banbury Junction line, whose disused embankments I can almost see from my garden. It never paid anything to its shareholders at all. Or you might have gone on backing Brunel – the Bill Gates of his era – and sunk your money in his visionary Great Eastern, the largest ship ever built. You would have lost every penny of it.
The first careful estimate of the contribution of railways to economic development was made by Rogert Fogel, who showed that by 1890 – just before the introduction of automobiles – the carriage of freight by rail allowed American output to be 5% higher than it would have been otherwise. This figure has been criticised for being much too low, and subsequent estimates have more than doubled it. Whatever the right answer, once you add in the economic impact of greater personal mobility through passenger transport the effect was huge.
All that was said in the various railway manias about the economic transformation that this innovation would bring proved to be correct. Railways not only became a huge business in their own right but changed the nature of most other businesses. But that does not mean that investors in railways made a lot of money – even if they were prescient enough to prefer a London to Bristol line to the one between Banbury Junction and Northampton. With the benefit of hindsight, not a lot of prescience seems to be required – but there are plenty of interesting niches around in the information technology market today.
How do these facts fit together? The answer was given in Bill Gates’ recent talk in London, when he observed that most of the benefits of the internet would go to consumers. Competition and regulation meant that the Great Western Railway’s margins were steadily eroded and this was true for all the other successful railway companies. It was on these successful companies, not on the Banbury Junction and Northampton line, that competition and regulation focused.
So even if railways increased US output by 5%, or 15%, railroad profits were only ever a small fraction of that. Related estimates for the UK, by Gary Hawke, suggest that the benefits of rail passenger services alone were five times the total earnings of railway companies. And yet these companies were better placed than today’s infrastructure builders to defend their position. The construction of railways involved capital expenditure and project management on a previously unprecedented scale – a workforce of tens of thousands crossed England to build Brunel’s vision, and while other lines competed no-one else duplicated his achievement. Yet all this earned the shareholders a 5% return.
The greatest beneficiaries of railway mania were the promoters of the companies. Some were out and out fraudsters. Others merely lined their pockets with the proceeds of the issues. Even on the Great Western Railway, the first action of the 24 non-executive members of the Board was to award themselves a salary of £1,000 a year each, no mean sum when a worker building their railway took less than £1 per week.
And some things have not changed. No investor in Brunel’s Great Western Railway made a return remotely comparable to the managers and financiers who secured the franchise for the privatised Great Western Trains and sold it to bus company First Group after only a few months.