George Hudson (1800 – 1871) and the Railway Mania
The railways, without doubt, transformed the economic fortunes of our country in the 19th century. The nascent railway industry provided the perfect opportunity for the unscrupulous to make hay. Although a Private Members’ bill was required to pass through parliament to authorise any new railway company as a measure to prevent fraud and the presentation of unviable proposals, this did not prevent the “entrepreneurs” spending all their investors’ money before the bill reached parliament – as happened with the West End and Southern Counties railway, the Bristol and Liverpool line and the Northampton, Bedford and Cambridge line.
If a bill made it to parliament there were significant conflicts of interest at play. Many MPs were significant investors in the proposed schemes and so would naturally vote them through. Other MPs were paid in guineas – the origin of the phrase guinea pig – by scheme proponents to lend their support to the cause. Newspapers puffed the advantages of a railway line and the development of a modern stock exchange made it easy for members of the public to invest. Often shares could be purchased for as little as a 10% deposit with the railway company retaining the right to call the balance at any time. Many small investors, lured by the promise of significant dividends to be earned from fool-proof schemes, sunk their savings into buying railway shares, even those who could barely afford the deposit.
The problems came when the train wheels met the tracks – it soon became apparent that many of the railways were not as easy to construct as their proponents had claimed and even when operational, the profits to be had were not as great as were originally anticipated. In late 1845 the Bank of England increased interest rates which led to share prices in railways levelling out and then plummeting. Investment stopped almost overnight leaving companies without funding and investors without the prospect of any return on their investments.
Some of the larger railway companies, the Great Western and Hudson’s Midland, bought up some of the failing lines for a fraction of their value, offering shareholders a below par value for their shares. Even so, many middle class families had lost everything when the bubble burst.
Hudson’s modus operandi was to cut costs, often at the expense of safety, offer significant dividends to investors and to cook the books. A pamphlet called “The bubble of the age” published in 1848 accused Hudson of paying dividends out of capital rather than revenue. Whether this was actually true or not, the finances of Hudson’s companies were built on sand. He had borrowed £400,000 at a high interest rate which had to be paid back in 1849. The vultures were beginning to circle and his shareholders were furious.
It soon emerged that Hudson had been selling shares between his companies at exorbitant values – when rumbled he had to pay back £30,000 – and had used the monies of the York and North Midland railway (YNMR) to build a private station at Londesborough Park, his gaff. Faced with demands to repay £750,000 Hudson sold his home (and station?) and repaid £200,000. In 1852 the YNMR magnanimously agreed to release Hudson from all his remaining liabilities for £50,000.
Foolishly, Hudson rejected the offer and the matter went to court, where he promptly lost and in the winter of 1853 had to negotiate a settlement of £72,670 to clear his debts and was forced to sell his property at Newby Park. Small consolation, perhaps, for the many who had bought a ticket to nowhere.