June 6th, 2014
by James Narron and David Skeie - Liberty Street Economics, Federal Reserve Bank of New York
Today, a leisurely trip down a canal on a quiet Sunday afternoon is a reminder of an unhurried time away from the hectic pace of modern commerce. But this was not always so. From the late 1790s into the early 1800s, canal transport was a crucial element of the industrial revolution—a time when barges were loaded with raw materials and goods rather than tourists and holidaymakers. By the mid-1700s, manufacturing was evolving from a cottage industry to a factory system in which goods could be produced en masse. But mass production required heavy raw materials like coal and a way to ship sometimes fragile goods such as pottery to market.
And while more roads were being built or improved, they weren’t very efficient—one horse could pull a ton on land, but up to thirty or even fifty tons on a boat. So when the Third Duke of Bridgewater built a canal to transport coal directly to Manchester and Liverpool, the price of coal was halved, but the Duke’s profits soared. In this edition of Crisis Chronicles, we explore England’s Canal Mania, drawing on studies fromThe Economic History Review on Manchester, the Thames, and British Public Finance.
The Castle in the Air
Canals were not new in the 1700s—they’d been around since at least Roman times. But the art of canal building faded with the collapse of the Roman Empire. Then in the 1660s, France began construction of the Canal du Midi (canal of two seas) to link the Mediterranean with the Atlantic to facilitate the transport of wheat.
By the time Francis Egerton, the Third Duke of Bridgewater, visited continental Europe in the 1750s, the Canal du Midi had already been in operation for more than fifty years. On his return to England in 1759, the Duke decided to build a canal from his own coal mines in Worsley directly to Manchester, bypassing the River Irwell and its tolls via an audacious aqueduct that pundits called “the castle in the air.” And even though the Sankey Brook Navigation—later named the St. Helen’s Canal—was completed in 1757, it is the “Bridgewater Canal” and its renowned aqueduct that is most famous from this era.
But getting permission to build the canal was no easy task. In response to the South Sea Bubble, Parliament enacted laws regulating joint stock companies, one of which required a literal Act of Parliament to build a canal. And the river navigations, like those on the River Irwell, opposed the canals in order to preserve their river transportation toll revenue. The Duke went into heavy debt to gain Parliament’s approval and build the canal, but once completed, even as the price of coal halved, the Duke’s profits soared.
From Cottage to Factory
Although the Duke’s success inspired others, canals were expensive and required significant up-front investment, such that only twenty-five new projects were started over the next thirty years. But as work moved from cottage to factory, power shifted from humans to the steam engine, and workers moved from the country to cities, the demand for coal continued to grow. And after the American war for independence, as Britain’s trade with the United States grew, ever more efficient transport was needed. So while just one new canal was approved in 1790, six were approved in 1791, seven in 1792, and twenty-one in 1793. And with so many new canals requiring so much new capital, speculators eyed the development as an opportunity to get in on good deals and turn a quick profit.
In one such example, only those who were present at the church in Stony Stratford could subscribe to shares in the Grand Junction Canal. And once investors were entitled to shares, they could start trading those shares. So a stock exchange was established in Liverpool to exchange canal shares—the London Stock Exchange wasn’t established until 1801—but historical data detailing price changes are limited to a few archived newspapers and magazines. In one example, shares in the Grand Junction Canal rose from £100 par to £472.75 in the single month of October 1792. But this time, remembering the South Sea Bubble, in March 1793, Parliament debated whether or not to limit trading in canal shares.
In January 1793, King Louis XVI was executed in France, and in February 1793, France declared war on England and Holland. But as England geared up to arm itself for war, inflation ensued and the already costly investments in canals were curtailed, with the once pricey Grand Junction Canal shares falling back to around £100 by 1795. Many canals were built, with some earning substantial profits for many years, while others were abandoned during construction or never started at all. By the end of the 1700s, the boom was over. Most canals were completed by 1815, and by the 1820s, the lure of the locomotive would capture contemporary speculators. But we’ll cover the lust for locomotives in a future post.
Dark Fiber and the Great Housing Convulsion
Like many speculative bubbles, rising prices fuel optimistic expectations and overinvestment. And sometimes just a slowing of price growth as supply outstrips demand—at least in the short-term—can drive down expectations of future price growth, and the bubble ends. And often, the investment turns out to be premature, but perhaps prudent in the long run. A recent example was the overinvestment in fiber-optic cabling in the dot-com bust of the late 1990s. As multiple telecom companies rushed to capture market share, each built enough network capacity to individually capture the market, including future growth. But much of the network capacity remained unused or “dark,” and the price for data traffic collapsed.
A more recent example might be what some have called the Great Housing Convulsion of the last couple of decades, where overinvestment in U.S. housing, particularly in parts of the West, created a boom of overbuilding as investors failed to understand the almost infinite capacity to supply housing in the desert West. And while the overcapacity contributed to the weak recovery of the last few years, buyers are returning to the market and excess capacity is getting worked down.
So is the real cost of a bubble-bust cycle the overinvestment during the bubble, or in the financial chaos that accompanies the bust? Let us know what you think.
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
About the Authors
David Skeie is a senior financial economist in the Federal Reserve Bank of New York’s Research and Statistics Group.