AI Dreams and Waterway Warnings: Lessons from the Canal Manias of the Industrial Revolution
It was the "Tech Bubble" of its day
Artificial intelligence (AI) technology promises to revolutionize efficiency and productivity.
In that way, it has much in common with the advent of canals during the Industrial Revolution. The canal mania of the 1700s and 1800s holds critical lessons for investors in cutting-edge technologies today.
The hype cycle and speculation around British and US canals in their heyday led to a painful bust.
Investors would do well to remain clear-eyed amidst the current AI gold rush.
The Spark of Canal Innovation
Today, it's hard to appreciate just how revolutionary canals were in their time.
In 18th-century Britain, transporting coal, iron, and other raw materials relied on slow, small-scale horse-drawn haulage.
Canals slashed transport costs by cleverly utilizing waterways, enabling bulk shipping at scale. The pioneering Bridgewater Canal in the UK, completed in 1761, charged just half the price per mile compared to traditional horse-powered haulage. And it did so with better reliability. Canals proved to be transformative.
Soon, investors were consumed with funding new UK canal projects for quick riches. Stocks skyrocketed.
Over the next 15 years, 52 Acts of Parliament were passed to encourage the further building of canals. But most of the acts chartered new joint-stock companies that would get exclusive rights to build and maintain canals and charge tolls. The dividends paid out on these stocks far exceeded the income paid on government bonds. They provided investors with an incomparable opportunity to build serious wealth.
By the 1790s, a canal share bubble was booming at the London Stock Exchange. Canal-Mania in the UK climaxed in 1793 and 1794, as another 38 Acts of Parliament were passed for new canal schemes. Investors saw canals as guaranteed money-spinners.
The Loughborough Canal was to be the most profitable canal in history. The canal was completed and opened in 1780 at the cost of £9200 when shares stood at £120. Shares in Loughborough Canal stock rose from its par of £100 in 1776 to over £300 in 1792, £2400 in 1819, and £5000 in 1824, a 50-fold increase in price in 40 years.
Once the railroads began to take over England, canals were unable to compete, and earnings, dividends, and share prices of canals slowly declined. The canal showed explosive growth in the beginning and then a slow decline into stability as competitors took business away.
Canals were transforming the real economy as well.
The historian Hubert Gordon Thompson documented that goods shipped annually between Manchester and Liverpool over a century along 35 miles of canal. (This stretch was the eventual site of the world’s first railway in 1826)
The amount of goods shipped increased from a mere 2,000 tons per year by horse to an astonishing 10 million tons thanks to interconnected canals. Average cost plunged from £1 to just 3-8 shillings per ton.
Such was the exponential growth promised by a new technology.
In America, the awe-inspiring 363-mile Erie Canal linking the Great Lakes to the Atlantic in 1825 catalyzed fierce canal speculation.
Imagine spending $4 billion in today's money to dig a ditch four feet deep and 40 feet wide. Thomas Jefferson described the notion of a manmade waterway linking the Great Lakes with the Atlantic Ocean as "little short of madness?"
Still, laborers clawed shovels of earth from the ground across New York's wilderness. In doing so, they achieved one of the greatest engineering feats in American history. And they did do without the aid of a single professional engineer!
Investors scrambled to replicate Erie’s success, sparking a canal-building revolution across states. For a time, canal stocks were all the rage as investors bought into the vision of soaring trade and commerce.
A Speculative Bubble Bursts: A Historical Parallel
The rise and fall of canal mania in the 18th and 19th centuries offers a cautionary tale for investors sucked into the excitement surrounding AI.
The allure of canals led to a speculative bubble and subsequent crashes.
Fueled by the promise of revolutionary change and the potential for immense profits, investors poured money into canal projects.
Investors blithely disregarded sober assessments of long-term viability. Unbridled enthusiasm drove canal share prices to unsustainable levels, culminating in a bubble that eventually burst.
Several factors contributed to the bursting of the canal bubble.
Firstly, too many canals were built. As with railroads in 1840s Britain, there were too many canals for too little cargo. Maintenance costs compounded. Many canals struggled to cover construction debts.
Secondly, the high construction and maintenance costs proved unsustainable for many canals. They could not operate profitably.
Finally, the death knell for canals sounded when steam railways arrived in the 1830s. The arrival of superior technology rendered canals obsolete. Trains delivered faster, more reliable transportation.
Irrational exuberance soon gave way to hard truths.
Investor sentiment collapsed, and canal stock prices plummeted.
The US canal-building frenzy ground to a halt. Many canals lay unfinished or abandoned. Those left struggled as relics amidst the domination of the railroads.
The boom that had promised enduring returns led to a bust in canal fortunes yet again.
Critical Lessons for Today's Investors
Curb Your Enthusiasm:
Much like today’s over-optimism around AI stocks, the canal bubble demonstrates how speculative bubbles blind investors to underlying business fundamentals. Maintaining a wide range of bets across sectors ensures against such hype cycles.
Expect Technological Disruption:
Dominant technologies risk disruption by upstarts. Canals fell prey to railways just as AI may disrupt today’s tech incumbents. Disruption is never a question of “if” but “when.”
Focus on Adopters Over Innovators:
Canal builders didn’t win big. However, industries using canal networks reaped significant gains. Similarly, online retailers benefited from Internet infrastructure, not the telecom companies laying the cables.
The lesson?
If history is any guide, similar dynamics will play out in the AI landscape.
The historical parallel between the canal bubble and the AI space is striking.
The emerging AI revolution promises to boost productivity but also risks inflating a textbook technological bubble.
The canal mania and bust of the 1700s serves as a timely parable for investors today.
Backing transformative technology can generate fortunes and end financial ruin if investors fall prey to irrational exuberance.
There are two significant takeaways for today's investors.
First, evaluate business models carefully. Be realistic in assessing potential risks and returns. Spread your bets.
Second, understand that profits accrue to industries best harnessing the new technologies rather than those who create them.
The canal boom boosted economic productivity and profits for many companies through increased trade.
But those who invested in the canals themselves rarely fared well. Indeed, overzealous speculation in canal shares led to financial collapse.
By learning from Canal-era speculation and other technological marvels and staying clear-eyed amidst today’s AI hype, investors can reap much of the gains while avoiding most of the pitfalls.
Put another way, “No, this time is not different.”