The Great British Bicycle Bubble : The Indicator from Planet Money We continue our series on financial bubbles with the British bicycle mania of the 1890s and the trail of bankrupt companies it left behind.

The Great British Bicycle Bubble

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UNIDENTIFIED PERSON: NPR.

(SOUNDBITE OF MUSIC)

STACEY VANEK SMITH, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.

PADDY HIRSCH, BYLINE: And I'm Paddy Hirsch, your humble editor.

VANEK SMITH: Oh, we love you, Paddy.

HIRSCH: All this week, we're talking about bubbles, where enthusiasm for a product or commodity becomes so intense that rational market behavior disappears.

VANEK SMITH: Buyers pursue a commodity with such intensity that the price swells up like a bubble or a balloon...

HIRSCH: Or a goiter.

(LAUGHTER)

VANEK SMITH: ...Or a goiter until, eventually, the bubble bursts.

HIRSCH: And these bubbles, in the past, have also been called manias, implying a kind of madness on behalf of consumers - mad, as the Australians say, as a cut snake.

VANEK SMITH: Mad as a box of frogs.

HIRSCH: Mad as a bicycle...

VANEK SMITH: (Laughter).

HIRSCH: ...Because that's true. Bicycles are pretty crazy. I mean, if you'd never seen a bicycle before, you'd think they were pretty bizarre, right?

VANEK SMITH: That's true.

HIRSCH: I mean, the two wheels, the spokes, the chain, the tiny torture device masquerading as a seat - and that's before you've even got to the clothing; all that neon Lycra.

VANEK SMITH: Or the riding uphill.

HIRSCH: Or the - well, that's completely insane.

VANEK SMITH: (Laughter).

HIRSCH: And riding uphill in neon Lycra and that helmet that makes you look like something Sigourney Weaver might hunt through a darkened spaceship.

VANEK SMITH: They do look like aliens.

HIRSCH: Right?

VANEK SMITH: (Laughter) And in the 1890s, there was an actual bicycle mania in Britain - the great British bicycle bubble.

HIRSCH: As opposed to the "Great British...

VANEK SMITH: British Bake Off (ph).

HIRSCH: ...Baking Show", which is - of course is also a mania.

VANEK SMITH: That's true.

HIRSCH: Prior to 1890, bicycles were expensive, impractical and really uncomfortable. I mean, think about that penny farthing - right? - with that big front wheel and that tiny back wheel.

VANEK SMITH: It's terrifying.

HIRSCH: Terrifying.

VANEK SMITH: It seems treacherous.

HIRSCH: Right? And you fall off that thing, and that's it.

VANEK SMITH: Goodbye.

HIRSCH: Indeed. Will Quinn is a professor of finance at Queen's University in Belfast and something of a specialist on the great British bicycle bubble. He says right around 1890, the British bicycle business went through a period of rapid innovation.

WILL QUINN: So they invented the diamond frame, and they invented the chain, which meant you don't need this big front wheel anymore. And they invented the pneumatic tire, which was great for the poor-quality roads that existed at the time.

VANEK SMITH: The new bicycles looked pretty similar to the bicycle that we ride today. They were safer. They were more comfortable, and they gave riders a relatively cheap and quick way to get out of the smog-wreathed cities of industrial Britain and into the glorious countryside. They were a huge and immediate hit. Newspapers ran these lavish stories about the cycling lifestyle, and there was this huge spike in ridership, especially among the ladies.

HIRSCH: And bicycles weren't exactly cheap; about 10 pounds on average when a decent working-class wage was about 300 pounds a year.

VANEK SMITH: Whoa. That's like a Lexus.

HIRSCH: (Laughter) Yeah.

VANEK SMITH: Right?

HIRSCH: It kind of is like a Lexus. But there were a lot of rental companies out there that rented bikes for as much as a pound a week. And as cycling caught on with people joining cycle clubs all over the country, people began buying their own bikes.

QUINN: It really started in the spring of 1896. So at this point, it's become clear that something's going on with bicycles. They're much more popular. There's very high demand that the existing companies can't really meet.

HIRSCH: There were about 15 or 20 public companies making bicycles at this point. But with so much demand, there's clearly an opportunity for an entrepreneur with a little pizzazz and flair, someone like Ernest Terah Hooley. This guy's a property dealer and a bit of a scoundrel, frankly, who somehow manages to convince a bank to give him a massive loan.

VANEK SMITH: Hooley then pays this heart-stopping amount of money for a company called Pneumatic Tyre - 3 million pounds. That's nearly 10 times the company's original valuation. It's like an early unicorn - ye olde unicorn. He renames the company the Dunlop Pneumatic Tyre Company. And then he turns around and flips that company. He sells it for 5 million pounds.

HIRSCH: And Dunlop wasn't a bicycle-maker. It made tires. But still, entrepreneurs all over Britain witnessed the apparently massive success of this trade. And now everybody wants to be in the bicycle business.

VANEK SMITH: Within a year, the number of public companies associated with bicycle manufacturing goes from a couple dozen to more than a hundred. There's the Birmingham Small Arms, Humber & Co., Rudge of Coventry, the Raleigh Cycle Company - oh, the British; they really know how to name things - and dozens of others. And all of them are competing in the stock market to raise capital to make bikes for the cycle-crazed people of Britain. And you can just see this bubble swelling.

HIRSCH: Except that this bubble isn't actually about the bicycles so much. It's about the shares of bicycle companies because the price of a bicycle stays about the same throughout 1896, but the price of bicycle company stock goes up like a rocket.

QUINN: You had a very rapid run-up in prices, so prices rose by about 200% in two months in 1896.

HIRSCH: Wow, 200%.

QUINN: Yep, 200% - and this early stage of the mania is very easily explained. So you have high dividends at these companies. You have these spectacular mergers taking place, and prices rise accordingly. The really hard part to explain is why, a year later, prices are even higher, even though you now have four or five times as many companies on the market. And they're not all - clearly not all going to survive.

HIRSCH: So part of the puzzle was that even though there were many more companies making bikes, increasing the supply to more than matched demand, none of them cut their prices much.

QUINN: So the price of bicycles stayed much the same. There was some sort of unofficial collusion between the British companies, where they agreed to just compete on quality.

VANEK SMITH: There was only so long that that could last. I mean, there was this intense competition, and nobody was cutting their prices. And there was this massive increase in the supply of bicycles that, basically, threatened to overwhelm demand. And then, as happens, the Americans arrived.

HIRSCH: Oh, the Americans.

VANEK SMITH: (Laughter) Dun dun dun (ph).

HIRSCH: (Laughter) We'll have more after the break.

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HIRSCH: Trust those hard-headed Americans to bring a dose of economic reality to the British market.

VANEK SMITH: Economic reality is what we do, Paddy Hirsch.

HIRSCH: (Laughter).

VANEK SMITH: When American mass-made bikes entered the market in 1897, it was basically like the entire British bicycle business had ridden over a nail. The American bikes were kind of scorned by purists who preferred the handcrafted machines that the Brits made. But the American bikes were cheap. They were just $25, which translated to about 5 pounds, which was half the average cost of a British bike. And they worked just fine - apparently not the same problems with the electrical systems. Oh.

HIRSCH: Oh.

(LAUGHTER)

HIRSCH: Anyway, the popularity and ubiquity of these American bicycles forced British firms to slash their prices at last. So it was clear to any objective observer that a lot of these companies, these British bike-makers, couldn't stay in business for long. And yet, Will Quinn says, share prices remained stubbornly high. And one big reason for this might sound familiar.

QUINN: A lot of the press at this time were very excited about bicycles, particularly the specialist press. So there was this body of cycling enthusiasts who would not have a bad word said about bicycles, who were just insistent that bicycles were the future, that anyone who thought that bicycle shares were overvalued just did not understand the spectacular potential of this new technology.

VANEK SMITH: It's like Silicon Valley.

HIRSCH: Bitcoin.

VANEK SMITH: It was Silicon Valley. Oh, my gosh, Bitcoin.

HIRSCH: I won't hear a bad word said about it.

VANEK SMITH: Buy crypto.

HIRSCH: (Laughter). Financial bubbles tend to expand slowly and then pop with a loud bang, like the housing bubble that popped in 2008 and caused a financial crisis. But the great British bicycle bubble did the reverse. It expanded very quickly in just two months in 1896, but it took several years to deflate completely - so kind of more of a slow puncture than a bursting bubble, like the nail stayed in the tire.

VANEK SMITH: In fact, it was nearly five years before the market really began to shake out. Of a total of 140 public bicycle manufacturing companies, 40 went bankrupt by 1901. And over the next 10 years, another 60 went out of business or just pivoted to other industries as bicycle prices fell. And the share of bicycle companies returned to a kind of equilibrium.

HIRSCH: And by the way, that tremendous trade that started it all - when Ernest Terah Hooley bought Dunlop for 3 million pounds and sold it for five - in the end, he admitted that he'd spent so much money on advertising and marketing to juice the share price that he only cleared about a 100,000 pounds.

VANEK SMITH: That still sounds - isn't that still a lot?

HIRSCH: Not really.

VANEK SMITH: No.

HIRSCH: Not if you're thinking about that kind of investment. I mean, that's only - that's like a...

VANEK SMITH: It's not Amazon money.

HIRSCH: It's certainly not Amazon money, so I'm sorry to burst your bubble there, Stacey.

VANEK SMITH: (Laughter).

HIRSCH: Our thanks to William Quinn at Queen's University for help with this story. He's got a bubblicious (ph) book coming out called "Boom And Bust," and you can preorder it now. This episode of THE INDICATOR was produced by Leena Sanzgiri. It is a production of NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

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