Overexpansion and crisis in the 1870s

The Railway Act of 1872: federal concessions

The Franco-Prussian War of 1870–1871 exposed the weaknesses of a network planned by competing private companies under cantonal concessions. The war showed how poorly a fragmented network served the needs of national defence and of the economy in an emergency, since no single company had an interest in closing the gaps in coordination. The second federal railway act, of 23 December 1872, drew the consequences. It transferred to the Confederation the power to grant concessions and gave it control over construction, operation, tariffs and accounting. According to Röll, the Act also abolished monopoly privileges contained in earlier concessions, authorised the Confederation to promote railway construction, especially of Alpine lines, and provided for a federal railway department to supervise the whole system.¹

The shift from cantonal to federal concessions has an obvious parallel in the later history of financial regulation. In both fields the Confederation began with minimal powers, left supervision to the cantons or to private actors and took over the central levers only after the costs of fragmentation had become visible. The 1872 Act was also a turning point for Escher personally. It coincided with the year in which he gave up the presidency of the Nordostbahn’s directorate for the chairmanship of its board, which followed his election in December 1871 as president of the directorate of the Gotthard railway company, whose financing is described in Chapter D.VI.² From then on his energies were divided between the company he had built and the international project that was to crown his career.

The race for concessions

The early 1870s were years of speculative euphoria throughout central Europe. After the Franco-Prussian War, capital was abundant, share prices rose and promoters competed for concessions. Once the abolition of monopoly privileges had opened the door to new companies in Switzerland, the established railways responded by applying for concessions for every line that a competitor might build. The Nordostbahn under its new directorate president, Friedrich Peyer im Hof, pursued an aggressive programme of network expansion.³ Much of this expansion was defensive. The company took on obligations to build lines that it had no intention of building soon, merely to prevent rivals from obtaining them. It also accepted secondary routes in order to secure the support of communities and cantons.

The financial consequences were those of any leveraged expansion at the peak of a cycle. The obligations the company had assumed required construction capital that could only be raised through bonds, while the new lines would generate little traffic for years. When the long depression that began with the stock market crash of Vienna in 1873 reached Switzerland, the flow of capital dried up just as the construction commitments fell due. In 1876 the Bern–Luzern-Bahn had to be liquidated only seven months after its opening, and on 3 March 1876 the Gotthard company reported a funding shortfall of 102.4 million francs.⁴ The Nordostbahn and the Centralbahn found themselves unable to fulfil their construction obligations.

The Nordostbahn in distress

For the Nordostbahn the crisis was severe. In 1877 the company had to ask the Federal Council for relief from its construction obligations, and on 14 February 1878 the Federal Assembly approved an agreement that postponed the obligations while the company restored its finances. Röll adds that the construction deadlines were extended to 1885. No dividend was paid from 1877 for several years. The share price, which had stood at 670 francs in 1871, fell to 53 francs during the crisis.⁵ Investors who had regarded Nordostbahn shares as one of the safest securities of the canton saw more than nine tenths of their market value disappear within a few years.

The distribution of losses followed the capital structure. Bondholders, whose claims ranked first and who were largely Swiss, were protected by the moratorium. Shareholders, who bore the residual risk, lost heavily. The outcome also shifted ownership across the border. As domestic shareholders sold out, the majority of the Nordostbahn’s shares passed into foreign hands, while the bonds remained predominantly Swiss.⁶ The company that Escher had founded partly in order to keep Swiss railways under Swiss control was, by the 1880s, controlled by foreign equity holders and financed by Swiss creditors. The episode foreshadowed a pattern often observed in the later Swiss capital market, in which domestic investors favoured the safety of fixed income while risk capital frequently came from abroad.

The crisis also reached Escher personally. The HLS speaks of setbacks after 1875, among them the crisis of the Nordostbahn and the delays in the construction of the Gotthard line. In 1877 he withdrew from the presidency of the Kreditanstalt, to which he returned in 1880, and on 27 July 1878 he resigned as president of the Gotthard company under pressure from the federal authorities, whose additional subsidies the project now required. Recovery of the Nordostbahn came only in the late 1880s. According to Röll, it was a consortium agreement of 1887, involving the issue of new priority shares, that enabled the company to complete its outstanding lines.⁷

The Nationalbahn: a democratic railway and its collapse

The most dramatic failure of the decade struck the project conceived as the democratic alternative to Escher’s company. The Schweizerische Nationalbahn was the railway of the Winterthur democrats. Its promoters, led by the Winterthur city president and member of the Council of States Johann Jakob Sulzer and the city secretary Theodor Ziegler, wanted to break the dominance of the Nordostbahn and the Centralbahn by building a line across the Swiss plateau, from Lake Constance through Winterthur to the west, that would bypass Zurich altogether.⁸ The company was formed on 5 April 1875 through the merger of two predecessors: the Winterthur–Singen–Kreuzlingen railway, founded in 1872, and the Winterthur–Zofingen railway, founded in 1873.

The Nationalbahn was a railway of towns and communes. Its capital came largely from public bodies along the route, above all the city of Winterthur and the Aargau towns of Baden, Lenzburg and Zofingen, which guaranteed its obligations in the hope of attracting traffic and industry.⁹ The eastern section, which cost 11 million francs, opened on 17 July 1875, followed in September and October 1877 by the western section, budgeted at 17 million francs. The finished network measured 159 kilometres. By then the company had lost its race. The established railways had used their concessions to block its access to the traffic centres, above all to Zurich, leaving a line that ran through relatively thinly populated country with sparse traffic.

The collapse came quickly. On 20 February 1878 the Nationalbahn was placed in forced liquidation, barely four months after the opening of its western section. At the second auction, on 15 March 1880, the Nordostbahn acquired the lines at a small fraction of their cost. While one summary puts the price at 12.4 per cent of the share capital’s face value, the HLS speaks of the Nordostbahn and the Centralbahn acquiring the lines and rolling stock for a fraction of their real value.¹⁰ Escher’s company, itself in distress, thus absorbed the network that had been built to destroy it.

The cost fell on the guarantor towns. The Confederation granted a loan of 2.4 million francs in December 1883 to help them meet their obligations, but the repayment dragged on for generations.¹¹ Winterthur, the largest guarantor, was plunged into debts that were paid off only in 1953, three quarters of a century after the bankruptcy.¹² The Nationalbahn showed that the democratic critique of the Escher system, justified as it was on the political level, offered no protection against the economics of overbuilt infrastructure. Public ownership by towns with limited tax bases proved even more fragile than private ownership by companies with access to the capital market.

For the history of public finance, the Nationalbahn is an early Swiss example of a lesson that the twentieth century would learn again: guarantees given by public bodies to infrastructure projects are contingent liabilities that can outlast the generation that granted them. The towns of Winterthur, Baden, Lenzburg and Zofingen carried the consequences well into the twentieth century.¹³

Notes

1. HLS, “Eisenbahnen” (cited above), section “Eisenbahngesetz 1872”; Röll, “Schweizerische Eisenbahnen” (cited above), section on the law of 23 December 1872. ↩
2. Röll, “Escher” (cited above), which dates his election as president of the Gotthard company to December 1871; HLS, “Escher, Alfred” (cited above), for the change in his functions at the Nordostbahn in 1872. ↩
3. Wikipedia (de), “Schweizerische Nordostbahn” (cited above). The article presents Peyer im Hof as Escher’s successor at the head of the directorate. ↩
4. Röll, “Schweizerische Eisenbahnen” (cited above), section on the financial crisis of 1876–1878. ↩
5. Wikipedia (de), “Schweizerische Nordostbahn” (cited above), section on the financial crisis and moratorium; Röll, “Schweizerische Nordostbahn” (cited above); HLS, “Schweizerische Nordostbahn (NOB)” (cited above), which attributes the difficulties to competing railway projects and places the collapse of the share price in the crisis of 1871–1878. ↩
6. Wikipedia (de), “Schweizerische Nordostbahn” (cited above); Wikipedia (en), “Swiss Northeastern Railway”, https://en.wikipedia.org/wiki/Swiss_Northeastern_Railway, which states that the vast majority of shares were in foreign hands while most bonds belonged to Swiss owners. ↩
7. HLS, “Escher, Alfred” (cited above), section on his final years; Röll, “Escher” (cited above), for the date of resignation; the HLS gives the years 1877 and 1878 for the two withdrawals; Röll, “Schweizerische Nordostbahn” (cited above), section on the moratorium and its resolution. ↩
8. Wikipedia (de), “Schweizerische Nationalbahn”, https://de.wikipedia.org/wiki/Schweizerische_Nationalbahn. The article dates Sulzer’s vision of a national railway to 1872 and names Ziegler as president of the directorate of the eastern company. ↩
9. Wikipedia (en), “Swiss National Railway”, https://en.wikipedia.org/wiki/Swiss_National_Railway. The HLS describes the Nationalbahn as publicly financed: HLS, “Eisenbahnen” (cited above), section “Krise der 1870er Jahre”. ↩
10. Wikipedia (de), “Schweizerische Nationalbahn” (cited above), section on the bankruptcy and auctions; Wikipedia (en), “Swiss National Railway” (cited above); HLS, “Eisenbahnen” (cited above), section “Krise der 1870er Jahre”. ↩
11. Wikipedia (de), “Schweizerische Nationalbahn” (cited above). The article dates the federal assistance to 21 December 1883 and records that Zofingen ceremonially burned its last Nationalbahn bonds on 2 February 1943. ↩
12. HLS, “Winterthur” (cited above). Wikipedia gives slightly different dates for the final repayments of Winterthur’s various Nationalbahn obligations, but the HLS date of 1953 for the extinction of the city’s debts is the authoritative one. ↩
13. Wikipedia (en), “Swiss National Railway” (cited above), which states that the four towns did not finish paying off the debts until the twentieth century. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of September 2025.