Because the steam locomotives created a polluted atmosphere in the tunnel, many passengers reverted to using the river ferries and the railway was bankrupt by 1900. Recovery came after the railway adopted electric traction in 1903. The Mersey Railway remained independent after the railway grouping of 1923, although it became closely integrated with the electric train services operated by the London, Midland and Scottish Railway over the former Wirral Railway routes after 1938. The Mersey Railway was nationalised, along with most other British railway companies, in 1948.
Records exist of a ferry service across the River Mersey between Birkenhead on the west bank and Liverpool on the east since the middle ages. In 1332 the monks of Birkenhead Priory were granted exclusive rights to operate a ferry; following the dissolution of the monasteries these rights passed through a number of operators eventually to the township of Birkenhead. It is recorded that Marc Isambard Brunel suggested a road tunnel when designing the Birkenhead docks and from the 1850s a railway tunnel under the Mersey was proposed several times. The Mersey Pneumatic Railway received Royal Assent for a single line pneumatic railway in 1866 but failed to raise the necessary capital. In 1871 the Mersey Railway was given the necessary permissions for an orthodox two track railway connecting the Birkenhead Railway near their Rock Ferry station through a tunnel under the Mersey to an underground station serving Liverpool. However the company found it difficult to raise the necessary funds until Major Samuel Isaac undertook to build the railway in 1881. He contracted construction to John Waddell, who appointed Charles Douglas Fox and James Brunlees as Engineers.
Construction of the river tunnel started from two 180 feet (55 m) deep shafts, one on each bank, containing water pumps. Three tunnels were to be dug, one for the two tracks, a drainage tunnel and a ventilation tunnel. A 7 feet 2 inches (2.18 m) diameter ventilation tunnel was dug as the pilot heading. Some 38 million bricks were used for the construction of the main tunnel. When the tunnel was opened, fans on both banks changed the air in the tunnel every seven minutes.
The geology of the riverbed meant that the plans were changed and at the deepest section the drainage and ventilation tunnels combined. The grade on the Liverpool side was increased to 1 in 27. Estimates of the influx of water varied from 5,000 imp gal (23,000 l) to 36,000 imp gal (160,000 l) per minute; after the works were completed the maximum pumped out of the tunnel has been 9,000 imp gal (41,000 l) per minute. There were two pumping stations, Shore Road Pumping Station on the Birkenhead bank near Hamilton Square and Georges Dock Pumping Station on Mann Island on the Liverpool Bank. The Railway's Workshop was built next to Birkenhead Central; stabling was also provided at Birkenhead Park.