Early history—Purchase of coal lands—Funding of floating debt—Failure—Struggles between Gowen and his opponents—Reorganization—Second failure and reorganization.

The Philadelphia & Reading Railroad has been peculiarly unfortunate. Although serving a region of abundant traffic, it failed three times between 1880 and 1895, and was in the hands of receivers ten years. It was reorganized after each failure, and each reorganization was marked by bitter struggles between contending parties, due in part to divergence in financial interests, and in part to personal rivalries.

In 1833 the Philadelphia & Reading Railroad was chartered by the Legislature of Pennsylvania to build a road from Philadelphia to Reading, a distance of 58 miles. Its early history does not concern us. In 1862 it leased, owned, and operated 437.4 miles of track, equivalent, roughly, to 119.4 miles of line; and derived $2,879,419 out of its gross earnings of $3,911,830 from the carriage of coal. Its capitalization was extremely high, roughly, $193,417 per mile of line,155 and the necessary payments each year, not including dividends, took up $1,454,635. At this time the road owned no coal lands, but, like the Lehigh Valley Railroad and the Schuylkill Canal, remained a common carrier, and relied upon the advantages of its position in respect to the Southern coal fields to secure the tonnage which it required.

From 1862 to 1865 inclusive the Reading enjoyed a period of extreme prosperity. The Navy Department, during the war, required large quantities of fuel, and in the revival of business after the conclusion of peace the Reading took its part. Merchandise earnings increased from $523,416 in 1862 to $1,165,277 in 1865; coal earnings from $2,879,419 to $8,627,292; and though expenses also increased, yet net earnings grew from $2,375,247 to $5,236,655, and the balance of earnings, after all charges had been paid, from $920,612 to $2,632,566. Dividends meanwhile ranged from 14 per cent on the preferred stock in 1862 to 10 per cent on both preferred and common in 1866, though the majority of the distributions were made in stock. On the whole, during the Civil War and for a whole year afterwards, the Reading was able to carry without difficulty the burden of an enormous capitalization. What increase in capital occurred at this time was in stock, and did not add to the load, although the desire to pay dividends on the increased stock led to the piling up of new issues.

In 1869 an entirely new departure in Reading policy occurred. Whereas the road had previously owned no coal lands, with the advent of Mr. F.B. Gowen to the presidency it began to purchase on an enormous scale. “The repeated and serious interruptions of the business of the company,” said the annual report for 1871, “caused by strikers in the coal regions during the last few years, and the many fluctuations in the coal trade, produced by alternate periods of expansion and depression resulting therefrom, have attracted the attention of the managers of the company to the necessity of exercising some control over the production of coal, so as to prevent a recurrence of the difficulties heretofore experienced; and it was believed that the best way to accomplish this result, without injuriously affecting individual interests, was for the company to become the owner of coal lands situate upon the line of its several branches.”156 Further, it was felt that some steps were necessary to retain for the Reading even the coal tonnage which it enjoyed. In 1871 every rival carrier had invested large sums in coal properties, and all the fields but the Schuylkill and Mahanoy (western middle) were occupied, while carriers had begun to enter the Mahanoy district, and it was reported to be their intention to build lines straight through to the Schuylkill fields.

The anthracite coal regions of Pennsylvania lie in four main districts: the Northern or Wyoming; the Southern or Schuylkill; and two smaller intermediate fields known respectively as the Eastern Middle or Lehigh region and the Western Middle or Mahanoy and Shamokin basins. The Northern field is the more easily worked, and the Southern field is the richer.157 Between 1869 and 1881 the Reading Railroad and its alter ego, the Coal & Iron Company, formed for the purpose, spent $73,326,668 for lands in the Schuylkill and Western Middle districts, securing 142 square miles, or 60 per cent of all the anthracite lands of these districts, and 30 per cent of all in Pennsylvania. Of the purchase money $69,816,204 were supplied either by the Railroad Company or by sale of Coal & Iron Company bonds which the Railroad Company guaranteed. The Coal & Iron Company incurred non-guaranteed liabilities for the rest.158 This gave ample resources for the permanent supply of coal tonnage to the railroad, and was sufficient also to give a considerable measure of control over production in the Southern district. Independent operators did continue, however, and the Reading coal was subject to the competition of coal from other fields. More important still, in attaining control, “all kinds of coal properties, good, bad, and indifferent, were purchased without regard to original cost, location, or revenue producing capacity.”159 In 1880 an engineer of reputation was appointed to evaluate the Reading coal lands, and recommended the surrender of five properties that originally cost $5,207,167, upon which there were encumbrances of $5,015,000. “But little weight,” said he, “should be given to the fear that rivals will possess the surrendered property; most of it is not a tempting investment.” Exorbitant prices were paid for the lands purchased. By 1881, as noted, there had been expended in all by the two Reading companies $73,326,668. This same report said that, “assuming the profit on the future coal product to be 30 cents per ton of coal shipped, that the company will be able to reduce the rate of interest on the money needed to hold and develop the property from 7 per cent to 6 per cent per annum, and that the development will be at the rate just stated [outlined earlier in the report], the whole estate has a value of $32,394,799: the company’s interest in the estate is worth $30,630,648, and, including colliery improvements belonging to the company, but situate on lands owned by others, the whole of the company’s property is worth $31,197,484.”160

It is unquestionable that the Reading did acquire an enormously valuable property in the decade succeeding 1870. It seems just as clear that it paid more for this than was necessary; but what is perhaps more to the point is the fact that the Reading paid more than it could afford. Whatever the ultimate advantages to be gained by exclusive possession of any considerable section of the coal fields, the Reading was not large enough nor financially strong enough to make such vast purchases within so short a space of time. The prosperity of the Civil War had disappeared, net profits were fluctuating without marked tendency to increase, the figures for 1870 being actually less than those of 1863, while the interest on bonds had more than doubled since 1867, and the sum required for dividends had increased. To advance $54,886,647 to the Coal & Iron Company under these conditions, and to become responsible as guarantor for $14,929,557 more, would have been ill-advised even had the prices paid by the company been in strict accord with the commercial estimate of the time. Under the best of circumstances returns from much of the property acquired could not be secured for many years. The parts of the coal fields which were worked yielded an income, though it was seldom that the collieries were allowed to run to their full capacity; but those districts which were bought for the sake of controlling the coal situation, or in order to secure a future reserve, and which in many cases could not be worked at existing prices, occasioned a drain upon the company to the amount of interest on the purchase money, with no return of any kind. Moreover, the purchase of the coal lands put the Reading in the anomalous position of a railroad corporation interested in industrial lines. It could no longer be content with encouraging the transportation of its main source of revenue (coal), but had to care as well for the price at which this coal was sold. When depression in the coal trade came, the Reading lost both as producer and as carrier, for less was transported, and that amount was sold at a lower price; but when good times came, from which as a simple carrier it might have profited largely, it struggled with conditions of over-production which should rightly have been none of its concern. There was, finally, a peculiar fatality in the time which the Reading chose for its expansion. The year 1873 will always be remembered as one of the most disastrous in the history of the United States. Commencing with the failure of Messrs. Jay Cooke & Co. on the 18th of September, the panic spread with such rapidity as to lead to the closing of the New York Stock Exchange on September 30. All railroad securities were exceedingly depressed, call loans were high, and it was nearly impossible to secure new capital. Business the next five years was very dull, and the Reading actually earned less gross in 1879 than in the year before the panic, and this at the very time that its liabilities were so largely extended. The natural result was the financial difficulty which can be detected as early as 1876. In June it appears that, owing “to the continued depression in the iron and coal trades and the consequent falling off in transportation,” the road was obliged to reduce its working force. In July the usual dividend was passed; salaries were lowered in September, and still later a temporary loan was secured to tide over the floating debt, which then amounted to $8,272,359. By the next year the matter had become serious enough to necessitate a formal proposition to creditors for the postponement of interest payments and of payments on the floating debt. The company professed itself able to carry out the following:

(a) To pay the interest on prior liens in full.

(b) To pay one-half the interest on the general mortgage bonds and on the Perkiomen sterling mortgage bonds for three years in cash, and one-half in five-year interest-bearing scrip, with the option to the holder of receiving instead scrip for the three coupons first maturing and cash for the rest.

(c) To pay for five years in scrip the interest on the debenture bonds of both the Railroad and Coal & Iron Companies; the convertible bonds of the Railroad Company, the bonds due in 1885, 1902, and 1918 of the Tidewater & Susquehanna Canal Company, and so much of the rent due to the Schuylkill Navigation Company as was applicable to the payment of dividends to stockholders of the Company and to the interest upon its mortgage loan of 1895.

(d) To suspend the drawings for the payments of sinking funds and of the improvement and general mortgage bonds for a period not exceeding four years, if so long a time should be required for the payment of the floating debt.161

“The relief to be obtained from the above,” said President Gowen, “will undoubtedly enable the managers, even with no improvement in traffic or increase of rates, to meet the fixed charges on all obligations of both companies other than those above named, and to pay off the entire floating debt within such time as will be satisfactory to the holders thereof.” Certain modifications were suggested by the London securityholders, providing for trustees with some power to protect the creditors,162 and the plan went quietly into effect.

From now on matters went from bad to worse. The year 1878 showed a falling off in almost every source of revenue, while expenses and charges remained very nearly the same. Depression in the coal trade and connection with the Coal & Iron Company, general dulness of business after 1873, troubles with employees, over-capitalization, all had their share in pushing the company still further into the mire. It became unable to keep its share of the existing business, and the percentages of the Schuylkill output carried by it steadily decreased from 83.49 in 1877 to 75.45 in 1881, while its percentage of the aggregate output from all the anthracite region diminished from 32.82 to 24.44. “It appears, therefore,” said the annual report for 1881, “that while other companies have steadily increased their capacity of production by regular and judicious expenditures for new openings, breakers, machinery, and other facilities for mining and delivering coal, the Reading Company has apparently remained stationary.... For this policy the local officers in charge are not probably responsible, as it was undoubtedly forced upon them by the management, because of the impoverished and embarrassed condition of the company’s finances.”163

Throughout 1879 there was trouble over the payment of wages, perhaps as good a sign of financial difficulty as can be desired. Employees were paid in scrip, not cash, and even scrip wages were left overdue. President Gowen went to Europe toward the middle of the year, but not at all, as he carefully explained, in order to place a new loan, or to transact any business except a little in relation to some railroads for the company; in fact, the condition of the Reading was an open secret, and new loans were impossible to obtain. In May, 1880, the New York and Philadelphia banks began to refuse further accommodations. At the same time the period during which, according to the agreement of 1877, cash payment of general mortgage coupons was suspended, drew to a close, and on May 21 the Philadelphia & Reading announced its inability to meet its obligations. As was said at the time, the company did not fall with a crash because it had not far to fall.

The failure occurred on May 21, and on May 24 Messrs. F.B. Gowen (president of the company), Edwin A. Lewis, and Stephen A. Caldwell were appointed receivers. Their resources were scanty and they had to do with them as best they could. On the one hand they applied to the court for authority to borrow $1,000,000 to pay the wages of employees and interest falling due July 1, and on the other they cut down expenses by reducing the working force in the repair shops, by putting the shops on short time, by discontinuing many of the trains on different lines, and by ceasing all dead work at the collieries.

Before any plan could be proposed for the rehabilitation of the company the condition of its finances had to be known, and this again the receivers took in charge. Their report in June, 1880, showed a sufficiently serious state of affairs. The floating debt of the Railroad Company had mounted up to $10,254,766, besides $1,900,482 more for the Coal & Iron Company. This represented an increase of $3,604,000 as compared with November 30, 1879, and an English bondholders’ committee declared that only $2,930,000 of it were represented by value.164 The rest had apparently been incurred in desperate attempts to preserve the solvency of the company. The total liabilities of the Railroad and Coal & Iron Companies, including mortgage, debenture debt, floating debt, and miscellaneous items, but excluding stock, were $152,436,890. The deduction from these figures of the Coal & Iron bonds held by the Railroad Company, which would have constituted a duplication of indebtedness, left a total of $106,215,830.

The stock of the two companies amounted to $42,278,175, and the stock in the hands of the public to $39,278,175. The grand total of liabilities was thus the enormous sum of $145,494,005. The charges for interest and sinking funds were $7,542,094, and the annual payment of $5,629,764, due on $87,558,482 of railroad bonded indebtedness, shows that the rate of interest upon the bonds was high. The net revenue was $5,494,979, and there was therefore a deficit of $2,047,115. Meanwhile the Coal & Iron Company had reported a regular deficit up to 1880, which, though not significant in itself, because of close relations with the Railroad Company and the impossibility of determining how much the Coal Company’s rightful profits were reduced by exorbitant transportation rates, yet made it very clear that from this source the Railroad Company could expect no aid toward the cancellation of the railroad deficit revealed.

The combined companies were unable to earn their fixed charges: the continuation of the struggle to do so was sure to mean, as it had in the past, merely a piling up of the floating debt. The coupon-funding scheme of 1877 had shown the inevitable result of temporary measures of relief; and though business in 1880 was rapidly improving, there was need for a radical reduction in the burden resting upon the company. Pending action, a bill for foreclosure was introduced under the general mortgage of 1874.165 A valuation of the Reading coal properties, to which reference has already been made, was started. It was entrusted at first to Mr. S.B. Whitney, chief engineer of the Coal & Iron Company, and to Mr. Frank Carver, the land agent; but was later given over to Mr. Joseph S. Harris, chief engineer of the Lehigh Coal & Navigation Company, in order to have the opinion of an unprejudiced expert.166

The first suggestion for a plan of reorganization came from England. The consolidated mortgage, prior to the general mortgage, was to be foreclosed; general mortgage bonds were to be deprived of their right to sue or to foreclose; all unsecured bonds and junior mortgages were to be exchanged for preferred stock; and a $15 assessment was to be levied upon the stock, for which collateral trust 7 per cent bonds were to be given. This assessment was relied on to pay off the floating debt, and the new company was to start free, with but $33,564,000 of mortgage indebtedness.167

This plan was a step in the right direction. It recognized the validity of prior liens, followed a sound principle in providing for the floating debt by assessments upon the stock, and relieved the company from the likelihood of a future failure by its treatment of the general mortgage bonds; but it was weak in that it reduced the general mortgage to the anomalous position of a bond entitled to a fixed return without the power to enforce it. Stockholders, moreover, objected strenuously to the assessment, maintaining that business conditions were now such as to make milder measures sufficient.

In October, 1880, Mr. J.W. Jones, formerly vice-president of the Reading Company, urged that an assessment on the stock was not necessary, and proposed the following:

(1) To convert the income, debenture, and convertible bonds and scrip into second preferred stock bearing 5 per cent interest if earned;

(2) To issue $15,000,000 of first preferred stock, with which to retire the floating debt;

(3) To scale the Coal Company mortgage bonds $200,000 per annum, which could possibly be done by consent of holders, if not, then by foreclosure.168

The main difference between this and the English scheme lay in the treatment of the floating debt. It is improbable, however, that the substitute which this plan offered would have been sufficient, and that the preferred stock could have brought $66, at which price alone it would have covered the floating debt. Reading common stock was selling in the middle of the month at 16?; general mortgage 6s were bringing only 74¼, while debentures and convertible 7s were being quoted at 28 and 37 respectively.

In October a representative of the English bondholders arrived in Philadelphia for the purpose of examining into the condition of the company, and the following month agreed with the board of managers upon a reorganization committee to act in the United States. “The probabilities are,” said this gentleman (Mr. Thomas Wilde Powell), “that it will be found that the bondholders in London will be willing to do as they did in the case of the Erie, that is, fund a reasonable number of coupons ... for the purpose of setting at liberty a portion of the revenue to pay unfunded claims.”169 The next move in the reorganization of the company came, however, not from this committee but from President Gowen, the man who had led the Reading into the purchase of coal lands, and who still remained in office in spite of the hostility shown toward him. His scheme comprised two parts: the first an issue of income bonds with which to pay off the floating debt (together with $5,000,000 mortgage bonds); the second a grand general mortgage to retire existing indebtedness. The plan in more detail was as follows:

(1) The company was to create $34,300,000 deferred income bonds, on which interest was to be deferred to a dividend of 6 per cent on the common stock. After this amount had been paid the bonds were to take all revenue up to 6 per cent and were then to rank pari passu with the common shares for further dividends. The debentures were to be issued at 30 per cent of their par value, or $15 per bond; and before selling or disposing of said bonds in the market the option of taking a pro rata share was to be first offered to the stockholders of the company.170

(2) A more permanent relief for the company was to be obtained from the proposal to issue a new long time or perpetual 5 per cent funding mortgage of $150,000,000, divided into two classes, A and B, of $75,000,000 each: class A having priority of lien and interest charge over class B. With this issue it was proposed, by purchase or exchange, to retire all outstanding indebtedness, and to acquire by purchase the securities of the companies owning the leased lines. It was estimated that $140,000,000 of the new issue would provide for all of this, the total interest on which would be $7,000,000, as against fixed charges for interest, sinking funds, and rentals, of $10,657,116, making an annual saving of $3,657,116.171 Mr. Gowen did not expect to secure so large an annual reduction, owing to the impossibility of purchasing the higher securities and the probable appreciation in value of the lower ones; but he did expect to realize in all a saving of some $2,700,000.

In part this plan was commendable; in part it was inadequate, and in part it relied on a mere juggling with words. The proposal to unify all classes of indebtedness by a grand consolidated 5 per cent mortgage was a good one, both in the simplification of accounts which was to be expected, and in the reduction in fixed charges so far as this reduction went; but on the one hand a reduction of $2,700,000 in charges was too little for a company which had reported for that very year a deficit of $2,000,000, and on the other hand too little allowance was made for the difficulty of forcing securityholders without a foreclosure sale to submit to a definitive scaling down of their holdings, with not even a preferred stock to show for the sacrifice. In its handling of the floating debt, the plan was a second edition of Mr. Jones’s stock-selling scheme, with all the good points left out. What justification there could have been for calling securities, such as the deferred incomes, “bonds,” which were to be issued for no definite time, ranked even after the common stock for dividends, and were of such doubtful character that Mr. Gowen himself proposed to sell them for one-third of their face value, does not appear; unless it be that the lack of voting power, itself a disadvantage, entitled them to the more respected name. The deferred income bonds were a device for saddling the holders of the unsecured debt with a worthless certificate which they might be induced to accept because of its name, and to which not even the Reading stockholders could object. Furthermore, even if the creditors had been eager for this new issue, in itself it would not have been sufficient. The issue, if taken up, would have yielded $10,200,000. It was proposed besides to sell $5,000,000 of unissued general mortgage bonds, which, after the success of the deferred income bonds, it was presumed would sell at par. Income bonds and general mortgage together promised a total of $15,200,000, or more than $1,000,000 over cash requirements after commissions had been paid.172

However poor the prospect, there was no lack of syndicate guarantee. In November, 1880, a London syndicate agreed to deposit with an American bank, to be named by the company, the sum of $2,058,000, to be forfeited in case they failed to take at the issue price all deferred income bonds not taken by the shareholders. This syndicate further agreed that the company might retain, up to $1,000,000, out of the deposit money, whatever might be necessary to make up a second instalment of $4 on such neglected bonds.173 Nothing was asked from the company in return except the chance to sell the bonds purchased at a premium. “As long as the bond- and shareholders find the money,” remarked the London Times, “there is nothing to be said. In all probability, however, these deferred bonds will become a medium for the very worst kind of gambling, and their chances for a dividend appear to us to be very small.”174

In December Mr. Gowen’s plan received the approval of the American committee and of the board of managers of the company. Bondholders were in no way injured by the worthlessness of the deferred income bonds, and only the most far-sighted could be expected to have demanded a larger reduction in their claims. The same month a meeting of London bond- and shareholders passed unanimously a resolution expressing confidence in President Gowen, and adopting his scheme.175 Opposition came from the influential London banking firm of McCalmont Bros., and the struggle centred about the annual election set for January 10, 1881. The last of November or first of December President Gowen issued a circular in which he said: “As I am about to visit Europe on business of the company, and as it is possible that I may not return until the first week in January, I think it proper to call your attention to the fact that it is highly important that all shareholders who can possibly do so should attend the annual meeting in Philadelphia on the second Monday in January. An effort will undoubtedly be made at the next election to control the management of the company in the interest of rival lines, and if the effort is successful the future of the Philadelphia & Reading Railroad Company will be little, if any, better than that of the Philadelphia & Erie Railroad Company, or of the Northern Central Railroad Company.”176 In Europe, or, more strictly speaking, in London, Gowen busied himself in placing his deferred income bonds, with apparently a very considerable measure of success. As to the result of the coming election he professed absolute confidence. It made little difference, said he, which way the McCalmonts decided to vote their shares. He could be elected without any English votes at all, and with the backing of the English bondholders who had resolved to support him, the matter was not at all in doubt.177 On January 4, six days before the date set for the election, Gowen actually issued a prospectus for his new income and mortgage loans, and cabled to Vice-President Keim that he was satisfied that he could dispose of the general mortgage A bonds at 110 and the general mortgage B bonds at par.178

Meanwhile in America both parties had recourse to the courts: the McCalmonts, to prevent the issue of the deferred income bonds, and the friends of Mr. Gowen to get the election postponed in order to give the president time to return from Europe. The latter suit was the first decided. Judge McKennan, of the United States Circuit Court, refused to grant an order, but unofficially advised postponement. The board of managers therefore withdrew the notice of the annual meeting, and on January 12 voted to postpone it indefinitely. Counsel for the McCalmonts then made application to the Court of Common Pleas in Philadelphia for a mandamus to compel the board to call a meeting. They obtained a peremptory mandamus on January 24, but accepted the date of March 14 as satisfactory, and forbore further proceedings.

The matter of the deferred income bonds was complicated by a full and complete authorization which Mr. Gowen had before obtained from the Circuit Court for the issue of his bonds. The request of the McCalmonts was twofold: the court was prayed to revoke the previous decree, and to enjoin any further action in the negotiation or consummation of the said scheme; or, failing this, to direct the officers of the company and the receivers to refrain from the issue of the bonds until the form thereof should have been settled by the said court, and also until deposit with the receivers should have been made of the $2,058,000 provided as a guarantee.179 The first request sought a prohibition of the issue; the second attempted to delay the negotiation of the bonds until the annual election should have passed and the McCalmonts should have had a chance to obtain control. The immediate result was the transference to Philadelphia of the $2,058,000 guaranteed, from its place of deposit in London. In February the McCalmonts obtained a revocation of the original grant of authority for the deferred income bonds, a continuance of the suit for a preliminary injunction, and an order restraining the respondents from “making any agreement or ordering any act by which the Philadelphia & Reading Railroad Company [might] be definitely bound touching the deferred bond plan or the proposed mortgage loan of $150,000,000.”180

In January the Coal & Iron Company quietly held its annual election, and chose Mr. Gowen president. As the time for the postponed election of the Railroad Company came round, the activity of both sides became intense. Both Gowen, who was still in London, and the McCalmonts issued calls for proxies. The former appealed to the shareholders to save the property from passing into the hands of the Pennsylvania Central Railroad Company, which he said was believed to be the ruling power behind the McCalmont litigation. The latter objected vigorously to this charge, and pointed out that the Reading managers held only 16,500 shares of the company’s stock, and that some of them had barely enough to qualify them for the positions which they held.181 The McCalmonts, furthermore, applied to the courts for an injunction to prevent Gowen from voting on the shares pledged as collateral for the floating debt. They maintained with some justification that these shares could not legally be voted, and that it was particularly illegal for the president to use them to elect himself.182

On March 12 the Court of Common Pleas issued a decree regulating the conditions under which the election should be held, providing for the separate count of votes of shares transferred three months before the election, and for the ultimate reference of all disputed points to the Court. By this time Mr. Gowen had become alarmed at the apparent strength of the McCalmonts, and had come to realize that a possible disenfranchisement of a part of his own holdings on the ground of too recent transference might lessen his chances of retaining control. He recalled, however, that the annual meeting had been postponed from January 10 to March 7, and finally to March 14. This, it occurred to him, might transform it from a regular to a special meeting, and might, according to the terms of the company’s charter, make necessary the presence and vote of a majority of all the shares outstanding, instead of a simple majority of all the shares on hand. If this should be true a disenfranchisement of his holdings would be of less importance; for whether disenfranchised or not, these would form part of the total shares outstanding, of which an absolute majority would be required.

On March 12, two days before the appointed date, Mr. Gowen issued a letter to the shareholders. “I hold,” said he, “up to the present time, the proxies of 1921 shareholders of the company, owning 359,500 shares of the capital stock, being very considerably more than a majority of all the shares.... Of the shares for which I hold proxies, so large a proportion, however, may possibly be disenfranchised by failure to register, that if the legal meeting of the stockholders is held on Monday next, and it should subsequently be determined by the Court that three months’ prior registry is essential to confer the right of voting, it may be possible that the wishes of the great majority of bona fide shareholders may be overruled by a minority.... I have determined to abstain from attending the meeting, and I earnestly request all shareholders who support the present management to absent themselves from the meeting on Monday, and thus to give legal effect to their wishes by making it impossible for the minority to secure the attendance of a quorum....”183

Mr. Gowen’s friends, English and American, followed his suggestion; and at the meeting on Monday but 211,095 out of 687,663 registered shares appeared to vote. The immediate result was the almost unanimous election of Mr. Bond, the candidate of the McCalmonts, which was followed by litigation on the part of Mr. Gowen, disputing the legality of the election. By the terms of the decree under which the election had been held, the matter came first before the Court of Common Pleas, which, on April 9, decided that the meeting had been a legal one, and that the officers then voted for by the McCalmonts had been duly elected. With the above court ranged against him, Mr. Gowen took appeal to the Supreme Court of the state, and meanwhile declined to surrender his position. On April 11 the new board proceeded to the Reading offices in Philadelphia, made formal demand for admittance, and were refused. On April 22 President Bond issued formal notice of his election. An injunction was asked against Mr. Gowen, but was held back until the Supreme Court should have taken action. Meanwhile the old board of managers announced that if a decree supporting the decision of the Court of Common Pleas should be rendered they would make no further opposition; and the transfer agents of the company in Philadelphia and New York refused to transfer any stock until the dispute should have been settled. On April 19 an order of the United States Court interfered with Mr. Gowen’s exclusive possession, and compelled him to furnish to Messrs. Frank S. Bond, etc., suitable accommodations in the offices of the Philadelphia & Reading Railroad Company, with free access to all books and papers. In May the Supreme Court rendered its decision, holding the meeting of March 14 to have been a regular meeting, and a majority of all the stock outstanding not to have been required for a quorum. Gowen asked for a rehearing, which was denied, and in June, nearly four months after the election, he grudgingly acknowledged Mr. Bond and his associates as the legally elected president and board of managers.

During all this time the deferred income bond scheme had not remained untouched. In April, 1881, on application of the McCalmonts, the United States Circuit Court at Philadelphia had granted a preliminary injunction against it. “Whatever power the defendant has in the premises can only be found in the general authority to borrow money,” said Judge McKennan, and went on to state that the issue did not constitute a loan, because a loan implied reimbursement, and the income bonds were redeemable at no special time.184 Mr. Gowen promptly proposed to make them redeemable, and insisted that this made them still more desirable. A week later the $150,000,000 general mortgage was also enjoined.185

Once out of the presidency Mr. Gowen endeavored to induce the McCalmonts to accept his plan. If they would adopt the deferred income bond scheme, he said in an address to shareholders, he would resign the receivership of the road at once, give bonds never to stand for the presidency again, and further coÖperate with them in selecting a new board of directors. As an alternative he offered to buy the McCalmont shares at $40 each, and threatened to beat that party at the next election if it refused.186 In September he assured the stockholders that he could without difficulty put the road upon its feet. “If Bond and his colleagues will resign and reinstate the old management,” he cabled from London, “and advise me by cable of the change, I can, before sailing on Saturday, procure sufficient advances against the proceeds of preferred [deferred?] income bonds and new 5 per cent consols to pay the floating debt, receivers’ certificates, and all arrears of interest.”187 Finally, appealing to Mr. Bond direct, Gowen made formal application that the new board should adopt his plan after changing the form of the proposed obligations by making them payable in 100 or 200 years.188 Bond refused. He pointed out that the deferred income bondholders would be in constant conflict with the management in their endeavor to secure dividends on their holdings, and would attempt to prevent proper and necessary expenditures upon the property from current net revenues. He declared that it was questionable whether the company had authority to sell its unsecured obligations below par, and that in any case the process would be enormously expensive; and, further, that the language of the obligation did not limit the payment of interest to the source of net revenue only, but might be construed to compel the declaration of 6 per cent on the income bonds whenever 6 per cent should be paid on the common stock.189 Failing in his attempts to win over his opponents, Gowen turned his energies toward securing their defeat.

Meanwhile President Bond brought forward a plan of his own. He had grasped three points of weakness in Gowen’s scheme, namely,—

(1) The issue of a mass of worthless obligations in the deferred income bonds;

(2) The high level of fixed charges which a $150,000,000 5 per cent mortgage entailed;

(3) The lack of any security which had a right to interest only when earned, and which might be given to the bondholders in return for sacrifices which they would otherwise refuse to make.

He proposed, therefore, to create a general consolidated mortgage to cover all the property of the Reading Railroad and Coal & Iron Companies, together with the interest of both companies in all other corporations and property, whether owned or controlled by lease or otherwise. This mortgage was to be junior to the consolidated and to the improvement mortgages only, but was to contain a provision by which, as bonds under these senior mortgages should be retired, additional bonds might be issued under the new mortgage, which was eventually to become a first lien upon all the properties of both companies.190 The total was to be $150,000,000, to be divided into two series: of which series A, for $90,000,000, was to run for fifty years, and was to have a prior lien over series B upon the revenues for interest at the rate of 4½ per cent, with a right to enforce foreclosure in case of a twelve months’ default; and series B was to run sixty years, and was to carry interest at 3 per cent, with a right to enforce foreclosure in case of a three years’ default. In prosperous years series B might receive more than 3 per cent: thus the mortgage provided that from current net revenue applicable to dividends it should get 1½ per cent additional interest before any dividend should be paid on the stock of the company; after that 3 per cent might be paid on the capital stock, and then 1½ per cent additional might be paid on series B; it being understood that the interest in excess of 3 per cent should not be cumulative, but was to be paid only from current net revenues of the company otherwise applicable to dividends. These two issues of unequal worth were to be used for different purposes. Series A was to be in part reserved to retire the senior obligations, and in part to be sold to pay off the general mortgage bonds, the general mortgage scrip, the income bonds, the floating debt of the Railroad and Coal & Iron Companies secured by collateral, the receivers’ obligations, and the mortgages on real estate that could be paid off. Series B was to be exchanged for the junior obligations, such as the debenture or convertible loans, or was to be held in reserve for subsequent acquisition of the guaranteed stock or obligations of affiliated corporations of the Railroad and Coal & Iron Companies.

What this meant for the immediate future was that all prior liens were to remain untouched, while everything from the general mortgage down was to be funded into the new obligations. In some ways this resembled the earlier scheme of Mr. Gowen, since in each case there was to be a $150,000,000 general mortgage in two parts, of which one part was to have priority over the other, and in each case this grand mortgage was to be used ultimately to retire all previously existing indebtedness. An innovation was now made, however, in the difference introduced between the two series. In Gowen’s scheme the amount of each series was to be the same, and each was to fare alike, except for the priority of series A; in that of President Bond, series A was to be half again as large as series B, and was to bear a higher rate of compulsory interest; although, a point of extreme importance, the return upon series B was to run from a minimum of 3 per cent to a maximum of 6 per cent whenever the road should earn it. Thus President Bond gained two things: he reduced the rate of interest which his new bonds could claim in any year from 5 per cent (as under Gowen’s scheme) to an average of something under 4 per cent, which would yet, in prosperous times, net them as much as the old bonds surrendered; and as a still further concession, he gave to the 3 per cent bonds a term of sixty instead of fifty years, raising their value to that extent. As the various existing issues of bonds had different market values, he thought it proper to equalize these values in the exchange by the grant of a bonus in stock, for which the capital stock of the company was to be increased one-third. Here were two of Gowen’s problems in a fair way of solution: the reduction of fixed charges was accomplished, while some incentive was given to the junior bondholders to assent. Scarcely less from the point of view of sound finance was the gain from the abandonment of the anomalous deferred income bond scheme, with its $34,300,000 of worthless speculative securities. Instead, the floating debt, under President Bond’s plan, was to be cared for by the sale of series A bonds, not at one-third their face value, but as near par as possible; by the best of the company’s new securities, in other words, and not by the worst. And, finally, the acquisition of the securities of subsidiary roads was provided for rather ingeniously by the conversion into series B bonds of $10,527,900 convertible 7 per cent bonds, against which had perforce been reserved an equal amount of stock. Conversion released the stock, which became a free asset available for any uses to which the company saw fit to apply it.

Yet while the advance which the plan of President Bond marks over that of President Gowen may be recognized, its defects must also be observed. It was, in the first place, in common with all other schemes suggested, too mild, too little drastic in its operations. The condition of the Reading companies was desperate in the extreme. By President Bond’s own figures the previous five years had shown a deficit of $11,479,217, or an average loss per annum of $2,295,853. The net earnings for 1881 by the same computation had been $8,418,009, and the fixed charges $11,265,666.191 What was needed was a radical scaling down of indebtedness, to take effect not in the far distant future but at once. President Gowen, face to face with a similar situation, had evolved a reduction in fixed charges from about $11,000,000 to about $7,000,000, but had explained that, owing to the impossibility of retiring all of the prior liens at once, the actual figures would be approximately $7,957,000. President Bond, less optimistic, or more honest, stated that the ultimate charge under his plan would be about $6,000,000; but that the immediate reduction would be to about $8,339,000 only, scarcely more than $100,000 below the net earnings of the current year. Both estimates would probably have been under the mark; but the relief which President Bond proposed was utterly inadequate even on his own showing. A margin of surplus earnings which could be wiped out in a single month was no answer to the demand for a restoration of the Reading companies to solvency. In regard to the floating debt, too, Bond’s plan left something to be desired, in that it provided for no assessment, but cared for the floating obligations by the sale of bonds. The danger in relying upon the sale of securities to supply the cash requirements of a bankrupt road has been mentioned in connection with Mr. Gowen’s scheme, as indeed at other times before. At best it is advisable only in prosperous times, and when the bonds offered are of high grade; and though the series A bonds might perhaps have been considered high grade, the prosperity of 1880 was not repeated in 1881, and a year of bankruptcy and litigation had not improved the Reading’s credit. That the plan failed, however, was due neither to its inadequacy nor to its method of dealing with the floating debt; but rather to the resolute and uncompromising opposition of Mr. Gowen and his friends, and to the determination of the junior securityholders to stand out for better terms. This twofold resistance caused a syndicate of bankers, which had been relied upon to place the new loan, ultimately to reject it, and the plan fell through.192

To return now to Mr. Gowen. This gentleman had been strengthening his following in every possible way, and had secured one ally of particular importance in the person of Mr. Vanderbilt, who in October, 1881, was reported to be buying largely of the company’s stock. Early in November Mr. Gowen and President Bond both issued addresses to the shareholders. The former maintained that although the present management had been in power for over four months it had done nothing to extricate the company from its difficulties, and promised that if elected he would “retain the office long enough to place the company in a good financial condition, by completing the issue of deferred income bonds and by issuing and selling the 5 per cent consolidated mortgage bonds, the result of which will be the resumption of dividends upon the company’s shares.”193 The business prospects of the company were never better, he continued, and the wisdom of the purchase of the great anthracite coal estate was being demonstrated. Bond, on the other hand, alluded to the failure of Mr. Gowen’s many promises, to the wasteful expenditure of money, to the coal speculations in which the road had been engaged, to the payment of unearned dividends, and to other points of Gowen’s policy, actual or alleged;194 and his statements were repeated by the McCalmonts in spite of Mr. Gowen’s vehement denials.195 The election was held from January 9 to January 14, 1882. There were cast 493,601 votes, of which Gowen received 270,984 and Bond 222,617; a result mainly due to the 72,000 Vanderbilt shares voted for Mr. Gowen. The same meeting approved by resolution Gowen’s financial plans, and called on the incoming board of managers to carry them into effect. To clear the way a test suit was brought in the Supreme Court of the state of Pennsylvania, and a close decision obtained favoring the issue.196 Counsel for the McCalmont Bros. petitioned in the Circuit Court for leave to withdraw their complaint, stating that the McCalmonts had disposed of almost all their holdings, and the Circuit Court vacated the injunction which it had previously granted.197

Gowen’s plan was now triumphantly brought forward, with the few alterations which time had suggested. There was to be as before a deferred income bond issue of $34,300,000, which was to retire the floating debt; the general mortgage was to be increased in amount from $150,000,000 to $160,000,000, but was still to be divided into two series, equal in amount, and differing in privileges only on the point of priority of lien; of which series A was ultimately to exchange for the senior, series B for the junior obligations of the company. $13,500,000 of the first series and $10,000,000 of the second series were to be put out at once, and $4,000,000 convertible adjustment scrip were to be issued to settle back coupons. Time had apparently made more modest Mr. Gowen’s estimate of the saving to be secured; for instead of not more than $7,000,000 as before, he now hoped for fixed charges of not more than $8,000,000; but with undaunted optimism he made up for this admission by glowing pictures of what the company in the future was going to earn. “Net earnings last year” (1881), said he, “were over $10,000,000—in 1882 they may be expected to reach $11,000,000, and they will before long be over $12,000,000. With net earnings of $12,000,000, and fixed charges of $8,000,000, there will remain a dividend fund of $4,000,000, equal to 6 per cent on the share capital, and 6 per cent upon the par, or 20 per cent upon the issue price, of the deferred income bonds. “In order to get the property out of the hands of the receivers an earnest effort was made to sell the $13,500,000 series A bonds of which mention has been made, but at the minimum price of 98 subscriptions for but $723,500 were received, and the company was obliged to have recourse to the $5,000,000 unissued general mortgage 7 per cent bonds, which it fortunately had at its disposal. Even before this the management had been forced to abandon any immediate attempt to retire the old general mortgage bonds,198 and had been compelled to answer inquiries as to the reasons for a decline in the price of the deferred income bonds. On February 28 the receivers of the Railroad and Coal & Iron Companies formally surrendered the control of the property to the officers of those corporations.

One of the first acts of the reconstructed company was the lease for 999 years of the Central Railroad of New Jersey. This road in many ways formed a natural complement to the Reading system. Like it, it was a coal road, carrying something less than half as great a tonnage as the Reading itself, and owning extensive coal lands in the Wyoming region; while in location it supplied the necessary connection between the Reading lines and New York. At a later date Mr. Joseph S. Harris testified that all the business of the Reading coming from the South or Southwest went to New York over the Central; while, on the other hand, business from the Northwest was carried by the Jersey Central from Scranton, where its lines began, to Bethlehem, and was there handed to the Reading for transportation to Philadelphia.199 The advantages of the Central to the Reading were thus enumerated by General Traffic Manager Bell in 1885: “The joint traffic with the Central Railroad, outside of coal, and outside of passengers, adds $1,500,000 to the revenue of the old Reading system. By means of the Lehigh & Susquehanna division of the Central Road we extend from Phillipsburg to Scranton or Green Ridge through the entire Lehigh Valley; that system feeds our North Pennsylvania line; it is our connection for the Catawissa system by way of Tamanend and Tamaqua; it is the connecting link in the cross line or Allentown system; it creates the shortest line from interior Pennsylvania, and from Northwest Pennsylvania to New York waters. Through the operations of the lease we reach the largest slate territory in Pennsylvania, and the largest iron producing furnaces anywhere in this country, with the exception of Pittsburg.”200 In 1883 the Central was bankrupt with no immediate prospect of recovering from its difficulties, and had therefore an incentive to accept any arrangement by which interest on its obligations should be paid; while Mr. Gowen, with misplaced confidence in his scheme of reorganization, was ready to put fresh burdens on his road in the hope of future gain.

Rumors of a lease were abroad in 1882, and after the termination of the Reading receivership the operation was pushed to a speedy conclusion. The Reading undertook to assume all the obligations of the Central, and to pay 6 per cent on its capital stock then outstanding, as well as $18,000 annually for maintaining the corporate organization of the lessor. In case any of the Central bonds should be retired, or rentals or interest reduced, the rental to be paid by the Reading was likewise to be reduced. The roadbed and rolling stock of the Central was to be maintained undiminished, but if the Reading should make any additions or improvements, or if from its own funds it should pay off any of the Central’s obligations, it was to receive equivalent bonds with interest not exceeding 6 per cent from the Central Company. The lease was terminable on 60 days’ notice in case the lessee should fail at any time to carry out its provisions.201 This involved something more than a nominal obligation. The net earnings of the Jersey Central in 1882 had been $5,091,072, while the sum due for rentals, interest, 6 per cent dividends, etc., had mounted up to $5,898,087, not including payments on car trusts or certain contingent obligations. Broadly speaking, the Reading proposed to guarantee 6 per cent on the stock of a road which had failed because unable to meet its fixed charges; and however great the ultimate advantages, it is apparent that the prospect of a drain upon the Reading Company was real. In order to get the road out of receivers’ hands, the Reading had further to take care of a floating debt of $2,062,000, and to compromise with certain creditors by settling back interest on their bonds. This was done, and on May 29, 1883, possession formally passed over. The same day was concluded another arrangement, whereby the Central of New Jersey leased the coal and railroad companies comprised in the Lehigh Coal & Navigation Company for one-third of their gross receipts, and the Philadelphia & Reading Railroad became liable for the faithful execution of the contract. The Reading agreed that the Lehigh coal lands should be developed pari passu with its own, so that the product of the two estates should be constantly as 28 to 72 until the Lehigh production should reach 3,000,000 tons. The rental of the road was not in any year to be less than $1,414,400, nor more than a sum rising from $1,728,700 before 1887 to $1,885,800 from 1887 to 1892, and $2,043,000 after 1892, plus certain minor payments; and there was provision for arbitration of any disputes which might arise.202

The year 1883 now seemed to find the Reading imbued with new life. Earnings increased, both gross and net, fixed charges as reported rose less rapidly, and the net profits for the year, or balance on all operations, showed a threefold increase. “The company,” said Mr. Gowen, “has now surmounted the difficulties of the last four eventful years.”203 The annual meeting in January was a genuine love-feast, marked by the presentation of resolutions highly flattering to Mr. Gowen. “We trust,” said one, “we thankfully appreciate your herculean efforts in our behalf, in the face of unparalleled difficulties and obstacles, in rescuing our property from bankruptcy against the malignant and determined efforts of its enemies and conspirators to foreclose and wreck it.” “As citizens of this great commonwealth,” said another, “we beg to add our gratitude and admiration for your untiring, brave, honest, and able devotion, which has preserved the Philadelphia & Reading Company intact, and has fairly started it on a broader career of usefulness.”204 Not less extraordinary was the further action of this harmonious meeting. In the first place, it authorized the creation of a collateral trust loan of $12,000,000 for the purpose of paying the floating debt, the balance due upon the purchase of Central Railroad Company of New Jersey stock, and the retirement of the outstanding income mortgage bonds. What, may be inquired, had become of the deferred income bonds of which Mr. Gowen had been so proud, and the $5,000,000 additional first series consols which with them were to cover the floating debt, if a new collateral loan was needed for the purpose for which they had been considered ample? As for the purchase of Jersey Central shares, an account would require a chapter in itself. The intent had been to secure more complete control of this subsidiary road. The purchase had been made on margin in May. By January, 1884, more funds were necessary to carry the stock; and as the business depression grew acute, the Reading was obliged to seek a time loan from Mr. Vanderbilt, and to pledge the purchased securities as collateral therefor. When the loan matured Reading was no better off than it had been before, and Vanderbilt, who seldom mixed philanthropy with business, sold the stock. The original purchase had been at 78; the prices obtained when the stock was thrown on the market ranged from 57 to 50, and the Reading lost the difference, besides those advantages which it had expected to gain.

In the second place, the meeting proposed a dividend of 21 per cent on the preferred stock, representing arrears due, and of 3 per cent on the common; both cash, and to be paid in case the collateral loan should succeed.205 In order to give shareholders time to consider, an adjournment was taken for two weeks, after which the dividend on the preferred stock was approved, though that on the common was not. It seems almost superfluous to insist upon the folly of this dividend. The Reading had not, in reality, “surmounted the difficulties of the last four eventful years.” Scarcely any of the benefits promised by Mr. Gowen’s plan of reorganization had been secured; fixed charges had not been reduced, because it had been found impossible to get creditors to take new securities in exchange for the old, and equally impossible to sell any considerable amount of the new securities for cash. While old charges had remained unabated, new charges had been added through the lease of the Jersey Central, new car trusts, and the like, and the very gain in earnings which might have been construed as favorable was due to increased mileage, and was not proportional to the growth of the system.206 A fitting sequel to Mr. Gowen’s words and acts was the scrip payment for labor and supplies which took place in May, 1884, and the accompanying fall in the prices of the company’s securities. On June 2 the company again passed into receivers’ hands. The same judges were applied to as in 1880, and the same receivers were appointed, except that Mr. Gowen, who had given up the presidency of the company, was replaced by Mr. George de Keim, his successor.207

The various creditors had now to do what should have been done before, and, by lightening the charges upon the road, to put it in a position where its solvency could be maintained. The chances for obtaining radical action from the bondholders were somewhat brighter, since even the most obstinate were being forced to realize that no halfway measures would avail; and a reasonable solution was even thus early hinted at in the suggestion that some of the bonds under which the road was staggering should be replaced by stock. Nevertheless, we shall find in this reorganization a slow working out of the requirements for a plan, and a slow process of at least partial reconcilement to the inevitable.

The receivers’ report was issued in October, but contained little not known or suspected before. From November 30, 1883, to June 2, 1884, there had been a net loss in operation for the Railroad Company of $2,322,282, and for the Coal & Iron Company of $1,049,702, showing conclusively the condition of the companies. The total bonded indebtedness was $94,613,042; a total to be compared with the $78,101,894 of four years previous. The total floating debt was $16,549,968 as compared with $10,254,766 at the beginning of the previous receivership. Including the Central of New Jersey, the total fixed charges for the Railroad and Coal & Iron Companies were $18,241,051; a sum which certain offsets, however, reduced to $16,584,732.208

The first suggestion for a reorganization came from a committee primarily representing the general mortgage bondholders, though including other interests as well. The chairman was Mr. Townsend Whelen, and the committee may be taken to represent the views of the management. “The present fixed charges of the company,” said Mr. Whelen, “are in round numbers $16,650,000, while the earnings of the past fiscal year are, in round numbers and after proper deductions, $12,900,000. The objects sought to be accomplished by the committee are:

“(1) To reduce fixed charges to the limit of last year’s earnings;

“(2) To preserve the proper order of priorities of each class of securities, so that no income applicable to any senior security that remains unpaid can by any possibility be diverted to paying the interest on a junior security;

“(3) To provide a method of paying the floating debt.”

The plan was, roughly, to leave the prior liens untouched, to fund one-half the coupons upon the general mortgage for three years, and to convert all of the other obligations into income bonds. Preferred stock was to be changed from cumulative to non-cumulative; rents of leased lines, including the Central of New Jersey, were to be reduced to the amounts which the properties had earned; the canal leases were to be reduced; the interest on some of the divisional coal land mortgages was to be reduced, and on some was to be paid in full. In regard to the floating debt the committee decided to postpone any attempt to raise money for its extinction. If the bondholders should accept the scaling down of their indebtedness, the company might have no difficulty in procuring cash by a collateral loan; if this should prove impossible, the duty of providing funds would devolve upon the junior securities.209 The committee found it impossible to prepare within the short time at their disposal a complete plan of reorganization with exact figures of present and proposed fixed charges; and it is therefore impossible to ascertain how great was the saving which they expected to secure.

The plan marks sufficiently well the advance which had been made since the reorganization of 1880–3. The best that could then be imagined had been the creation of a grand general mortgage for which the old bondholders might, but mostly did not, exchange their holdings; while now the very first suggestion endeavored to retain for all bondholders a chance for the same return as before, and found the salvation of the company in the transformance of certain bonds from mortgage to debenture obligations. The general criticisms which may be made are three: first, that it was unwise to defer all provision for the floating debt; second, that the new income bonds might better have been replaced by stock; and third, that the probable reduction in fixed charges would have been insufficient. So far as the committee suggested any action in relation to the floating debt, it favored a funding of it. This funding might have been either into mortgage or into income bonds: if the former, the fixed charges of the company would have been increased, or else the other mortgage bondholders would have been compelled to accept a lower rate of interest; if the latter, the volume of securities of slight value would have been increased, or the junior securities would have had to take less for their holdings. The action taken would have gone far to determine what classes of securities would assent, while in the absence of definite declaration it was on the whole likely that all classes would hold off. As for the income bonds, it is in general true that they are an unsatisfactory sort of security, and likely to hinder the legitimate increase of capital. Most important was the question of fixed charges. It will be remembered that of the first and second series 5s of the previous reorganization only $23,500,000 had been intended for immediate sale, and that of these but a portion had been disposed of; and yet these consols were the only securities the nature of which was really changed by the Whelen plan. Interest had been optional before on the income bonds, the convertible bonds, the convertible adjustment scrip, debenture and deferred income bonds; interest was not made optional on the general mortgage or prior liens. The result would not have been, in spite of the reduction in rents and the scaling of the divisional coal mortgages, any sufficient lessening of the fixed requirements. This fact was, moreover, perceived. The board of managers, to whom the scheme was reported, concluded a favorable opinion with the declaration, “to conclude, we are satisfied that the large economies already in operation, with those which are still being introduced, should be regarded as a margin to meet adverse contingencies.... That the revenue we reckon on, though reasonably certain under such reorganization, will surely not be realized in case the property should be torn asunder by foreclosure sale.”210 In other words they relied, much as Mr. Gowen had done two years before, on a subsequent increase in earnings to ensure the solvency of the company. A final objection made at the time was that the plan asked too little of the junior securities.

The Whelen plan was reported to the general managers’ committee, and was approved by them. Some slight modifications were made, and a large number of signatures was secured. Opposition was not slow to spring up. In February a meeting of general mortgage bondholders elected a committee, known as the Bartol Committee, to prepare a plan more suited to their interests. This body conferred with the Whelen Committee, and two members from each were selected to construct a new reorganization plan.211 In March it reported to its constituents that it had made all the concessions which were possible without sacrificing the interests of the general mortgage bondholders, and that in spite of this, the negotiations had not proved successful.212

In April, ten months after the beginning of the receivership, the Reading managers evolved a plan for dealing with the floating debt. Holders were to agree to accept renewals at intervals of three months for three years, with interest at the rate of 6 per cent, paid at the time of each renewal, and to hold the collateral pledged as security until the whole of the debt should have been discharged. In case the Philadelphia & Reading should fail at any time punctually to pay the interest on any of the obligations agreed to be renewed, or should fail to cause the same to be renewed, or in case nine-tenths of the floating-debt holders should not assent to the plan, or in case an adverse judicial sale should be made, the obligation to accept further renewals should immediately cease.213 The scheme deservedly fell through. Creditors were asked to tie up their assets for three years, with no concession in return except the payment of interest quarterly in advance; while the unofficial suggestion that the Reading pay ¼ per cent commission on each renewal was felt to be too expensive for the company to entertain.

The following month the Whelen and Bartol committees came out with a new edition of the Whelen plan, which introduced an assessment on the junior bonds and stock, but preserved the same method of dealing with the old securities as before.214 Assent to the plan was to be on the condition that sufficient money should be raised to pay off the floating debt. Interest on such debt was not to have priority of payment over interest on the general mortgage for longer than three years; and during those three years the preference was to be limited to that part of the floating debt secured by collateral yielding income to cover interest, or important for other reasons to be retained. There were to be seven reorganization trustees to receive the assents of parties in interest, and to receive and hold the securities and assessments thereon pending reorganization, and when accomplished to return such securities duly stamped to their respective owners.215 The trustees were further to decide whether the assents to the plan in question should be considered adequate, and if they should conclude on or before May 1, 1886, by a vote of six of their number, that the assents were not sufficient, they were to call into a council the managers of the Philadelphia & Reading Railroad Company, the receivers of that company, and the committees of the general mortgage (Bartol) and income mortgage bondholders; and this council, by a vote of four of the five interests therein represented, was to formulate a plan of reorganization adapted to the circumstances, and involving no larger contribution in money to be paid than under the plan as then modified; and under such power the trustees were to proceed to foreclose under such mortgage or mortgages as they might deem advisable.216 The plan was obviously a compromise whereby the Whelen Committee clung to the main lines of its previous proposition, and the Bartol Committee secured modifications which benefited the general mortgage at the expense of the junior securities. Criticisms which applied to the earlier plan largely apply to this also; but it is to be noticed that at last the idea of funding the floating debt was abandoned for the sounder scheme of paying it off in cash. The reorganization trustees were an innovation, but were destined to be a useful one. On the whole the compromise was a step forward; and yet it was not more successful in obtaining assents than the scheme which had preceded it. Although the directors approved it, as was to have been expected, the bulk of the bondholders held off.

Matters now went on in much the same old way. The seven reorganization trustees, representing the principal interests concerned, held meeting after meeting with no apparent result. The courts became impatient; bondholders clamored for their interest; but after the failure of the earlier plan the way out seemed harder and harder to find. In September, 1885, Mr. E. Dunbar Lockwood addressed an open letter to Mr. John B. Garrett, one of the trustees, in which the following points were made:

(1) “The trustees should recognize promptly and unequivocally that the Reading Railroad is bankrupt, and has not sufficient available assets to meet its obligations.

(2) “Two dollars of obligations cannot be paid with one dollar and a half of assets, and the sooner all persons interested ... recognize this fact, and agree to scale both principal and interest sufficient to meet the obligations of the company and put it upon a strong financial basis, with sufficient working capital to enable it to conduct its future business economically, the better it will be for all concerned.

(3) “The trustees should look only at the facts as they exist ... and while endeavoring to rehabilitate the road, also bring it into harmonious relations with its adversaries.

(4) “The trustees should consider the problem ... precisely as business men consider the matter of the settlement of a bankrupt firm. The question at once presents itself, is it best that the company should continue in business, or should it be wound up?”217

In his reply Mr. Garrett pointed out the difficulties to be overcome, and concluded by saying that in his judgment no reorganization would be final that did not ensure the establishment of credit, the entrusting of the management to an interest having an actual equity in the property, and just expectation of pecuniary return from it, and harmony with competing lines, coupled with due regard for the rights of the public.218

The reorganization trustees by this time appeared discouraged, and the following month called a conference of creditors at which a resolution was passed looking toward foreclosure. In November a suit was actually begun, supplementary to a similar suit instituted a year before. It was during the pendency of these proceedings that the plan of reorganization devised by the reorganization trustees themselves came out, and marked a third effort to rehabilitate the road. The first plan proposed, it will be remembered, had suggested the conversion of all of the junior securities into income bonds, plus a funding of one-half the general mortgage coupons for three years; and the second had introduced an assessment on the junior bonds and stock. This third plan, while preserving the assessment, and making it more severe, added a provision for the conversion of general mortgage liens into 3 per cent bonds, and of junior liens into preferred stock. For the ultimate retirement of the prior liens a new fifty-year 5 per cent mortgage was to be created; for both the prior and general mortgage liens the difference between the return from the old bonds and that from the new was to be adjusted by the use of 5 per cent preferred stock, so that bondholders in prosperous times would not find their incomes diminished. Preferred stock was to be of two kinds, of which the first was to go to satisfy the general mortgage bondholders and for assessments, while the second was to exchange at varying rates for the junior securities above the second series 5s. Everything below the second series 5s was to receive common stock instead. Under the scheme the company’s obligations would have been reduced to $60,731,000, of which $33,400,000 prior liens and $24,686,000 new 3 per cents; while its stock would have been increased to the very considerable figure of $96,516,282. The total cash assessments, if all paid, would have amounted to $13,506,620; and, joined with the balance of stock, were expected to be sufficient to cover the floating debt. The new fixed charges were to be $7,064,830.219

Various points in the plan deserve mention. For the first time since the failure of 1880 it was proposed to use two kinds of securities, of which interest on one should be fixed, and interest on the other optional. For the retirement of senior bonds President Bond had suggested a bond on which half the interest should be fixed and the other half variable, but his plan had been inferior in flexibility to the one now proposed. The junior securities received less favorable treatment than before; but the general mortgage itself did not escape, and was required to accept 3 per cent plus preferred stock instead of a mere funding of its coupons. The increase in the amount of stock was very great, and naturally so, in view of the new uses to which it was put.220 Assessments were made heavier, and for the first time the management frankly excluded from their calculations the Central of New Jersey, foreshadowing the abandonment of the lease. To repeat, the first two plans described had developed the idea of an assessment and the conversion of the junior bonds into income obligations. To this the reorganization trustees added the use of preferred stock, and, more important still, the combination of two securities, respectively with obligatory and optional liens, which were to be given for the general mortgage bonds. In principle the result was excellent, in practice the degree of reduction was somewhat too slight from the point of view of the company, although it seemed more than the creditors were willing to accept. The general mortgage bondholders in particular were loud in their protest. “The truth of the matter is this,” said one of them, “while the plan of the trustees has much to commend it, and is based on an excellent theory, it fails to cover the whole ground, and falls terribly short of meeting our reasonable demands.” Thus, although the Bartol and Whelen committees accepted the plan, matters again stood still for a while, while the financial powers talked and wrote and threshed the question out.

In February, 1886, the reorganization trustees received a letter signed by J. Pierpont Morgan and John Lowber Welsh, which is important enough to be quoted in full.

“A syndicate has been formed,” said these gentlemen, “composed of leading bankers and capitalists here and in Europe, together with corporations or their representatives controlling large transportation and coal producing interests, who have agreed to subscribe in the aggregate $15,000,000 for the purpose of aiding in the reorganization of the Philadelphia & Reading Railroad Company and its affiliated lines. The syndicate has no commitment of any kind with any other railroads or corporations upon this subject beyond securing a management in harmony with the principle that capital invested in internal improvements should be so managed as to result in a fair return in the way of interest and dividends. Their object and purpose is to secure the reorganization on business principles for the Philadelphia & Reading bondholders, stockholders, and creditors without prejudice to the relative position of either, and in their interest only.

“To do this effectually there must be suitable arrangements made with the Pennsylvania Railroad and other kindred coal interests for harmonious relations, in order that suitable prices may be obtained for coal produced and shipped. These objects we shall endeavor to secure, and we now enclose you a copy of a correspondence with Mr. Roberts, president of the Pennsylvania Railroad, on these subjects, which seems to us sufficient to warrant the syndicate in placing reliance upon the assurance given by that company.

“As the reorganization shall proceed our effort and expectation will be to bring about satisfactory arrangements with all the anthracite coal roads, and also the trunk lines, which shall secure to the Philadelphia & Reading Railroad Company, when reorganized, its just share of the business at remunerative rates.

“The syndicate have believed that your plan was, in the main, suitable for the purpose of reorganization, and that your board was composed of gentlemen who would command the confidence of all parties in interest.

“They therefore prefer to make an arrangement with you and to aid you in working out a plan.

“But they also think that there should be certain modifications as to your organization, and also as to your plan, as follows:

“(1) The syndicate would wish two persons, to be named by them, added to your board.

“(2) Your plan should be made so flexible that it could be modified hereafter in such respects as may be found necessary to success.

“(3) There should be an executive committee of five to take charge of the foreclosure proceedings, the purchase of the property, the organization of the new company, and generally of whatever may properly appertain to reconstruction under the plan. There should be five voting trustees who should vote on the stock when deposited under the plan, and to whom the power of voting on the stock in the reorganized company should be confided for five years after reorganization. These two committees should be composed of parties satisfactory to the syndicate and the trustees, and shall fill their own vacancies. But in case the syndicate and trustees cannot agree upon the five, then, and in that case, three shall be named by the syndicate and two by the trustees, and each class shall fill any vacancy occurring in its own number.

“(4) The compensation to be allowed to the syndicate shall be 5 per cent on the amount of the syndicate capital.

“(5) The syndicate to be allowed interest at the rate of 6 per cent upon any amount they may advance the company in the course of the process of foreclosure and reorganization. “(6) Proper provision must be made for securing to the syndicate the refunding of the money they may advance on account of interest not exceeding 4 per cent per annum on the general mortgage bonds during reconstruction, and also for the substitution of the syndicate in the place of any creditor or stockholder who may abandon his holding and refuse to pay his assessment, it being the purpose of the syndicate to pay 4 per cent per annum interest on the general mortgage bonds during reconstruction, and also to pay the assessments of such parties as may abandon their holdings or right to take the securities to which they may be entitled under the plan.”221

The correspondence with Mr. Roberts referred to contained the assurance that the Pennsylvania Company would not hold aloof from an understanding with the Reading either in respect to the coal or transportation business, and would, moreover, “cordially unite in the arbitration of all differences.”222 This could not, of course, force distasteful terms upon the Reading bondholders, but it could and did supply sufficient capital to ensure the success of any plan adopted, and it infused confidence and vigor into the action of the nearly discouraged reorganization trustees. The executive committee which they were to name was perhaps a useful tool, but the suggestion of a voting trust was a genuine contribution, and aided powerfully in securing necessary backing for future schemes.

It is to be remarked that the syndicate appeared with no panacea, was without a plan of its own, and at first merely adopted that of the trustees, with a few modifications which it thought advisable; but that by March, 1886, it had so worked over the proposals of the reorganization trustees as to make in many respects a new plan; which retained the assessments, likewise the combination of fixed and optional charges and the use of preferred stock, but reserved 4 per cent bonds against prior liens, gave 4 per cent bonds with preferred stock in exchange for the general mortgage instead of 3 per cents, and created four classes of stock instead of three. Somewhat more in detail this plan was as follows: The Reading was to issue a new 4 per cent general mortgage for $100,000,000, and four kinds of stock: a preferred, income, consolidated, and common. Of the general mortgage $9,792,000 were to be for future use in the improvement of the railway; of the remainder $38,422,000 were to be reserved against prior liens; $24,686,000 were to exchange for the general mortgage if such should not be paid off in cash; $15,000,000 were to take up shares or bonds of leased lines, and $10,000,000 were to exchange for or to redeem Coal & Iron Company divisional mortgages. The total amount issued was to be $90,208,000, and no mortgage in addition was to be placed on the Reading properties for five years after the reorganization without the consent of a majority of the preferred stockholders. Of the different classes of new stock the preferred was to be given dividends up to 5 per cent non-cumulative, and then the income and consolidated stocks were to have up to 5 per cent non-cumulative. Generally speaking, the preferred stock was to go for assessments; the income stock for the income mortgage and convertible adjustment scrip; the consolidated stock for the first series 5s and one-quarter of the principal of the second series 5s; the common stock for the rest of the second series 5s, for the convertible debentures, deferred income bonds, and for old preferred and common stock. New fixed charges were estimated at $6,971,687, which dividends on the preferred stock would raise to $8,198,636. There was to be a voting trust for five years, consisting of J. Lowber Welsh, J.P. Morgan, Henry Lewis, George F. Baer, and Robert H. Sayre; and a syndicate was to advance necessary expenditures and disbursements pending reorganization, including unpaid assessments. The syndicate compensation was to be 6 per cent on its advances, plus a commission of 5 per cent upon its $15,000,000 of subscribed capital. The property was to be sold at foreclosure sale, and a new company was to be organized.223

A comparison of this with the plan of the reorganization trustees at first announced will show the changes made. Nothing of value which previous reorganizations had worked out was cast aside. The fixed interest allowed the general mortgage bondholders was raised in the hope that they might support the plan, and more care was taken to follow the order of priority in the advantages offered to the various classes of junior securityholders; an end to which the four classes of stock were admirably adapted. The voting trust was altogether new, and was doubtless intended to ensure a policy in accord with the syndicate’s wishes for a series of years, and to prevent a renewal of the vagaries of Mr. Gowen’s administration. The provision for foreclosure was to be expected in view of the extreme difficulty of obtaining the assents of so many conflicting interests; but with a net revenue of $12,026,309 (both companies) and fixed charges of $6,971,687, the task of maintaining the solvency of the companies in future did not seem an impossible one.

In opposition to the plan the Lockwood Committee urged that the scheme was unjust to certain classes of bonds; that it was cumbersome, expensive, conferred power on the trustees which should have been reserved for the direction of the new company, and that the reserved powers to change any part of the plan, and the uncertainties connected with the settlements under it, involved risks which creditors should not accept.224 The objections were not weighty. If the Lockwood or any other committee had proved itself able to formulate and carry through a plan, or if the syndicate arrangement had been proposed at the very beginning of the receivership, bondholders might fairly have criticised its expense. In point of fact numerous attempts to reconcile divergent interests had failed, and what with Messrs. Lockwood, Bartol, Whelen, Gowen, and their respective followings, the future offered no more promising result. Meanwhile bondholders were going without their interest, and costs of the receivership were mounting up; so that a greater expense than that of which Mr. Lockwood complained was being incurred by delay. As for the general mortgage bondholders, they were given a chance at their old interest whenever the road should earn it, and could fairly ask no more; while that it was inequitable to ask income bondholders to accept a reduction to $50 in their annual interest, or holders of the first series 5s to wait for their interest until liens before theirs had been satisfied, are conclusions to which few will agree.

In April Messrs. Whelen and William H. Kemble, representing the Reading consolidated mortgage bondholders, announced that they had determined not to accept the syndicate plan. Even before this Mr. Gowen announced that he was organizing a syndicate and would soon be able to pay off overdue coupons on the general mortgage bonds, and to prevent any foreclosure under that mortgage.225 It is scarcely necessary to say that he had a plan of his own. He proposed to issue $100,000,000 4 per cent 70-year consolidated mortgage bonds much as did the syndicate, part of which should go to redeem the general mortgage and the floating debt; but second to this he suggested a cumulative 4 per cent first preferred income bond, to take the place of the income and consolidated stock under the syndicate plan, and to be exchanged for the first series 5s, a portion of the second series 5s, and some of the leased canal securities; while finally he planned a second preferred cumulative 4 per cent income bond, to be exchanged for those securities down to the deferred income bonds, which under the syndicate scheme were to receive common stock. The surplus of income offered by the old general mortgage was to be made good by first preference bonds. The existing preferred and common stocks were to remain as they were, and the deferred income obligations were to remain untouched. Finally, the New Jersey Central was to be retained in friendly alliance, either under a modified lease at a rental equal to earnings, or under a special traffic contract.

A comparison of this with the syndicate plan shows that Mr. Gowen gave up the idea of an assessment; provided for the floating debt through first preference bonds; swept away three of the four classes of stock, replacing them by two kinds of income bonds; and retained the deferred income bonds which the syndicate proposed to retire. His plan was to be carried through without foreclosure, but outside of this its advantages are rather difficult to ascertain. The abandonment of the assessment was distinctly bad; the retention of the deferred income issue was also bad; the reduction in the number of kinds of securities tended towards simplicity, but made impossible the nice distinction of priority on which the syndicate had relied; while even the replacement of stock by income bonds must be condemned, substituting as it did an obligation without any very distinct character of its own for a stock which represented frankly only a share in the profits of the enterprise. These things were realized, and the plan received no serious support; but as every plan so far proposed contributed something to the final product, so Mr. Gowen’s income bonds and his aversion to foreclosure were not without influence upon the scheme which ultimately attained success.

The next few months saw active hostilities between Mr. Gowen and the syndicate; the former taking the position that he would never consent to foreclosure, nor to the placing of the property for five years under the management of a board of trustees named by his adversaries.226 To Mr. Garrett, chairman of the reconstruction trustees, he wrote suggesting that the board should substitute his plan for that of the syndicate, and that seven reconstruction trustees should be appointed by the managers of the company to carry it through. “Upon this being done,” said he, “I will engage that the plan shall be underwritten by an association of capital sufficient for the purpose of paying off all the general mortgage bonds which do not voluntarily accept the new securities provided by the plan, and I will agree that the financial responsibility of these subscribers to this fund shall be determined by the presidents of the Bank of North America, the Farmers’ & Mechanics’ National Bank, the Pennsylvania Company for Insurance of Lives, etc., and the Union Trust Company....”227 Mr. Garrett naturally refused.

As in many cases before, the struggle ended in a compromise. The new agreement was as follows: The syndicate was to be enlarged by $4,000,000 additional subscriptions, and the reconstruction trustees increased to thirteen by the addition of certain friends of Mr. Gowen, one of whom was also to be given place upon the executive committee. The syndicate plan was to be carried through without foreclosure, providing sufficient assents could be obtained, and was to be modified by the substitution of first, second, and third 4 per cent income bonds for preferred, income, and consolidated 5 per cent stock. Dividends on the bonds, like those on the stock, were to be payable from net earnings only; but net earnings were defined as the profits derived from all sources after paying operating expenses, taxes, and existing rentals, guarantees and interest charges, but not fixed charges of the same sort subsequently created. All third preference bonds issued for convertible bonds were to have the right to be converted into common stock; and the company was to have the privilege of increasing the issue, subject for five years to the approval of the voting trustees. As finally worked out, the first preference bonds were to be given for assessments; the second preference for all securities which had been promised income or consolidated stock; and the third preference for the second series 5s, convertible and debenture bonds, and preferred stock to which common stock had before been allotted. Somewhat more emphasis was laid on the possibility of paying off the general mortgage. It was proposed to reduce the aggregate of rentals and guarantees (exclusive of the Central of New Jersey, the Schuylkill Navigation Company, and the Susquehanna Canal Company) to an annual charge of less than $2,350,000 by direct negotiation with the companies affected. And to deal directly with the three companies above named upon the basis of a continuance of their respective leases at rentals involving no fixed liability beyond the earning power of the leased line, or on the basis of a surrender of the said leases, and the cancellation of the traffic agreement with the Schuylkill Navigation Company for a consideration. The voting trust was to be composed of three representatives of the syndicate and one friend of Mr. Gowen, which four should elect a fifth who should be satisfactory both to the syndicate and to the reconstruction trustees. A united effort was to be made by the company, the reconstruction trustees, and the syndicate to secure the immediate appointment of Mr. Austin Corbin as an additional receiver; and, if Mr. Corbin would take the position and legally qualify himself to fill it, it was understood that the presidency of the company would be offered to him. The other provisions of the syndicate plan were to remain unchanged.228

The total capital and charges under the plan were to be as follows:

We have now the reorganization in its final shape, and it will be interesting to review briefly the gradual way in which this shape was fashioned. With the company plunged anew into bankruptcy after a reorganization insufficient to afford any genuine relief, the proposal was made to fund one-half the general mortgage coupons for three years and to convert all junior claims into liens on income. This scheme failed because plainly inadequate to meet the needs of the situation, and a modified version was presented providing for an assessment with which to pay the floating debt. The assessment was approved, but not the plan, and an ensuing scheme supplied an altogether new method of treatment, whereby on the one hand the assessment was made more heavy, and on the other two classes of preferred stock were proposed, with one issue of bonds at 3 per cent. This plan failed, not so much because of its inadequacy, although it was inadequate, but because general mortgage bondholders felt that a 3 per cent bond was less than they could reasonably expect for their holdings, and insisted on a security with a higher obligatory rate of interest. The next plan took note of these objections: it raised the interest on the bonds which it proposed from 3 to 4 per cent; and in the endeavor to please the junior bondholders as well, created four classes of preferred stock, by means of which the relative priority of different issues was carefully and completely recognized. Assessments were retained, and a guarantee by a syndicate and a voting trust for five years was suggested. In the discussion that followed, a new scheme was introduced, which replaced the preferred stock by two classes of income bonds, and forced the managers to realize the desire of the old bondholders for some new security with at least the name of bond. As a result, the syndicate which had fathered the previous plan consented to substitute for three of their classes of stock first, second, and third preference bonds. Meanwhile the fixed charges estimated for the successive plans steadily decreased. The first looked for $12,911,000, or $14,266,051 as variously reckoned; the second for $14,143,384, or, deducting the Jersey Central, for $8,223,177; the third for $7,064,830; the fourth for $6,971,687; and the sixth for $6,583,055. Thus each plan took over what was most satisfactory in its predecessor; and there was on the one hand a steady decrease in the fixed charges proposed, and on the other a continuous effort to discover some plan which might be satisfactory to all concerned.

That the compromise plan last mentioned succeeded was in part due to the feeling of all contending parties that concessions must be made; it was due also to endorsement by the leaders of the more important interests; and, finally, to an appreciation that the plan was after all a good one, reducing largely the fixed charges which the company would have to pay, while depriving no one of a return which, under the circumstances, he could fairly expect to receive. Mr. Corbin proved willing to undertake the new responsibilities put upon him. He was therefore appointed receiver in October, and elected president in the January following.

Nevertheless, it would be a mistake to suppose that the plan was unanimously accepted from the start. The Lockwood Committee of general mortgage bondholders were prompt in their disapproval, pronouncing it “unjust, uncertain, and indefinite”; saying that reorganization under it would be unduly expensive, and that it was more objectionable than the plans which had preceded it.229 Equally decided was a small group of capitalists which held a majority of the first series 5s outstanding, the members of which were said to have agreed to hold their bonds and to abide the result.230 The original time limit for deposits expired on March 1, 1887; it was then extended to March 15, and again to March 31, and deposits of $110,409,464 out of a total of $117,972,859 were secured. By October certain other bondholders had been induced to come in, and the trustees declared the plan operative. Holders of $3,348,000 of first series 5s stayed out, and forced an arrangement by which they were practically paid off in cash.231 Arrangements were made with some of the subsidiary Reading lines, but the lease of the Central of New Jersey was not renewed. Only odds and ends now remained to be cleared up, and all through the rest of the year the managers were busy paying off receivers’ certificates, floating debt, overdue interest, etc. On January 1, 1888, without formalities, the Reading passed out of receivers’ hands and into the control of the stockholders.