Difficulties of the Coal & Iron Company—McLeod’s policy of extension—Collapse of this policy—Failure of company—Summary of subsequent history.

With the year 1888 a new period in the history of the Reading began. The long struggle to bring the company back to solvency was fairly over, and for the first time in seven years the road saw before it a chance for genuine prosperity. Unlike the reorganization of 1880–3, that of 1884–7 succeeded in accomplishing the greater part of the saving expected of it. According to the plan, interest charges were to be reduced to $4,233,055;—in 1888 they were $4,516,433, and in 1889 $4,058,139; rentals were not to exceed $2,350,000;—in 1888 they were $2,882,582, and in 1889 $2,842,319. Other payments, it is true, the necessity for which was passed over by the advocates of the plan, raised the total which the road was obliged to meet, but did not prevent a comfortable balance of over $2,000,000 for the Railroad Company in 1888, and one of $1,444,000 for both Railroad and Coal Companies combined. During the next few years large sums were spent in improving the permanent way. By January, 1889, almost the entire line between New York and Philadelphia had been relaid with 85 and 90 pound rails; grades had been smoothed, bridges strengthened, and culverts strengthened or rebuilt.

Less satisfactory than the results for the Railroad Company, however, were those for the Coal & Iron Company. In this case profits of $654,211 for 1887 turned into a loss of $806,222 for 1888, and in the following year a weak demand for coal, combined with a high cost of mining, increased the loss to $974,373. President Corbin felt called upon to explain that prior to 1886 the deficits of the Coal Company had been habitually met by inflating the capital account of the Railroad Company; so that with allowance for this fact the showing of the companies under his management had been relatively good.232 In November, 1889, a letter of Mr. Gowen’s was issued, hopeful as ever, criticising the management for their refusal or neglect to give authoritative information about actual earnings, but pointing to the large expense for new coal cars, barges, and collieries, and explaining the benefit which these would confer.233

The weakened position of its allied company pulled the Reading down, and prevented it from attaining the secure position which had seemed in sight. The payment of dividends only increased the general dissatisfaction. In February, 1889, holders of a considerable amount of second preference bonds circulated a petition objecting to the official statement of net earnings applicable to these securities, and demanded an examination of the books. After an investigation their expert declared that a 7½ per cent dividend had been earned, but the bondholders could not induce the company to increase its distribution. The next year preference bondholders fared even worse. The managers declared that the surplus over all fixed charges for the year was barely $100,000, and that no dividends at all upon their holdings could be paid. Again an investigation was demanded and accorded, and Mr. Howard Lewis, the expert appointed, reported that there was applicable to the payment of interest upon first preference bonds the sum of $90,101, or ? of one per cent; a sum which the company promptly agreed to pay. Meanwhile even the stockholders were becoming restless. In June, 1889, a suit was commenced in Philadelphia, praying that the company’s voting trustees and the trust under which they acted should be set aside, on the ground that the trust was to be exercised by five voting trustees, whereas only four had ever been appointed. Later on the matter was taken up by London stockholders, and became serious enough to force a concession of two seats in the board of managers of the company.

There was no question but that the trouble was caused by depression in the anthracite coal business, for in the carriage of both passengers and freight the Reading in these years made steady and substantial gains. In the three years following 1887 the number of passengers transported increased by 2,400,000 and the earnings from them by $470,000; while the freight tons moved gained 1,500,000 and the freight earnings $1,000,000. Only in coal was there a decrease, which appeared for the Coal & Iron Company in the figures for sales and gross and net receipts, and for the Railroad Company in the earnings from anthracite transported. The result was an attempt to improve the situation: first, by a combination among coal producing roads which should raise the selling price of that commodity; and second, by extension of the railroad into new markets, whereby an outlet for increased production should be obtained. At the instigation of Mr. Gowen a syndicate was formed to purchase a majority of the stock of the Reading Company,234 which bought much more than 50 per cent, even though Mr. Gowen, the prime mover, died in the mean time. The existing managers showed no desire to combat the movement, although the voting power lay entirely in their hands. In June, 1890, President Corbin resigned, and Mr. A.A. McLeod was elected in his place.

Mr. McLeod now began a vigorous policy of consolidation and expansion with the lease for the second time of the Central of New Jersey. He evaded a New Jersey law which forbade the lease of a domestic to a foreign corporation by incorporating the Port Reading Railroad Company and then executing a lease of the Central to this minor corporation.235 The Port Reading promised 7 per cent on the Central stock for 999 years, plus one-half the surplus earnings above the dividend up to 10 per cent, and secured a guarantee of the fulfilment of these promises from the Reading Railroad proper. Finally, Mr. McLeod leased the Lehigh Valley to the Reading direct, on a guarantee of 5 per cent on the stock until May 31, 1892; 6 per cent from that time until November 30, and 7 per cent thereafter for the rest of the 999 years. So far as control over the coal supply was concerned this put the Reading in a very favorable position. The Lehigh Valley tapped the northern Wyoming field, and the Central of New Jersey the Mahanoy and Shamokin deposits, and both had access to New York through New Jersey. The Lehigh, moreover, extended to Buffalo; and with a line of steamers to Duluth, Milwaukee, and Chicago, promised to command a large proportion of east-bound traffic in other things than coal. Figures for the coal industry show that the Reading, Central, and Lehigh shipped in 1891 53.3 per cent of the total production of 40,448,000 tons; in 1890 55.5 per cent; and in 1889 57.75 per cent. In addition, control of the Delaware, Lackawanna & Western was said to have been acquired by the purchase of a majority of its stock, which added 15.1 percent more;236 making a total of 68.4 percent for the year 1891, or sufficient to give a considerable measure of control over prices. But the terms were severe; quite as severe as in the case of the leases earlier put through; and though the Reading was in better shape than it had been five years before, full interest on its preference bonds was not being paid, and so long as this continued no outside payments could properly be made. The subsidiary companies, on the other hand, were not earning the dividends promised on their stock by nearly one-third of a million dollars; and it seemed unlikely that sufficient economies could be secured to cover permanently the deficit. The question could fairly have been asked whether the Reading had not bought a chance to contribute an annual sum to the Lehigh Valley and Jersey Central stockholders; and whether these roads had not deliberately entered into a contract which was little likely to be carried out. The justification of the arrangement lay in the control of coal prices which it made possible, and in the advantages of close traffic arrangements and connection with both Philadelphia and New York. “The main reason why the combination failed,” said Mr. I.L. Rice before the Industrial Commission, “was that there was not an understanding of the first principles of an operation of that kind, i. e. that it must reduce prices and not increase them. The anthracite coal combination was killed because prices were immediately put up....

“Q. Mr. McLeod has testified before this commission that it was his intention to effect such economies as should be reflected in lower prices. Do we understand that you criticise the policy in that it did not so reduce the prices?

“A. He did not do it, no matter what his intention was.”237

The situation was, however, as clearly understood by the public as by the managers themselves. Even before the combination had begun to carry out its policy, outcry was made, and as prices went up the agitation became intense. In New Jersey an act to legalize the combination which passed both houses was vetoed by Governor Abbot on the ground of the effect upon the price of anthracite coal;238 and in June the Attorney-General applied for an injunction to dissolve the lease of the New Jersey Central to the Philadelphia & Reading, alleging that the tripartite agreement between these companies and the Philadelphia & Reading was illegal. The court granted a temporary injunction,239 which it continued in August to a final hearing, with conditions to make it more effective.

Prices did not go down, and in October Attorney-General Stockton of New Jersey again appeared before Chancellor McGill. He now charged the Philadelphia & Reading, the Central, and the Port Reading with having conspired to advance the price of coal in defiance of the order of the court, and asked for the appointment of a receiver to enforce the former decree, and to restrain the company from further using the New Jersey railroads for carrying any coal until the advanced price should have been reduced.240 The officers denied the allegations, but the Chancellor sustained the Attorney-General on every point; and only the official announcement of the abrogation of the lease prevented the granting of the order.241 The lease of the Lehigh Valley fared better. In a suit brought by M.H. Arnot, a stockholder in the Lehigh Valley, Judge Metzger of the Court of Common Pleas held that the Reading and Lehigh Valley were not parallel and competing lines in the sense contemplated by the law; and that mere incidental competition between branches or spurs of two systems would not prevent the consolidation of their main lines.242 So much then of the original programme was allowed to stand.

Meanwhile, in the search for new markets, the Reading had stretched into New England, having chosen that territory in the hope of increasing its tonnage without a desperate struggle with its neighbors.243 The most available subject for control was the Boston & Maine, which reached from Northampton and Boston, Massachusetts, to Portland, Maine, was independent of the large trunk lines, and had a profitable local business of its own. Purchases of this railroad’s stock were quietly made; and in October, 1892, the public was surprised by the election of Mr. McLeod to the presidency, although, as it subsequently transpired, an actual majority of Boston & Maine stock was not secured.244 It was obvious that nothing could be gained from the new arrangement unless the gap between the Reading and the Boston & Maine should be filled; and so, even before the purchase of stock in the latter was begun, the lease of the Poughkeepsie Bridge across the Hudson was put through,245 and a controlling interest was bought in the stock of the Central, New England & Western. The last-named road extended from Hartford, Connecticut across the Poughkeepsie Bridge to Campbell Hall, 145½ miles, and connected at this point with the Pennsylvania, Poughkeepsie & Boston, a road controlled in the interest of the Reading. This completed a through route from Philadelphia to Hartford. Later the Central, New England & Western Railroad Company and the Poughkeepsie Bridge Railroad Company were consolidated into the Philadelphia, Reading & New England, with Mr. McLeod as president;246 and a controlling interest was purchased in the New York & New England Railroad, which ran from Poughkeepsie via Hartford and Providence to Boston,247 and afforded another entrance into New England. All this involved a very great extension of the Reading system. The lease of the Lehigh Valley had connected it with Buffalo; the subsequent consolidations brought it into every New England state, and gave it a total mileage of, roughly, 5000 miles.

Danger lay in two directions. First, it was possible that even the union of the Lehigh, Jersey Central, and the Reading might fail to secure a profit for the mining end of the business, and second, the financing of the New England deals might be so conducted as to put the parent road into a very difficult situation.

Both these contingencies occurred. The early termination of the Jersey Central lease weakened the control of the Reading over prices, while the severity of the winter of 1893, though assisting to maintain prices, so increased the expense of operating the mines that earnings fell below fixed charges for the three months ending February 28, 1893, by the amounts of $933,443 for the Railroad Company and $468,362 for the Coal & Iron Company. Moreover, losses of $616,351 accrued during the same time under the Lehigh Valley lease, and were met by the Reading, contrary to expectation, and contrary to the express provisions of the mortgage by which its income bonds were secured. In order to accomplish the New England extensions shares were bought on margin by President McLeod personally with collateral in part supplied by himself, in part taken from the treasury of the company, and consisting of general mortgage, collateral trust, and income bonds. “On or about September 22,” said Mr. I.L. Rice, a representative of the bondholders, who had been examining the books, “Mr. McLeod entered into certain individual stock transactions which resulted in the purchase of 24,036 shares of the stock of the Boston & Maine Railroad Company and 32,000 shares of the stock of the New York & New England Railroad Company. On October 15, 1892, he withdrew from the control of the company, without having previously obtained the authority of the board of managers therefor, and without expressing the purpose for which he intended to use the securities, 30,000 general mortgage bonds of the company, which as afterwards appeared were used at that time as margins in the transaction. He subsequently withdrew from the control of the company in the same manner and for the same purpose, between October 28 and December 1, 1892, $713,000 of collateral trust bonds, and $99,000 third preference bonds. No reference whatever is made to these stock transactions on the books of the company except the mention of the withdrawal of securities against the personal receipt of the president, nor are they referred to on the minutes of the board of managers prior to December 24, 1892. On the latter date the board of managers in a resolution approved the transaction, calling for the use of $613,000 of the company’s collateral, and indemnifying Mr. McLeod for advances made for the same purpose to the extent of $400,000. On January 17, 1893, Mr. McLeod deposited $250,000 additional collateral trust bonds as margin, making a total of $963,000. On February 15 Mr. McLeod directed that the account be transferred from his individual name to that of the company’s.”248

Leaving aside the matter of the propriety of Mr. McLeod’s action, it is plain that the method which he employed was an extremely expensive one, in that it raised the necessary cash by temporary loans at high rates from brokers in New York and Philadelphia instead of by the sale of stocks or bonds, or by the use of funds which the company might have had on hand. According to President Harris, the average charges paid on the floating debt in 1892, a large portion of which had been accumulated in these operations, was 9 per cent. If the control over the corporations acquired had been desired for temporary reasons the operation would have been a stock speculation pure and simple, and the Reading would have trusted to the possible rise in price of the securities purchased to cancel the expense of advances to the brokers who did the buying; but in this case the control was designed to be permanent, not temporary, and Mr. McLeod expected results which could be obtained only after a series of years.

This brings us to the beginning of 1893. Mr. McLeod had succeeded in carrying out his plans for a combination of coal producing roads and for the extension of the Reading into New England, but had seen his first project bitterly attacked, and his second scheme become a burden because of the insufficient funds behind it. Matters came to a head in February with an attempt to borrow on $10,000,000 collateral trust bonds. Speyer & Co. accepted the issue, but the Drexels refused to handle it, and began to sell the company’s securities at any price.249 Quotations dropped from 46¾ to 40? on February 17, and continued to fall the two succeeding days, reaching 28 on February 20. On this last day application was made to the United States Circuit Court in Philadelphia, and Messrs. McLeod, Wilbur, and Paxon were appointed receivers. “I am very sorry,” said President McLeod, “that we were driven to the necessity for a receivership, but it was the only thing to do. Our credit was attacked in a way which made it impossible for us to meet our obligations, and we had the receivership established before the property was further injured.... The trouble was brought about by the fact that we were doing an enormous business on a small capital, and when this attack was made ... it hurt our credit so that we could not borrow money.”250 Lack of capital was the repeated cry of the management. At a later date Mr. McLeod again said, “When I leased the Lehigh Valley and the Jersey Central and took over their coal operations ... I found that I had $13,000,000 invested in coal and in carrying the customers of the companies. The Reading did not have that much capital, and I had to borrow $8,000,000 of that $13,000,000. Then the panic of 1893 came on. I had arranged to fund that $8,000,000 of floating debt by selling securities, etc., giving me a working capital of $17,500,000, but the parties who were to furnish the money had six months in which to do it, and on account of that panic coming on before I could get the money, there was nothing in the world for me to do except to put the Reading in the hands of the receivers to save its securities.”251 The statements concerning the lack of capital were a true explanation though not an excuse. Money had been tied up in unsalable coal, acquired not only by the leases of the Lehigh and Central, but also by purchases from independent operators252 and by production during the current year;253 while whatever spare funds the Reading had been able to provide had been put into New England securities at high prices to carry out the road’s ambitious plans. In the mean time the large purchases on margin made a fall in the price of Reading securities of especial moment; and, as Mr. McLeod explained, it proved impossible to liquidate the floating debt. The failure of 1893, then, was caused less by a continued inability to meet fixed charges than by an undue expansion of operations such as has ruined many a solvent firm. Reading’s venture in the coal fields had not proved a success, but the loss had not been sufficient to ruin it within a year; its New England extensions had not brought all the results desired, but they had not had a fair trial; the true cause for the failure was the attempt to accomplish by means of stock speculation and temporary loans at high rates more than the road could do out of its legitimate resources, with the intent on the one hand to raise the price of coal and on the other to secure fresh markets for the sale thereof.

After the failure the first impulse of the bondholders was to denounce Mr. McLeod. A meeting of European creditors in London chose a committee to represent them and solicited McLeod’s removal from the receivership on the “serious ground” that the administration of their property should not any longer be jeopardized by remaining under the control of an official who had already brought it into its existing difficulties. A New York general mortgage bondholders’ committee decided to act in a similar direction, and Mr. Drexel represented to the president that he should resign for the sake of the future of the company.254 Mr. McLeod unwillingly gave way. For successor the board of managers chose Mr. Joseph S. Harris, a man of long experience in railroad affairs. Mr. Harris had been for many years connected with the Lehigh Valley system, and was the same man who, it will be remembered, had evaluated the Reading coal properties in 1880. Following his election as president he was appointed receiver in the place of Mr. McLeod.

The receivers’ statement came out in March and announced a floating debt of $18,472,828, against which were held reported assets to the amount of $15,779,784; but of these last $4,985,276 were in the shape of coal, and $8,861,065 consisted of the items “due for freight,” “tolls due from connecting roads,” “bills receivable,” “cash,” etc., a large part of which was probably of little worth. Both the current liabilities and the current assets are instructive, and show that on the one hand Mr. McLeod’s stock operations had involved the company in heavy obligations to his brokers, and that on the other losses in the coal business had necessitated current advances to branch lines from which it was impossible to get return. It appears, for instance, that the Coal & Iron Company had been unable to pay the sums charged it for freight, and while the full amounts had been nevertheless included in reported earnings, the actual result had been a swelling of bills receivable by debts which the Railroad Company was quite unable to collect.255

The general lines of the policy to be pursued were now sufficiently clear; the more pressing claims were to be met by the issue of receivers’ certificates, expenses were to be cut down, payments under leases were to be amicably reduced where possible, holdings of Boston & Maine stock were to be sold, and on the side of the bondholders the various interests were to agree on some scheme for raising cash and for improving the general condition of the property. There was need for some reduction of fixed charges, but not for such radical cuts as in 1880 or in 1884.

The receivers and managers carried out their part of the work first. Application was made in March, and again in June, for permission to issue certificates in settlement of the most urgent claims. In May Mr. McLeod resigned the presidency of the Boston & Maine after a large part of the Reading’s holdings had been sold, and the same month President Harris inaugurated a policy of retrenchment by the retirement of four out of the five vice-presidents which the Reading had been accustomed to maintain. In July the receivers obtained permission to dissolve the agreement with the Pennsylvania, Poughkeepsie & Boston Railroad, and in August the appointment of a separate receiver for the Philadelphia, Reading & New England marked, except for the minor matter of the Poughkeepsie Bridge, the final abandonment of New England extension. Meanwhile an arrangement had been made with the Lehigh Valley, whereby the payments under the lease were reduced for two years from 7 per cent to 5 per cent, on condition that the Reading should make extra payments at the end of that time if the Lehigh proved to have earned more than 10 per cent in the interval; and permission had been obtained from the Circuit Court to surrender the possession and operation of the Eastern & Amboy Railroad and the Lehigh Valley Terminal Railroad, both lines belonging to the Lehigh Valley in the state of New Jersey. The Lehigh lease, even as modified, aroused much opposition from bondholders, who rightly maintained that payments under it constituted a diversion of funds which should have gone to the creditors of the Reading proper. Suit was begun before the Circuit Court, and on August 8, 1893, a formal abrogation was obtained. This incidentally caused the resignation of Mr. Wilbur, president of the Lehigh Valley, from his position as receiver of the Reading, and the appointment of Mr. J. Lowber Welsh in his place.

The more complicated task of the bondholders was at first undertaken by two committees: one for the general mortgage bondholders, of which Mr. J. Edward Simmons was chairman; and one for the income bondholders, led by Mr. George Coppell. Three demands were at once made: first, that Mr. McLeod retire from the receivership; second, that the lease of the Lehigh Valley be abrogated; and third, that the books of the company be examined by a railroad accountant. The first and second points were complied with, though not altogether because of the insistence of the committees, and in the end the third was also granted, and Mr. Stephen Little was set to work.256 On May 27, 1893, the managers of the company brought forward a reorganization plan, which estimated the floating debt at $19,991,941, and proposed to cover it by the issue of $22,000,000 collateral trust bonds at 95. These bonds were to be redeemable any time before maturity at 110, and the trustee was authorized “to apply the surplus income or the proceeds of sales ... of any of the securities pledged until 1898, and thereafter so much as might be determined from time to time by the Railroad Company, to the purchase of the said bonds at the best price obtainable, or, if necessary, to draw the same for redemption.” General mortgage and first, second, and third preference bonds were to be entitled to subscribe to the amount of 10 per cent of their holdings; deferred income bonds to 4 per cent; and stockholders to 24 per cent; while besides the $22,000,000 mentioned, $2,000,000 additional bonds were to be issued each year for working capital and for the acquisition of real and personal property. General mortgage bondholders were to fund their coupons to and including January 1, 1898, and to receive an equivalent amount of coupon trust certificates. The rental under the Lehigh Valley lease was to be reduced, and the Reading stock was to be transferred for seven years to a voting trust composed of Joseph S. Harris, E.P. Wilbur, Thomas McKean, and two others to be afterwards named.257 Assents of 90 per cent of the general mortgage bondholders and of 60 per cent of the stockholders were required by the 21st of June to make the plan effective, and a syndicate was pledged to carry out the provisions if such assents should be obtained.258

An issue of collateral bonds, a reduction in the Lehigh rental, a funding of coupons, and a voting trust: these were the propositions which President Harris and his associates presented for the consideration of the bondholders. There was to be no disturbance of existing securities, no assessment, not even a reduction of fixed charges except as these were lightened by the lowering of rentals and by the payment of the floating debt. It is to be presumed that the attempt to extend the Reading into New England was not to be continued, for no provision was made for the purchase of the shares of the New England roads hitherto held on margin, and in fact large sales of Boston & Maine stock had already taken place; but no formal mention of the deal was made. The lease of the Lehigh Valley was to be continued in the hope of better times, while the reduction of rental which the plan required had already taken place. Under ordinary circumstances any plan such as the one outlined would have been quite futile. Where the failure of a road is due to deep-seated causes the remedy must be fundamental; and when a piling up of indebtedness is due to inability to pay fixed charges the situation must be met by a reduction of those charges even though a foreclosure sale be a necessary preliminary. In the present case matters were somewhat different: bankruptcy had come, not from a long-continued drain, but from a rapid diffusion of resources in an attempt to accomplish more than the finances of the road would permit; and a change of policy was the thing most urgently required. But this again was not a question with which a reorganization plan had to deal, except in so far as such a plan might smooth the difficulties which lay in the way; and any scheme which should restore to the company the collateral imperilled in its rash campaign, fund the floating debt at a reasonable rate of interest, and give the management a chance to start again, was worthy of serious consideration. It may be observed, however, that granting all of the above, the plan before us did not go far enough. The extensions due to President McLeod had been in the heart of the coal regions, as well as in New England, and one of the most important of these, the Lehigh Valley, the managers proposed to retain. This policy, it may be said, was of very doubtful wisdom. The attempt to monopolize the production of anthracite coal had already been fruitful of disaster, and the possession of the Lehigh would have constituted a continual temptation to future purchases; while it was far from certain that even under the reduced rental the road could have been made to pay. What the Reading needed was a period of quiet attention to its own business, undisturbed by meddling in the business of other people; an attention which would be sure to result in increased economies, and was the true remedy for the lack of prosperity in the coal industry which had driven Mr. McLeod on his wild career. It is to this latter judgment that we must in the end conform. The plan of President Harris was not so inadequate as might at first appear; it accomplished much that needed to be accomplished, and it gave an opportunity to the management of the road to retrace many of the steps of the previous two years; but on the other hand, it did not embrace the chance to free the Reading from all its mistaken enterprises, and passed by an occasion which could only again occur after much suffering and loss.

Discussion turned, however, on other features. In a circular to securityholders in June, President Harris said: “My deliberate opinion is that the assistance asked for by the proposed plan ... is none too great, and that there is a good probability that if it is afforded and the plan is carried out prudent and careful management may prevent the recurrence of such a crisis. My judgment is that the securityholders will make a very serious mistake if they do not accept the relief offered them, for I see no probability that the necessary assistance can hereafter be obtained except upon much more onerous terms. I strongly advise that the plan shall be promptly accepted.”259 “We cannot but regard these terms as very easy,” said the Financial Chronicle. “To be sure a new collateral trust mortgage for $30,000,000, bearing 6 per cent, is to be created, but the greater part of this goes to take up floating debt and other existing obligations, and will involve no increase in fixed charges....”260 On the other hand, it was objected that the plan was formed entirely in the interest of the floating debt holders, income bondholders, and stockholders; and that the management under the arrangement would have the power to pay dividends upon the income bonds, while at the same time the coupons on the 4 per cent mortgage bonds were being funded.261 In an editorial urging foreclosure proceedings the London Standard said: “That [foreclosure] will prevent holders of pledged collaterals from getting a market for their securities, and, at the same time, bring a good many doubtful matters connected with the finances of the company into the light of day. It should also tend to make the ‘floating debt’ swindle less popular with eminent American financiers. At present they pile these debts up in the full assurance that they can easily arrange matters so as to put them, when funded, before existing mortgages. It is for the Reading general mortgage bondholders to act promptly for their own interests.”262 Finally, it was objected that the plan was in the interest of the McLeod management, and that the voting trust was to be a McLeod organization, which would either whitewash the ex-president’s operations, or by keeping them in the background would virtually outlaw them.

The plan failed because the time allowed for deposits was too short. In spite of the objections raised 31,356 general mortgage bonds and 411,218 shares of stock were deposited in twenty-five days, and it was maintained that additional securities would surely be obtained to make up the percentages required. The managers alleged, however, that extension was impracticable, and announced that the scheme could not go through.263

The year following this attempt at rehabilitation was full of the struggles of different interests, each jealous of any concession and working devotedly for its own hand. Prominent at this time was Mr. I.L. Rice, the same gentleman who has before been quoted in connection with Mr. McLeod’s operations in New England stocks. Mr. Rice had been a member of the syndicate which had put Mr. McLeod into the presidency, and had served as foreign representative of the company during his rÉgime. He had been instrumental in forming the anthracite coal combination, and at the time of the Reading failure had been in England raising money to finance the coal holdings then acquired.264 Returning from Europe upon the appointment of receivers, he examined the Reading books with the results which have been noticed, and now appeared as the active enemy of everything connected with Mr. McLeod, even to the receivers who had succeeded him. In May, 1893, he resigned the seat which he had held on the Reading board, on the ground that the management had condoned the use by Mr. McLeod of the company’s securities in carrying on his private and personal speculations; in September he resigned from the income bondholders’ committee, and attacked in a circular the McLeod rÉgime and the succeeding receivership;265 and in December he applied for the removal of the receivers, alleging that they had grossly neglected their duties to the stockholders, and had ignored the financial transactions of Mr. McLeod prior to their appointment.266 In spite of his hostility to the existing rÉgime, Mr. Rice hoped to rehabilitate the company without foreclosure or, indeed, formal reorganization. The action of others was inspired by a less optimistic view. The original suit on which receivers had been appointed had been brought by one Thomas C. Platt; but as early as March Alfred Sully and A.B. Rand of New York, and John Lowrie of London, holders of first and second preference income bonds, petitioned to intervene. In July Judge Dallas dismissed the Lowrie suit, but the petition was renewed in September, alleging that Mr. Platt “did not file his bill in good faith on his own behalf, and on behalf of all other holders of bonds, but at the request and for the benefit and protection of the men who were then managers of the Philadelphia & Reading Railroad Company and the Philadelphia & Reading Coal & Iron Company, and that the suit was not being pressed with due diligence.”267

All this time the receivers had been busy on a plan, which they presented in January, 1894. By leaving out of consideration some $5,000,000 of car trusts they arrived at the figure of $12,500,000 for the floating debt. This they proposed to cover by the issue of $6,000,000 in 6 per cent ten-year trust certificates, based on the stock of coal on hand, and by $10,000,000 in 5 per cent collateral trust bonds then in the treasury of the Reading Company. They hoped that a balance of $2,500,000 would then remain available for working capital or other purposes. General mortgage coupons were to be funded for five years, although the receivers planned to have a syndicate formed to purchase at par for cash the coupons as they matured, giving to the bondholders in each case the choice between receiving money or coupon trust certificates for the interest due. There was to be no formal reorganization, no cuts in charges, nothing but a provision for the floating debt and for a temporary funding of interest payments; and this was the more feasible because the Lehigh Valley lease had been by this time abrogated and the New England extensions definitely abandoned.268 It will be remembered that to the plan of May, 1893, it had been objected that the provisions contrived to bring in the floating debt ahead of previously existing liens, and were a premium on a kind of financial juggling too common among American railroads. This plan, therefore, avoided a new issue of bonds, and used only what the treasury already possessed. The coal notes were obviously unobjectionable, and served at the same time to utilize the unsalable stock which the management had earlier accumulated. If their value should prove small the loss would fall on the holders of the floating debt and not on the owners of the general mortgage bonds; while the return to the company was assured by arrangement with Drexel & Co., Brown Bros. & Co., and J. Lowber Welsh on the one hand, and the Finance Company of Pennsylvania on the other. On the whole this plan was gentle even to tenderness with the creditors of the road, and its failure revealed clearly the bondholders’ state of mind. The holders of the general mortgage refused to fund their coupons for five years, they refused to fund them for two years, and they insisted that foreclosure proceedings should be instituted unless they should receive immediate payment of their interest. “In view of this,” the receivers were forced to remark, “it would be idle for [us] to continue the efforts to readjust the affairs of the company....”269 The trouble with the receivers’ scheme was not that it demanded large concessions,—much larger had been asked and granted in 1887,—but that the general mortgage bondholders felt that on the one hand the road was very nearly earning fixed charges, so that in the contingency of a foreclosure sale their interests would be reasonably safe; and on the other that a demand for concessions so soon after a complete reorganization of the property was an irritant which might well be resented even at the risk of some pecuniary loss. Fortunately the assent of the bondholders was not necessary to the issue of the coal trust notes, and the receivers executed them under the authority of the court, practically as proposed.

In April, 1894, Mr. Simmons, chairman of the old general mortgage bondholders’ committee, resigned his position, and Mr. Fitzgerald, president of the Mercantile Trust Company, was chosen to succeed him. The committee presently issued a notice which, after reviewing its early activity, went on to say that it had believed it prudent to give the receivers every opportunity to familiarize themselves with the affairs of the company, but that in its judgment the time had come for action to enforce the rights of the bondholders under the mortgage.270 In May, 1894, a new general mortgage committee was organized, with Mr. F.P. Olcott as chairman, designed not directly to oppose the Fitzgerald Committee, but to hasten the rehabilitation of the property. The committee prepared a bondholders’ agreement calling for the deposit of general mortgage bonds, and in a statement of their position said: “Difficulties in the way of a foreclosure and reorganization thereafter are exaggerated; if any danger is wrought by such foreclosure it will fall upon the junior securities and not upon us.”271 Lastly, at this time, there was a committee headed by Mr. Earle, president of the Finance Company of Pennsylvania.

The first matured suggestion after the failure of the receivers’ plan appeared in what was known as the Olcott-Earle Agreement, published on September 25, 1894, which seems to have been in many respects a revival of that scheme. It proposed to cover the floating debt by the sale to securityholders of $10,000,000 collateral trust bonds, heretofore held in the treasury, and to fund coupons on the general mortgage 4s for five years. A syndicate agreed to advance $9,000,000, or as much thereof as might be needed, to buy the coupons as they should mature. The stock was to be held and voted by the reorganization committee until all the money advanced by the syndicate should have been repaid; that is, till June, 1898; a second syndicate guaranteed the sale of the collateral bonds at 70; and the preferred bondholders were asked to forego any claims for interest until all the general mortgage coupons should have been retired and cancelled. Certain other details are of interest. The collateral bond issue was to be taken up by the preferred bondholders and stockholders, each individual subscribing to 10 per cent of the par value of his holdings; but the bondholder might, if he preferred, pay 3 per cent of the par value of the securities he owned and receive nothing, instead of paying 10 per cent and getting a collateral bond. Securityholders were given 60 days in which to assent, and if at the end of that time the number of assents did not amount to practically all the interests involved, the committee proposed to reorganize by foreclosure for the benefit only of those who had assented to the plan; while for the future the committee was to provide by agreement with the railroad company that the latter should call an annual meeting of general and income mortgage bondholders and stockholders, at which bondholders as well as stockholders should vote in proportion to the par value of their holdings.272

It will be observed that the source of relief sought by this plan was precisely that of the receivers’ plan earlier described. Certain changes, however, of considerable importance were introduced. The subscriptions to the collateral issue were made distinctly obligatory, and an alternate assessment was provided; greater use was made of syndicate assistance; some voting power was given to the bonds; and a voting trust was added to ensure permanency of control to the designers of the reorganization till their work should be complete. On the whole there were still few concessions to creditors, and indeed could be few. Ten coupons of the general mortgage were to be funded, though it was made easy for the bondholder to get cash if he preferred it; the provisions concerning subscriptions to the collateral bonds were rather more burdensome than before; and the voting trust, while redounding to the ultimate advantage of creditors, was only indirectly a concession to their demands. The grant of voting power to the bondholders would have been a great concession, but the wording of the clause was vague and probably little practical effect would have ensued. As in the previous plans, no particular attention was paid to the reduction of fixed charges.

So much for the provisions of the plan. It was a hopeful innovation for the suggestions it contained to come from holders of general mortgage bonds, and seemed to give some evidence of a change of heart; especially since the Olcott Committee did secure the assent of a larger proportion of the issue than had accepted either of the propositions before brought forward. The Fitzgerald Committee strenuously protested, still insisting on the advisability of foreclosure; and further objections came from Mr. Rice and from the Hartshorne Committee. Nevertheless, the general mortgage as a whole gave its consent, and ultimate shipwreck was due only to the abstention of the income mortgage bonds.273 It is not surprising that the income bondholders should have felt that the plan had little in it for them. They had been given no voice in its making,—their wishes had at no time been regarded. During the whole reorganization the question had been of the terms to which the general mortgage bondholders would consent, and the only sign of the existence of junior liens had been an occasional fearful inquiry as to what would become of them under foreclosure; until now the combination of a voting trust with the expenses of a syndicate reorganization, and an assessment upon them and upon the stock, touched the limit which they would stand. There was, moreover, at this time no question of the wiping out of the value of their holdings. The preamble to the Olcott-Earle plan stated that the annual charges were $10,477,560 and that the net earnings for 1891 had been $10,977,398; thus showing that something was left for the junior securities even after the payment of interest on all prior and general mortgage liens. It seemed also barely possible that the difficulties of a foreclosure, with the danger under the laws of Pennsylvania of losing the coal properties of the company, might secure better terms for the holders of junior obligations in case they should withhold their assent.

Early in January, 1895, the following official notice was issued: “The plan of readjustment, dated October 1, 1894, has not been assented to by a sufficient number of income bondholders and stockholders to make the same effective. The committee now hold over a majority of the general mortgage bonds, and have, in accordance with the bondholders’ agreement of May 7, 1894, and their circular of October 1, 1894, notified the trustees of the general mortgage to bring suit for the foreclosure thereof ... as expeditiously as possible.”274 Suit for foreclosure was brought March 2 in accordance with the announcement, and the Junior Securities Protective Committee, an organization with purposes indicated by its name, was allowed to intervene. Meanwhile the Fitzgerald and Olcott committees together prepared and brought forward the final reorganization scheme. The conditions now differed from those with which any previous plan had been confronted, in that it was no longer necessary to seek for as little change as possible, and a broader, more radical reorganization was in point. “Unless,” began the scheme, “the managers shall decide to proceed without foreclosure or sale, the properties of the existing Reading companies will be sold and successor companies will be organized under the laws of Pennsylvania, and the stock and securities of these successor companies will be vested in a new company formed, or to be formed, under the laws of Pennsylvania or of some other state.”

There were to be issued:

If at any time dividends of 4 per cent should have been paid on the first preferred stock for two successive years the company might convert the second preferred stock at par, one-half into first preferred and one-half into common stock. These new issues were ultimately to retire all outstanding securities, to provide for expenses of reorganization, and to go for new construction, additions, betterments, etc., in the succeeding years. Since, however, it was obviously impossible to cancel prior liens before maturity, sufficient general mortgage bonds ($44,550,000) were reserved from immediate issue to retire these when they should fall due. This left new general mortgage bonds with four classes of stock against old general mortgage bonds with three classes of preferred bonds, common stock, and deferred incomes; and, as might be expected, new general mortgage 4s were given for the old general mortgage, second preferred and common stock went for preference bonds, and new common stock for old common stock and deferred income bonds. Certain cash payments were made on the general mortgage, and $4,000,000 of the new issue were sold to a syndicate; but on the whole we may say that the prior liens and general mortgage bondholders occupied the same position in the new company which they had occupied in the old; that the income bondholders exchanged a bond with a lien on income for a stock with a right to dividends; and that the floating debt, syndicate, and other expenses were given equal rights with the general mortgage.

No additional mortgage was to be put upon the property, nor was the amount of the first preferred stock to be increased, except with the consent, in each instance, of the holders of a majority of the whole amount of each class of preferred stock, given at a meeting of the stockholders called for that purpose, and with the consent of the holders of a majority of such part of the common stock as should be represented at such meeting, the holders of each class of stock voting separately; neither was the amount of the second preferred stock to be increased, except in a similar way. These careful clauses made some provision for future capital requirements necessary which should be independent of the consent of the stockholders at any time; and $20,000,000 general mortgage bonds were accordingly set aside, to be issued in amounts not greater than $1,500,000 in any one year for future construction, equipment, and the like. Additional general mortgage bonds were provided to retire Philadelphia & Reading Terminal and Coal & Iron Company bonds up to the sum of $21,000,000.

The floating debt, estimated at $25,150,000, was provided for in part by assessment, and in part by the sale of securities to the syndicate for cash; 20 per cent being levied on first, second, and third preference income bonds, 20 per cent on the stock, and 4 per cent on the deferred incomes; while the syndicate agreed to take $4,000,000 of the new general mortgage bonds and $8,000,000 of the new first preferred stock. The assessment was expected to yield $20,862,289, and the syndicate to contribute in cash $7,300,000; leaving an estimated cash balance of $3,000,000. In addition, the syndicate (Messrs. J.P. Morgan & Co., J. Kennedy Tod & Co., Hallgarten & Co., and A. Iselin & Co.) undertook to underwrite the payment of the assessments on the income bonds and stock, and to guarantee the extension or payment of the improvement mortgage and Coal & Iron Company bonds, most of which were to mature in the following two years. No great reduction of fixed charges was of course to be expected. The cancellation of the floating debt effected, nevertheless, a certain saving, so that charges for the future were estimated at $9,300,000 as against net earnings of $9,839,971 in 1894; while the refunding or extension of maturing bonds was looked to for a reduction of $500,000.275

It is plain that this plan favored the general mortgage bondholders to the last degree, and admitted them to the reorganized company with absolutely no sacrifice save that of the addition of $4,000,000 to the total general mortgage issue. They funded no coupons, they suffered no diminution of interest and no shaving of principal; they paid no assessment; and as an additional protection to them, the provision was inserted that all classes of stock of the new company, except such number as might be disposed of to qualify directors, were to be voted by three voting trustees, of whom J.P. Morgan and F.P. Olcott were designated in the plan. It has seldom happened in any reorganization that a mortgage similar to the general mortgage in this case has been able to take and hold so strong a position.276 The secret lay in the fact that the road had been earning the interest on the general mortgage bonds; and that under these circumstances no interest or combination of interests could force the holders to accept less than payment in full of all their claims. The situation could never have arisen in the earlier reorganization; it could never have occurred where a reduction in annual payments was required for the salvation of the property, or even where the amount of cash to be raised to pay the floating debt was so large that junior securityholders would have relinquished their holdings rather than pay the necessary assessments. In this case none of these conditions existed, and all the burden was thrown on the holders of junior mortgages and stock. It must be remembered, also, that though in ordinary cases the difference between the income bonds which the old first and second preference bondholders surrendered and the preferred stock which they received would not have been very great, yet here the provisions of the old income mortgage, which forbade the deduction from net earnings of any interest on bonds subsequently created until its interest should have been paid, rendered the loss more serious.

To sum up, the holders of junior securities and stock paid the expenses of reorganization, paid the floating debt, lost what right they had to interest before the settlement of interest on subsequently created claims, and got only stock, and for the most part second preferred or common stock at that. The general mortgage bondholders got new 4 per cent bonds, plus 12 per cent, or 2 per cent in cash, had no greater interest charges ahead of them, and without paying any assessment or making any concession, except to allow the immediate increase of the amount of their issue by $4,000,000, and thereafter by $1,500,000 per year, secured a lien on the assets of the company; a privilege which was, moreover, extended to undeposited as well as to deposited bonds. The company itself was dissolved, but the new corporation which took over its assets enjoyed, with slightly decreased charges, freedom from the old floating debt and from the extensions and combinations which had caused the floating debt of the old management, and seemed besides a strong financial backing.

In May, 1896, Judge Atchison of Philadelphia signed the decree for the foreclosure and sale of the property of both the Railroad and the Coal & Iron Companies, and on September 23 the sale took place, C.H. Coster, of J.P. Morgan & Co., and Francis Lynde Stetson paying an aggregate of $20,500,000 for the whole estate.277 The sale ended the life of the old Reading charter; and in view of the constitution adopted for the state of Pennsylvania in 1871, which forbade any railroad owning more than 30,000 acres of coal land, some device had to be sought whereby the Philadelphia & Reading Railroad and the Philadelphia & Reading Coal & Iron Companies could hold together. Diligent search revealed the existence of the “National Company,” a corporation chartered in 1871 by special act of the legislature of Pennsylvania at the very time when the new constitution was under consideration. This company, originally the Excelsior Enterprise Company, had power “to purchase, improve, use, and dispose of property to contractors and others and for other purposes,” with privileges fully as broad, it was said, as those enjoyed by the Reading before foreclosure.278 The National Company now changed its name to the Reading Company, called a special meeting, increased its stock to the amount required by the plan of reorganization, and, jointly with the Coal & Iron Company, authorized a mortgage to secure bonds up to a possible amount of $135,000,000; to be secured on the property of both companies, including the stock and bonds of the Railway Company. Meanwhile the Philadelphia & Reading Railway Company had been organized to succeed to the property and franchises of the old Philadelphia & Reading Railroad Company,279 with a capital stock of $20,000,000 in $50 shares. The charter of the Coal & Iron Company was preserved in spite of the foreclosure sale.280 The next step was for the Reading Company to exchange its bonds and stock for the general mortgage bonds and stock of the two minor companies in the proportions already agreed upon, and to deposit the securities so obtained in its treasury; leaving the prior liens the only direct obligations of either company in the hands of the public. This meant, of course, absolute control of both companies by the Reading Company; and in the future, when the prior liens should mature, it was to mean the replacement of all outstanding obligations by the obligations of the holding company. Both the Railway and the Coal & Iron Companies retained their separate organizations; the belief was that there was no merger which might be attacked before the courts; that it only happened that one corporate individual had invested in both Railroad and Coal Company shares and proposed to vote this stock, as was lawful, to further the policies of which it approved.281 Representatives of the reorganization managers laid an elaborate defence of the legality of these operations before Attorney-General McCormick of Pennsylvania, and on January 2 secured an opinion confirming the validity of the charter of the Reading Company. “After due consideration,” said Mr. McCormick, “I reach the conclusion, most reluctantly, that the Commonwealth of Pennsylvania cannot now successfully attack the chartered rights of the Reading Company.... My view of the whole matter is that the charter of the company authorized it to do the kind of business in which it engaged prior to January 1, 1874, which business was of the same general character as that in which it proposes to engage for the purpose of controlling the stocks of the Railway Company and the Coal & Iron Company.”282

Like the Baltimore & Ohio and the Erie, the Reading has benefited largely from the favorable business conditions of the last decade. The combined income of the three Reading companies has grown from $48,422,971 in 1898 to $95,715,088 in 1907.283 Earnings on the Philadelphia & Reading Railway alone are now nearly as great as the combined income of the three companies at the earlier date. Net receipts were $13,586,710 in 1898 and $29,190,316 in 1907; and the surplus over all payments rose from $1,376,420 to $8,741,454 between those years. It is important to notice that this showing does not depend primarily upon the anthracite business. Not only has the carriage of general merchandise increased until it affords to the railway a return almost equal to the earnings on coal, but in the coal business itself bituminous has assumed an importance nearly as great as that of its harder rival. The Coal & Iron Company still concerns itself almost entirely with anthracite, and has accordingly been more affected by special causes. The strike of the miners in September and October, 1900, and again from May to October, 1902, checked the growth in production for a time; but the increased demand for domestic consumption has made possible an increase in output from 4,849,002 tons in 1897 to 10,034,713 in 1907. Increasing business has stimulated improvements. Over $15,300,000 have been withdrawn from income by the Philadelphia & Reading Railway Company for this purpose between 1896 and 1907; and over $10,000,000 have been invested from earnings by the Coal & Iron Company during the same time in colliery improvements alone. Maintenance charges have been ample. Whereas $1300 to $1500 per mile of single main track are sufficient for normal repairs upon a trunk line, the Philadelphia & Reading Railway has spent over $2600 per mile of line for the last seven years, and over $1700 for the three years preceding. As much as $73 has been spent in a single year for average maintenance per freight car, $609 in maintenance per passenger car, and $3244 in maintenance per locomotive. In consequence of these repairs and of renewals upon a considerable scale, the average value of all locomotives has increased between December 1, 1896, and June 30, 1906, from $4906 to $8393; the average value of freight cars producing revenue from $383 to $622; the average value of steam colliers and tugs from $41,533 to $55,451; and the average value of barges from $7930 to $21,074. The average freight train load was 194 tons in 1897 and 403 tons in 1907. Ton-mileage has increased during the period 159 per cent and freight train mileage only 27 per cent.

It is true that no great sums have been spent from capital account. $5,137,825 in car trust certificates were outstanding on June 30, 1907, and $5,608,000 in general mortgage bonds have been sold and the proceeds invested principally in new equipment, but this is all. Improvements have been made mainly from earnings, and fixed charges have not had to be increased. In fact, the voting trustees stated at the expiration of their trusteeship in 1904 that, eliminating the fixed charges created since December 1, 1896, on account of the acquisition of additional properties and interest upon the additional mortgage bonds issued for the purchase of equipment, the fixed charges of the Reading system were $1,018,065 less for the fiscal year ended June 30, 1904, than they were for the fiscal year ended November 30, 1896.284

It thus comes about that the finances of the Reading, while not as secure as could be desired, are yet in better shape than they have been for thirty years. Fixed charges, taxes, and operating expenses285 took 86 per cent of gross income in 1907, but a decline of nearly $12,000,000 in net earnings must precede a default on any bonds outstanding. To this margin should be added the considerable amount by which maintenance expenses now surpass normal figures. An initial dividend was declared on the Reading Company first preferred stock in August, 1900; on its second preferred in October, 1903; and on its common in February, 1905. Four per cent is now being paid upon all classes of stock.

Large amounts of Reading stock are held by the Baltimore & Ohio and by the Lake Shore. The Reading has again bought control of the Central of New Jersey, and owns besides a steamship line and something under 500 miles in other subsidiary roads. Its large earnings, its troubles with its mine employees, its influence over the supply of a necessity of life, and the possibility of discrimination which its control of both railroad and coal properties affords, have made it a target for legislative attack from state and national governments. Action was begun by the Department of Justice in 1907 to dissolve the merger between the Reading and the Central of New Jersey. In June of the previous year the so-called “commodity clause” of the Hepburn Act forbade any railroad company to transport in interstate commerce any article except timber and the manufactured products thereof which it should have produced, or in which it should have any interest, except those products necessary and intended for its own use in its business as common carrier. The legality of the Reading’s position in these matters is yet to be decided by the courts. The student may well doubt whether legislative action will ever succeed in preventing the common ownership of the Reading railroad and mining interests. What is more probable is that a strict governmental control will come to be imposed. Against this proper development no appeal to legal technicalities will avail.