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.