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.