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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“(5) The syndicate to be allowed interest at the rate of 6 per cent upon any amount they may advance the company in the course of the process of foreclosure and reorganization.

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

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

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

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

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

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

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

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

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

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

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

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

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