Contentious Recovery, New Expansionism
Though Gowen's powers as president were eclipsed by the appointment of receivers, his position as the one receiver who had close knowledge of the overall operations of the combined rail and coal businesses placed him in the middle of revitalization efforts. However, his hitherto support from the McCalmont Brothers banking concern was about to unravel through a series of discords into downright enmity. The McCalmonts owned at the time two-thirds of the Reading's stock and half of its bonds, and they formed their own committee to look after the interests of (especially British) bondholders. Initially this committee, chaired by a former Lord Chancellor, approved with reservations Gowen's inclusion as a receiver on the bases that "he proprietors of the bonds and stocks of the company in America have evinced their satisfaction with the choice of receivers," and that his "action... as receiver will be controlled by his colleagues and by the court." It was not long, though, before these optimisms were being rethought.
Before any concrete planning to regain solvency could be undertaken, an accurate accounting of the railroad's condition was required. The receivers' report, issued in June 1880, indicated total liabilities of US$145,494,005. Annual carrying charges were just over US$7.5 million, while net revenues were just under US$5.5 million. Already, this early into the process, the English bondholders' committee contended that expansions in the Reading's floating debt incurred during the six months prior to the bankruptcy were not covered by value in the corporation's assets.
Three plans of reorganization were put forth before the end of 1880. The first came from the McCalmont faction; the second from a former vice president of the Reading; and the third from Franklin Gowen. The McCalmont plan would have given preferred protection to senior mortgage bond holders and also would have put a levy upon stockholders, US$15 per share, towards substantially paying down floating debt. The second plan did away with the levy—heavily objected to by American shareholders—but was contingent for success upon the Reading's preferred stock being worth roughly four times its current trading value.
The third plan was put forth by Franklin Gowen in the context of known contemplation by the English bondholders of exercising their right of foreclosure against the Reading. Gowen's plan called for receivership to last for five years, for which time he projected increasingly improved business performance, reduction of fixed expenses to a manageable level, and liquidation of floating debt by the selling off of assets and/or conversion into preferred stock. This plan, as put forth to the McCalmonts, was accompanied by Gowen's offer to step aside as receiver. The English faction agreed to a plan very close to Gowen's, but with the stipulation that Gowen should indeed be replaced as receiver by someone not involved in the corporation's management prior to the bankruptcy. Gowen backpedaled vigorously.
He still held the positions of receiver and president, and had the confidence generally of the corporate board and of many American investors. In late 1880 Gowen traveled to England to attempt repairing relations there, and at the same time sought to postpone the annual shareholder meeting, with its election of president and board, from its regular January schedule. Through cross litigation by the Reading board and the McCalmonts the postponement was realized, and then Gowen began a campaign to get American shareholders to not attend the meeting. His argument to them was that the Reading was in danger of undermining influences from rival railroads (especially the Pennsylvania), but his hope was that the postponement would change the voting rules, and the absence of his allied shareholders would prevent a qualified quorum from being present. When the meeting was finally held in March 1881, however, and the McCalmont-dominated voting resulted in election of a different president and board from Gowen and his associates, Gowen resorted to new litigation. State and federal courts ruled against him, though, and he grudgingly gave access to the corporate offices to his temporary successor, Frank S. Bond—though in surrendering the physical office, Gowen retained possession of the company records. It was at this point that Gowen hired the Philadelphia Academy of Music for the purpose of addressing stockholders, as well as Philadelphia's political and business leaders. His three-hour oration not only excoriated the McCalmont Brothers' "cowardly meanness," but accused them and their American agents, Kidder, Peabody, of working in league with the Pennsylvania Railroad in order to attempt moving the Reading into the sphere of control of that much larger corporation. This oration was interrupted frequently by applause, but it did not change the fact of Gowen's removal from his presidency.
No longer president, Gowen was still a receiver, and from that position he continued to lobby for his reorganization plan to stockholders, to the McCalmonts, and even to the new president. President Bond, however, was lobbying for his own new plan of reorganization, and things remained at somewhat of a standstill in that regard.
On another front, however, Gowen was maneuvering to regain the presidency, and toward that end he forged a pivotal alliance with William Vanderbilt, president of the New York Central and other railroads. Vanderbilt bought up a large block of Reading Railroad stock, sufficient to reelect Gowen as president in January 1882. The same annual meeting saw resolutions passed approving Gowen's reorganization plan and requiring the incoming board of managers to put that plan into effect.
In response to this turn of events, McCalmont Brothers liquidated its holdings in the Reading and withdrew from ongoing litigation. The forty-year predominance of English capital in the finances and affairs of the Reading Railroad was thus ended; but in exchange the company's future became a fresh, inviting target for opportunistic American capital.
In 1881 and 1882 the Coal & Iron Co. continued to register losses, but the railroad actually saw upturns in its passenger, coal and merchandise freight business lines. Austerity measures implemented early in the bankruptcy at the railroad's car production and repair shops in Reading now found these operations taxed to their limits. Rather than rehabilitate these units, though, Gowen put money into building diverse new stations as well as a million-bushel grain elevator at Port Richmond. He also moved to expand the Reading Railroad's scope by having it lease the Central Railroad of New Jersey (the Jersey Central). His ally William Vanderbilt supported the move as it would increase the value of his own railroad's interconnection at New York Harbor. Ominously, the Jersey Central was at the time in receivership, and the deal included assumption by Gowen's Reading of the Jersey Central's US$2 million of floating debt and guaranteeing a 6% dividend on all of the Central's stock then outstanding.
Next, Gowen and Vanderbilt hit upon a plan to turn the Reading into a trunk line by building new extensions: two from Williamsport: one to Buffalo and one to northwestern Pennsylvania's soft coal region in Clearfield County; a third, in collaboration with the B&O, that would form a direct line from Washington, DC through Philadelphia to New York; and most ambitiously a fourth—the so-called South Penn line—that would extend the Reading's western reach from Harrisburg to Pittsburgh. They formed a syndicate including steelmakers Andrew Carnegie, Henry Oliver, Henry Clay Frick, Pennsylvania career politician J. Donald Cameron, and—paradoxically, given Gowen's longstanding litigious hostility to Standard Oil—John D. and William Rockefeller. Predictably, the rival Pennsylvania Railroad, which dominated rail service into Pittsburgh, looked askance upon such plans as they became known.
Operating in the atmosphere of improved business conditions generally, the Reading Railroad emerged from receivership in February 1883. That year witnessed continued improvement in the Reading's rail businesses, and in his annual report at the end of the year, Gowen made glowing predictions of prosperity for the road overall, including its new expansionist endeavors. "The company has now surmounted the difficulties of the last four eventful years," Gowen proclaimed; but that was not an accurate assessment of all the facts. Nevertheless President Gowen seized the moment of high praise from American shareholders for "rescuing our property from bankruptcy against the malignant and determined efforts of its enemies and conspirators to foreclose and wreck it," to remove himself from the official duties and pressures of president. At the January 1884 annual meeting he resigned in favor of his recommended successor, George deBenneville Keim, his close friend and associate since their days as young attorneys in Pottsville. Gowen's resignation was over the objections of his ally and friend, William Vanderbilt; but the former assured the recent investor in the Reading that the nature of his relationship with Keim would assure his close involvement in all matters related to running the company.
The same meeting that elected Keim authorized a new US$12 million loan issue to pay the recently increased floating debt and the balance due on the Jersey Central deal. It also considered a proposal from Gowen of paying out a 21% dividend on preferred stock, in case the loan issue should be successfully placed. However, in spite of President Gowen's glowing predictions at year-end 1883, "carcely any of the benefits of plan of reorganization had been secured; fixed charges had not been reduced, because it had been 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 ... 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." An additional immediate legacy of the second Gowen expansionist presidency was the payment in company scrip for labor and supplies in May 1884 and an accompanying new fall in the value of Reading Railroad securities. On June 2, 1884, although Gowen was no longer president of the Reading, the company again passed as a direct result of his adventuristic management into bankruptcy and the hands of receivers, including this time not Gowen but his hand-picked successor as president, George deB. Keim.
Before Keim's election as president, Franklin Gowen had assured his friend, William Vanderbilt, that "on account of the relations existing between Mr. Keim and myself ... I can control the Reading...." However the new management, under Keim, in fact was not keen to continue Gowen's affiliation with the company at all. Following a confrontation between the two old friends, in which Gowen was told (by his own later recounting) "you were not a very successful president of this company, and now other people have got hold of it; we are responsible and you are not"; Gowen's hyperbolic response eventually obtained him a position as counsel, allowing him to offer advice but make no decisions.
Throughout 1884 and into 1885, Gowen jockeyed and jostled to make his way back into active management of the Reading, but with no real headway. A hidden roadblock to all his efforts was that management was attempting to obtain fresh financing through the Philadelphia firm of Drexel and Company. It was clear that these conservative financiers—including a not yet well known partner, J.P. Morgan—would have inevitably turned away from any such dealing if Franklin Gowen were managerially involved in the Reading. These matters were further complicated by tightening business conditions in those two years. Vanderbilt's alliance with Gowen had begun as part of a campaign by his New York Central against the Pennsylvania Railroad, and both of these trunk lines were feeling the pinch of hard times. Morgan felt the pinch as well in the form of poor performance from his New York Central share holdings.
Morgan then began a campaign of his own to bring peace—that is, an amicable reduction of profit-destroying competition—between the two trunk lines. In the working out of this peace, Gowen's erstwhile syndicate for constructing the South Penn line that would turn the Reading into a viably competitive trunk line was undermined entirely, leaving little prospect of completing that project. Ultimately, significant portions of the South Penn's right of way and partly completed gradings lay fallow until they were eventually utilized in the 1930s for construction of the Pennsylvania Turnpike.