Lehigh Valley Railroad - History - 1890-1900 - The Reading Lease

The Reading Lease

The 1890s were a period of turmoil for the LVRR. Although the decade began with the completion of its terminals at Buffalo and Jersey City, and the establishment of a trunk line across New York, the company soon became entangled in business dealings which ultimately led to the Packer family's loss of control.

The coal trade was always the backbone of the business but was subject to boom and bust as competition and production increased and the economy cycled. The coal railroads had begun in 1873 to form pools to regulate production and set quotas for each railroad. By controlling supply, the coal combination attempted to keep prices and profits high. Several combinations occurred, but each fell apart as one road or another abrogated its agreement. The first such combination occurred in 1873, followed by others in 1878, 1884, and 1886. Customers naturally resented the actions of the cartel, and since coal was critical to commerce, Congress intervened in 1887 with the Interstate Commerce Act that forbade the roads from joining into such pools. Although the roads effectively ignored the Act and their sales agents continued to meet and set prices, the agreements were never effective for long.

In 1892, the Reading Railroad thought it had a solution — instead of attempting to maintain agreements among the coal railroads, it would purchase or lease the major lines and bring them into a monopoly. It leased the CNJ and the LVRR, purchased the railroads' coal companies, and arranged for the Delaware, Lackawanna and Western Railroad to cooperate with the combination, thereby controlling 70% of the trade. Unfortunately, it overreached and in 1893 was unable to meet its obligations. Its bankruptcy resulted in economic chaos, bringing on the financial panic of 1893 and forcing the LVRR to break the lease and resume its own operations, leaving it unable to pay dividends on its stock until 1904. The economic depression following 1893 was harsh, and by 1897 the LVRR was in dire need of support. The banking giant J. P. Morgan stepped in to refinance the LVRR debt, and obtained control of the railroad in the process. Ousting President Elisha P. Wilbur and several directors in 1897, the Morgan company installed W. Alfred Walter as President and seated its own directors. In 1901 Morgan arranged to have the Packer Estate's holdings purchased jointly by the Erie, the Pennsylvania, the Lake Shore and Michigan Southern Railway, the DLW, and the CNJ, all companies in which Morgan had interests. Newly elected President Eben B. Thomas (formerly of the Erie) and his Board of Directors represented the combined interests of those railroads.

A final attempt to establish a coal cartel took place in 1904 with the formation of the Temple Iron Company. Prior to that time, the Temple Iron Company was a small concern that happened to have a broad charter allowing it to act as a holding company. The Reading, now out of receivership, purchased the company and brought the other coal railroads into the partnership, with the Reading owning 30%, the LVRR 23%, the Delaware, Lackawanna and Western 20%, CNJ 17%, Erie 6%, and New York, Susquehanna and Western 5%. The purpose of the Temple Iron Company was to lock up coal production and control the supply. Congress reacted with the 1906 Hepburn Act, which among other things forbade railroads from owning the commodities that they transported. A long series of antitrust investigations and lawsuits resulted, culminating in a 1911 Supreme Court decision that forced the LVRR to divest itself of the coal companies it had held since 1868. The LVRR shareholders received shares of the now independent Lehigh Valley Coal Company, but the railroad no longer had management control of the production, contracts, and sales of its largest customer.