How Greed Destroyed America’s Largest Railroad Company
How Greed Destroyed America’s Largest Railroad Company
In 1968, the Pennsylvania Railroad was the largest corporation on the planet.
It merged with its oldest rival to create the most powerful transportation company the world had ever seen.
Two years later, $7 billion in assets evaporated in the largest corporate bankruptcy America had ever seen.
This was not death by competition.
This was suicide by boardroom.
In 1846, Pennsylvania was falling behind.
New York had the Erie Canal.
Maryland had the Baltimore and Ohio Railroad.
Goods and people were flowing around the state, not through it.
So, the state chartered its own railroad, the Pennsylvania Railroad, running from Harrisburg to Pittsburgh, straight through the Allegheny Mountains.
The problem was that no railroad in America had ever figured out how to cross them efficiently.
That job fell to J. Edgar Thomson, the railroad’s first chief engineer.
Thomson’s solution was the Horseshoe Curve, a massive sweeping bend carved into the side of a mountain near Altoona that let trains climb the Alleghenies in one continuous run.
Before that, locomotives had to be disassembled and hauled over the mountains on inclined planes.
Thomson made that obsolete overnight.
But, Thomson wasn’t content just solving engineering problems.
He wanted to run the entire operation.
He became president in 1852, and within two decades, he had bought out rival lines, absorbed smaller railroads, and turned a regional route into a system that stretched from New York City to Chicago, from Washington, D.C.
To St. Louis.
And Thomson built something into the railroad’s DNA that no competitor could match.
He standardized everything.
From the gauge of the track down to the way conductors addressed passengers.
While other railroads ran like loose frontier operations, the Pennsylvania Railroad ran like a military organization.
They called it the Standard Railroad of the World.
That pride, that absolute certainty that the Pennsylvania Railroad did things better than anyone else, would define the company for the next century.
But, eventually, that same certainty would blind the men running it to the fact that their empire was rotting from within.
Thomson died in 1874.
But, by then, the Pennsylvania Railroad had its own momentum.
His successor, Tom Scott, pushed it even further, extending lines into the Midwest and locking down freight contracts with the steel mills, coal mines, and oil refineries that were turning America into an industrial superpower.
And the Pennsylvania Railroad didn’t just move that freight.
It built the machines that carried [music] it.
The Juniata Shops in Altoona became one of the largest locomotive manufacturing facilities on Earth, employing tens of thousands of workers in a single complex, and turning a tiny mountain town into a company city that lived and breathed Pennsylvania Railroad.
By the early 1900s, the railroad employed over a quarter million people.
The entire United States Army in peacetime had [music] fewer soldiers.
The Pennsylvania Railroad was hauling the raw materials of American industry from Pittsburgh’s blast [music] furnaces to East Coast ports, pulling in revenue that rivaled the federal government’s own budget.
But, the man who took over next was not satisfied with just dominating freight.
Alexander Cassatt wanted the Pennsylvania Railroad to make a statement.
Every other railroad stopped at the edge of the Hudson River and ferried passengers into Manhattan.
Cassatt wanted to tunnel under it.
He spent $115 million, roughly $4 billion in today’s money, to bore twin tunnels beneath the Hudson River and build a terminal in the heart of New York City.
Pennsylvania Station.
The station was modeled after the ancient Roman Baths of Caracalla, with a main waiting room that stretched 150 ft overhead and columns of pink granite lining every concourse.
A cathedral to the idea that the Pennsylvania Railroad was permanent, that it would outlast everything around it.
Wall Street agreed.
Pennsylvania Railroad stock became the safest investment in the country, the one pension funds and banks pointed to when clients wanted something guaranteed.
The company paid dividends every single year from 1848 through the 1940s, nearly a century without missing a payment.
But, that streak, that obsession with never missing a dividend, would quietly become the thing that destroyed them.
During World War II, the Pennsylvania Railroad moved more troops and war material than any other railroad in the country.
Business was booming, and the Pennsylvania Railroad looked invincible.
But, the war masked a shift that was already underway.
Americans were buying cars, suburbs were spreading, and the passengers who used to fill Pennsylvania Railroad coaches every morning were now driving to work on freshly paved roads.
Then, in 1956, President Eisenhower signed the Federal Aid Highway Act, authorizing 41,000 miles of interstate highways.
The federal government committed $25 billion to build them.
Railroads got nothing.
The Pennsylvania Railroad’s leadership had watched highways and airlines grow for a decade and dismissed them as passing trends.
The railroad had survived the Civil War, two World Wars, and the Great Depression.
In their minds, it would survive this, too.
Trucks took the freight and airlines took the passengers.
And the board of directors, faced with a railroad that desperately needed billions in reinvestment, made a choice that would define the next decade.
They kept paying dividends.
The track was deteriorating.
Locomotives were aging out.
And stations were falling apart across the system.
But, every dollar spent on maintenance was a dollar that did not go to shareholders.
The board, terrified of losing that blue-chip reputation, chose appearances over reality.
When the dividends started costing more than the railroad was earning, management did not cut them.
They started selling things, profitable real estate, coal properties, anything that could be liquidated to keep the payments flowing.
They were hollowing out the railroad to maintain the illusion that it was still healthy.
In 1963, the Pennsylvania Railroad demolished Penn Station.
Cassatt’s monument to permanence, with ceilings that rose 150 ft and pink granite columns, was torn down and replaced with a squat office building and a cramped underground terminal.
The railroad sold the air rights, so Madison Square Garden could be built on toP. The outcry was enormous.
The New York Times called it a cultural tragedy, and the demolition directly inspired the creation of the New York City Landmarks Preservation Commission.
But, the Pennsylvania Railroad did not care about legacy.
They needed cash.
And that desperation was about to lead them into the worst corporate decision in American history.
By the mid-1960s, the Pennsylvania Railroad was bleeding from every direction.
Passengers were gone.
Freight customers were switching to trucks, and decades of deferred maintenance had left the physical railroad in dangerous condition.
Derailments were becoming routine.
Stuart Saunders, the railroad’s chairman, believed he had one move left.
Merge with the enemy.
The New York Central Railroad, the Pennsylvania Railroad’s oldest and fiercest rival, was drowning in the same probleMs. Saunders’ solution was to tie the two sinking ships together and hope the combined wreckage would somehow float.
He pitched it to regulators and shareholders as simple math.
Eliminate duplicate routes, cut redundant staff, and create a railroad powerful enough to fight back against the highways and airlines that were eating them alive.
On February 1st, 1968, the merger went through.
Penn Central became the largest corporate merger in American history.
The two railroads had been trying to destroy each other for over a century.
Now, their executives were supposed to sit in the same boardroom and cooperate.
Instead, Pennsylvania Railroad men and New York Central men fought over [music] everything.
The fighting got so petty that managers from one side would reroute freight cars away from yards controlled by the other side, not because it was efficient, but out of spite.
Freight cars disappeared into the Penn Central system and could not be located.
Shipments that used to take two days were taking two weeks.
Customers did not wait around for Penn Central to figure itself out.
They called trucking companies, and most of them never came back.
And while the railroad was disintegrating, Saunders was not trying to fix it.
He was pouring hundreds of millions into real estate ventures, hotel chains, pipelines, and an amusement park company.
His vision for Penn Central was not a better railroad.
It was a conglomerate that happened to own some track.
When the losses became impossible to ignore, Saunders and his board did not come clean.
They hid them.
They shuffled money between subsidiaries to create the appearance of profit.
They sold railroad assets to their own shell companies at inflated prices.
Booking phantom revenue on deals that existed only on paper.
For 2 years, Penn Central’s financial statements told Wall Street that the company was struggling but stable.
It was already dead.
Wall Street figured it out too late.
On June 21st, 1970, just 2 years after the merger, Penn [music] Central filed for bankruptcy.
$7 billion in assets were wiped out.
Tens of thousands of workers faced layoffs.
And the stock that widows and orphans had been told was the safest investment in America was now worthless.
The Nixon administration seriously considered a federal bailout, fearing that Penn Central’s collapse could drag the stock market down with it.
They ultimately let it fail.
And the aftermath helped trigger a broader recession that punished the American economy for years.
What Penn Central left behind looked like the aftermath of a war.
Thousands of locomotives sat rusting in rail yards across the NortheaSt. Too neglected to run and too expensive to repair.
Track had deteriorated so badly that on some main lines, trains were restricted to 10 mph.
Freight that used to move at speed now crawled.
The company towns suffered worSt. Altoona, the city the Pennsylvania Railroad built from nothing, watched the Juniata shops go quiet.
Tens of thousands of jobs vanished from a community that had no other major employer.
Families that had worked for the railroad for three generations had nothing.
Saunders was forced out before the bankruptcy filing.
But he was never criminally prosecuted.
He walked away while the workers, the shareholders, and the taxpayers were left to clean up what he had broken.
In 1976, the federal government stepped in and created Conrail, a government-backed corporation that absorbed Penn Central and five other bankrupt Northeastern railroads.
Taxpayers funded over $7 billion in rebuilding, replacing rotted track, overhauling locomotives, and modernizing yards that had not seen real investment in decades.
It took years, but Conrail slowly brought the system back to life.
New track went down.
Modern diesel locomotives replaced the aging fleet.
And freight customers who had abandoned rail started coming [music] back.
By the late 1980s, Conrail was actually turning a profit.
>> [music] >> In 1987, the government sold it to the public in what was then the largest initial public offering in American history.
In 1999, Conrail was purchased and divided between Norfolk Southern and CSX.
The bones of the Pennsylvania Railroad still carry freight today.
Through the Horseshoe Curve, through the tunnels under the Hudson River, along the same routes J. Edgar Thomson surveyed over 150 years ago.
But the name on the locomotives is different now.
And the company that once called itself the standard railroad of the world exists only in the rust stains on abandoned buildings and the memories of the families who built their lives around it.
Today, if you walk into Penn Station in New York, you enter through a cramped, low-ceilinged corridor that feels more like a subway station than the gateway to a great city.
Above you sits Madison Square Garden, built on top of what Alexander Cassatt spent $4 billion to create.
The Pennsylvania Railroad was not destroyed by trucks or airlines or any outside competition.
It was destroyed by the men sitting in its own boardroom who decided that the railroad beneath them was less important than the stock price above them.
The tracks are still there.
Freight still moves through the Horseshoe Curve and under the Hudson River every single day.
The engineering that Thomson and Cassatt built into this railroad was so sound that it outlasted the company itself by decades.
The historian Vincent Scully once said that through the old Penn Station, one entered the city like a god.
Through the new one, you scuttle in like a rat.
That is not just a line about a building.
That is the story of what happens when the people running something great decide they would rather cash it out than keep it running.
