Conrail was created to bail out several bankrupt railroads in the Northeastern states. Faced with the prospect of the cessation of most major rail activity in New York
, New Jersey
, and Pennsylvania
, the US government stepped in, and operated the properties itself.
Most of the railroads in the northeast were in serious trouble after the World War II traffic boom ended. Ironically, the high property taxes and other government regulations placed on railroads were the main culprit. In 1946, the Pennsylvania Railroad failed to post a dividend for the first time in its 100-year existence. The New York, Ontario & Western was already in the bankruptcy courts. The conversion from steam to diesel power helped, but the railroads continued to lose passenger and freight traffic to the highways and airlines.
The railroads generally didn't react quickly enough in divesting themselves of unprofitable mileage. They continued to operate passenger services at a tremendous loss. In 1957, the NYO+W folded. In 1960, the Erie Railroad, one of the major New York-Chicago pikes, merged with the Delaware, Lackawanna & Western. In 1961, regional coal-and-cement hauler Lehigh & New England called it quits.
Things only got worse. In 1968, the two major eastern giants, the PRR and the New York Central, merged into Penn Central. This merger was the most spectacular railroading failure of all time. The railroads, bitter rivals for over a hundred years, were unable to successfuly integrate their operations. To hide the mounting losses, the corporate executives got into land speculation, and lost even more. By 1970, Penn Central was bankrupt.
In 1974, Penn Central's bridge over the Hudson River at Poughkeepsie burned. This spelled doom for the Lehigh & Hudson River, a "bridge" line (i.e. a line which exists to transfer traffic between two other lines). The L+HR was dependent on the Poughkeepsie bridge, as it made its livelihood transporting coal and goods from Pennsylvania into New England.
The Lehigh Valley and Central of New Jersey had also entered an unofficial sort of merger. The railroads had paralleling main lines between Easton and Wilkes-Barre, and combined them into a single main line, using the trackage that was in the best condition.
Conrail's biggest hurdle was the existence of duplicate, and often poorly maintained trackage. All non-essential lines were abandoned or sold to local interests. Any available cash was used on track maintenance. Incredibly, within ten years, Conrail was a profitable railroad. The stock was even offered publicly in the late 1980s.
**Incidentally, Penn Central also retains its corporate existence. It isn't a railroad anymore, but a real estate company, and a profitable one, at that.