The best-known manufacturer of model trains in the United States, Lionel was founded in 1900 by Joshua Lionel Cowen. Cowen's first product was a battery-powered flat car called the "Electric Express" that came with a circle of track on which it would run around and around. It was actually first built to be part of a store's window display and attract attention to the products on sale, but customers kept coming in asking to buy the moving train car.
By 1906, locomotives and other freight cars had been added as Lionel products, to make complete trains. More importantly, batteries had given way to house current for power, with a transformer that plugged into the wall and stepped down the voltage before it connected to the track. By 1912, the speed of the train could be controlled with a knob on the transformer that regulated the voltage.
The track Lionel began using was 3-rail track with only three ties per track section, 2-1/4 inches between the rails, which they called "Standard gauge," although it was really only their own standard. With the 3-rail track, the middle rail carried the positive charge and the two outer rails were the return rails carrying the negative charge. This avoided having to worry about a short circuit when the track doubled back on itself at a switch.
In 1915, in addition to the Standard gauge trains, Lionel began making smaller trains in O gauge, 1-1/4 inches between the rails. Their "O gauge" was also nonstandard, because it was slightly smaller than European O gauge (a 1:48 scale versus 1:45).
Lionel also began offering electrically operated accessories, such as crossing gates and block signals, to go with the trains.
Sales boomed throughout the 1920s. Lionel bought out their major competitor, Ives, in 1926, which allowed them to add Ives' patented reversing unit to their locomotives. This allowed the operator to reverse a train's direction by pressing a button on the transformer.
Sales slumped during the early years of the Great Depression, sending Lionel into receivership. However, in 1934, they licensed the Disney cartoon characters and produced two inexpensive handcars models, one featuring Mickey and Minnie Mouse, the other featuring Donald Duck and Pluto. Meanwhile, for those who enjoyed scale models of real trains, they came out with a model of the Union Pacific M-10000, one of the first streamlined trains. Both were O gauge and sold exceptionally well; production of the larger, more expensive Standard gauge trains ended in the late 1930s.
Lionel had to shut down its train manufacturing during World War II. To fill the void, they produced printed sheets of cardboard that, when cut and folded correctly, assembled into the Paper Train.
After the war, their innovations included magnetically-operating knuckle couplers, allowing train cars to be uncoupled by remote control; actual smoke puffing from the smokestacks of steam engines; and Magne-Traction, which helped to hold locomotives on the track and allowed them to pull heavier loads than before.
With the Baby Boom, Lionel sales were higher than ever in the early 1950s as fathers bought trains for their children, but sales began to slump in the mid-1950s. Kids were more interested in playing with airplanes and model rockets, representations of the wave of the future, instead of trains, which seemed tied to the past.
Lionel unsuccessfully attempted to counter the slump by building items such as trains that could launch missiles at other trains, which would explode (actually, the plastic sides would fly apart, so they could be reassembled and re-exploded over and over); they also tried expanding their customer base by building the Girls' Train, which was a freight train in glorious late '50s pastel colors. Lionel also failed with a more realistic-looking track called Super O, which had a very thin copper center rail that would, in time, ruin the electrical pickup on the locomotives, as it turned out. All this despite the fact that Lionel was a well-known enough name that Jackie Gleason could get a big laugh on his variety show by having his Reginald van Gleason character exclaim, as a model train ran across his bar carrying liquor bottles, "Booze goes swell with Lionel."
In 1959, the Cowen family sold out to an investment group headed by Roy Cohn. Throughout the '60s, sales of Lionel trains remained poor. The company tried to diversify into other products such as slot cars, walkie-talkies, and science project kits, but ended up filing for bankruptcy in 1967.
By the 1970s, the original Lionel corporation had become nothing more than the owner of a couple of toy store chains, Lionel Play World and Kiddie City. They had sold the model train manufacturing business and the rights to the Lionel name to General Mills, which made Lionel part of their toy manufacturing subsidiary Fundimensions.
Under Fundimensions ownership, Lionel tried to recapture its early 1950s glory by reproducing many of the trains they had made during those years in addition to trains of the present day, and promoting themselves as a traditional company that made a traditional toy. As it turned out, the approach worked, since children of the Baby Boom were growing nostalgic and wanted to buy Lionel trains for their own children.
General Mills sold off their toy businesses in the mid-1980s, with Lionel ending up in the hands of a Detroit developer named Richard Kughn, who reorganized the company as Lionel Trains, Inc., and continued the "traditional" aspect of things, even reviving the 1950s Lionel logo.
Kughn sold Lionel to a group including noted railfan Neil Young, and the company was reorganized again as Lionel, LLC, but nothing much else changed.
Innovations in the latter days of the 20th century included RailSounds, with a computer chip in locomotives providing realistic sounds; TrainMaster, a wireless remote control system; and locomotives containing a tiny TV camera and a transmitter.
Some of the historical information here came from, of course, http://www.lionel.com