This is a very old idea. This page from a 1954 Lionel booklet illustrates just such a system using isolated blocks to control more than one train on the same loop of track. I remember trying this method when I was a kid in the 60's.
You can find this Lionel booklet among the Electrical reference material thread near the top of the Electrical Forum. Look for a post from Susan Deats and find the file in the attachments section.
