Crédit Mobilier of America scandal

The Crédit Mobilier scandal of 1872 involved the Union Pacific Railroad and the Crédit Mobilier of America construction company in the building of the First Transcontinental Railroad. The distribution of Crédit Mobilier shares of stock by Congressman Oakes Ames along with cash bribes to congressmen took place during the Andrew Johnson presidency in 1868. The revelation of the congressmen who received cash bribes or shares in Crédit Mobilier took place during the Ulysses S. Grant administration in 1872. The scandal's origins date back to the Abraham Lincoln presidency with the formation of the Crédit Mobilier in 1864.

Background

The federal government in 1864 had chartered a “Union Pacific Railroad,” with $100,000,000 capital, to complete a transcontinental line west from the Missouri River. It offered to assist it by a loan of $16,000 to $48,000 a mile according to location, over $60,000,000 in all, and a land grant of 20,000,000 acres, worth $50,000,000 to $100,000,000. Even this offer attracted no subscribers: it meant building 1,750 miles of road through desert and mountain, at enormous freight costs for supplies, with frequent bloody encounters with Indians, and no probable early business to pay dividends.^[1]

George Francis Train and Thomas C. Durant, a vice president of the Union Pacific Railroad, formed the Crédit Mobilier in 1864. The original company, Pennsylvania Fiscal Agency, was a loan and contract company chartered in 1859.^[1] The creation of Crédit Mobilier of America was a deliberate attempt to falsely present to the Government of the United States and the general public the appearance that an independent (of the Union Pacific Railroad and its principal officers) corporate enterprise had been impartially chosen by the Union Pacific Railroad’s officers and directors to be the principal construction contractor and construction management firm for the Union Pacific Railroad project. It was created by the officers of the Union Pacific to shield the companies' shareholders and management from the then common charge that they were using the construction phase of the Union Pacific project (as opposed to the operating phase of carrying passengers and freight), to line their pockets in excess profits, profits which these corporate officers did not in fact believe would come to exist from the actual operation of the railroad. So they created a sham company to charge the U.S. Government extortionate fees and expenses for the construction of the line.

In simplified terms the Crédit Mobilier fraud worked in the following manner. The Union Pacific made contracts with Crédit Mobilier, paid by check, to build the Union Pacific railway. The Crédit Mobilier would use these checks to buy stock and bonds in the Union Pacific at par value, the crux to the whole fraud, and then would sell them on the open market to make huge profits. These construction contracts brought huge profits to the Crédit Mobilier, which was owned by Durant and the other directors and principal stock holders of the Union Pacific. The Crédit Mobilier would split these huge profits with the stockholders. The net result was that the U.S. Congress paid $94,650,287.25 and $50,720,958.94 respectively to the Union Pacific and Crédit Mobilier. This left $43,929,328.31 in profits, counting at par value the shares and bonds that Crédit Mobilier paid itself. The Crédit Mobilier directors reported this as a cash profit of only $23,366,319.81, a financial misrepresentation.^[1][2]

If the Union Pacific’s corporate officers had openly undertaken the construction of the railroad themselves, this scheme (to make windfall profits immediately through the construction of the railroad), would have been exposed to public scrutiny, and it would have given proof of fraud to the opponents^[3] of the transcontinental railroad. These opponents^[3] believed that the whole project was in fact an ambitious fraud to build a "railroad to nowhere" and make tremendous profits doing so, all the while getting the United States Government to pay for it. And most importantly, to construct the railroad in such a way, and going to such locations, that the project had no regard for trying to create a worthwhile and profitable transportation enterprise when it was completed. The principal means of the fraud was the method of indirect billing. The Union Pacific itself could and did present to the U.S. Government genuine and accurate invoices for construction costs, generated by Crédit Mobilier of America, and presented to the Union Pacific Railroad for payment. The railroad then prepared meticulously detailed invoices to the U.S. Government, requesting payment for these bills, accrued by the Union Pacific from Crédit Mobilier of America, for the construction of the line, with only a small additional fee over the cost stated on the Crédit Mobilier invoices, for the Union Pacific's overhead expenses.

Any audit of the Union Pacific and its invoices to the U.S. Government would have revealed no evidence of fraud or profiteering. Union Pacific was only accepting for payment genuine Crédit Mobilier invoices and was only applying an auditable overhead expense for management and administration during construction of the railroad.

The underlying fraud of a common and unified ownership of the two companies, as regards their principal officers and directors, was not immediately revealed. Nor was it immediately revealed that in every major construction contract drawn up between the Union Pacific and Crédit Mobilier, the contract’s terms, conditions and price had been offered (by Crédit Mobilier) and accepted (by the Union Pacific) through the actions of corporate officers and directors who were one and the same persons. Furthermore, the company sought, and was largely successful in maintaining, this fraud and its secrecy by giving discounted shares of stock to members of Congress who also agreed to support additional funding for the railroad, when (through the excessive charges for building the line), the Union Pacific had to come back to the government for additional construction funds. For its time, it was a very sophisticated corporate scam, and it was, at the time, largely not illegal.

Transgression

Editorial cartoon: Uncle Sam directs U.S. Senators (and Representatives?) implicated in the Crédit Mobilier scheme to commit Hari-Kari.

In 1867, Dr. Thomas C. Durant was replaced as head of Crédit Mobilier by Congressman Oakes Ames.^[4] In that year Ames offered to members of Congress shares of stock in Crédit Mobilier at its discounted value rather than market value, which was very much higher. The high market value of the stock was due to the superb performance of Crédit Mobilier of America corporation; which was in turn because the company had a major contract in which it was charging the Union Pacific whatever it wanted. The Union Pacific "suspected" nothing; and they "paid" Crédit Mobilier (themselves) whatever "they" asked. Crédit Mobilier's corporate balance sheet regularly showed huge earnings in excess of its expenses, and very high net profits in every quarter that it was engaged in the construction of the railroad. It also was declaring substantial quarterly dividends on its stock.

The Congressmen and others who were allowed to purchase shares at a discount could reap enormous capital gains simply by, in turn, offering their discounted shares to a grossly under-subscribed market, that was very eager to own shares of such a “profitable” company. These same members of Congress voted to appropriate government funds to cover the inflated charges of Crédit Mobilier. Ames' actions became one of the best-known examples of graft in American history.

The story was introduced to the public arena during the presidential election campaign of 1872 by the New York City newspaper The Sun, which was against the re-election of Ulysses S. Grant. Henry Simpson McComb, a future executive of the Illinois Central Railroad and an associate of Ames, had leaked compromising letters to the newspaper following a disagreement with Ames. It was claimed that the $72 million in contracts had been given to Crédit Mobilier for building a railroad only worth $53 million. Union Pacific and other investors were left nearly bankrupt.^[5]

Investigation and outcome

A Congressional investigation of thirteen members led to the censure of Ames and also James Brooks. A federal investigation was also enacted with Aaron F. Perry serving as chief counsel. A number of other political figures had their careers theoretically damaged, including James A. Garfield, Schuyler Colfax, James W. Patterson, and Henry Wilson. During the investigation, it was found that the company had given shares to more than thirty representatives of both parties including future President Garfield. Garfield denied the charges and went on to become President, so the actual impact of the scandal is difficult to judge. Colfax was replaced on the Republican ticket for renomination as Vice President, ironically, by Henry Wilson who was also implicated in the scandals.

See also

• Grantism
• Crédit Mobilier

References

1. ^ ^{a b c}  "Crédit Mobilier of America". Encyclopedia Americana. 1920. 
2. ^ Ambrose, Stephen E. (2001). Nothing Like It in the World: The Men who built the Transcontinental Railroad 1863-1869. p. 93. http://books.google.com/books?id=TZp_GT7PscIC&pg=PA93. 
3. ^ ^{a b} "First Transcontinental Railroad." (2011): n. pag. Web. 14 Feb 2011. <http://www.absoluteastronomy.com/topics/First_Transcontinental_Railroad>
4. ^ Logan Douglas Trent, The Credit Mobilier (New York, New York: Arno Press Inc., 1981), page 6.
5. ^ Logan Douglas Trent, The Credit Mobilier (New York, New York: Arno Press Inc., 1981), page 6.

External links

• Martin, Edward Winslow (1873). - "A Complete and Graphic Account of the Crédit Mobilier Investigation". - Behind the Scenes in Washington. - (c/o Central Pacific Railroad Photographic History Museum).
•  "Crédit Mobilier of America". New International Encyclopedia. 1905.