Dale Creek Bridge Union Pacific Railroad Company by Andrew J Russell

The Crédit Mobilier scandal () was a two-part fraud conducted from 1864 to 1867 by the

Union Pacific Railroad The Union Pacific Railroad , legally Union Pacific Railroad Company and often called simply Union Pacific, is a freight-hauling railroad that operates 8,300 locomotives over routes in 23 U.S. states west of Chicago and New Orleans. Union Pac ...

and the Crédit Mobilier of America construction company in the building of the eastern portion of the

First transcontinental railroad North America's first transcontinental railroad (known originally as the "Pacific Railroad" and later as the " Overland Route") was a continuous railroad line constructed between 1863 and 1869 that connected the existing eastern U.S. rail netwo ...

. The story was broken by '' The New York Sun'' during the 1872 campaign of Ulysses S. Grant. A new company, Crédit Mobilier of America, was created by Union Pacific executives to actually build the line albeit at inflated construction costs. Though the railroad cost only $50 million to build, Crédit Mobilier billed $94 million and Union Pacific executives pocketed the excess $44 million. Then, part of the excess cash and $9 million in discounted stock was used to bribe several Washington politicians for laws, funding, and regulatory rulings favorable to the Union Pacific. The US government gave the Union Pacific empty land to sell in a checkerboard pattern, keeping every other plot. Eventually the fertile land was sold to farmers who shipped out the crops by rail. To get the new project funded, Washington loaned the Union Pacific federal bonds that could be used as collateral when the railroad needed to borrow money. The Union Pacific – like a third of all the nation's railroads – declared bankruptcy during the

Panic of 1893 The Panic of 1893 was an economic depression in the United States that began in 1893 and ended in 1897. It deeply affected every sector of the economy, and produced political upheaval that led to the political realignment of 1896 and the pre ...

. By late 1897 the national economy was quickly reviving and profitability was at hand. An agreement was reached to pay the US Treasury the entire amount of principal and accrued interest on the bonds. The government received every dollar it wanted from the Union Pacific. The scandal negatively affected the careers of many politicians and nearly bankrupted Union Pacific. For decades partisan newspapers used the scandal to create widespread public distrust of Republicans, Congress, and the federal government during the

Gilded Age In United States history, the Gilded Age was an era extending roughly from 1877 to 1900, which was sandwiched between the Reconstruction era and the Progressive Era. It was a time of rapid economic growth, especially in the Northern and We ...

Background

The scandal's origins dated to 1864, when the

was chartered by Congress and the associated corporation Crédit Mobilier of America was established. This company had no relation to the major French bank '' Crédit Mobilier''. In the Pacific Railroad Acts of 1864–68, Congress authorized and chartered the Union Pacific Railroad and provided $100 million (equivalent to over $1.6B in 2020) in capital investment to complete a transcontinental line west from the Missouri River to the

Pacific coast Pacific coast may be used to reference any coastline that borders the Pacific Ocean. Geography Americas Countries on the western side of the Americas have a Pacific coast as their western or southwestern border, except for Panama, where the P ...

. The federal government offered to assist the railroad with a loan of $16,000 to $48,000 per mile of track, variable according to location, for a total of more than $60 million in all, and a

land grant A land grant is a gift of real estate—land or its use privileges—made by a government or other authority as an incentive, means of enabling works, or as a reward for services to an individual, especially in return for military service. Grants ...

of , worth $50 to $100 million. The offer initially attracted no subscribers for additional financing, as the conditions were financially daunting.

Obstacles to investment

The railroad would have to be built for through desert and mountains, incurring extremely high freight costs for supplies. There was the likely risk of armed conflict with hostile tribes of Native Americans, who occupied many territories in the interior, and no probable early business to pay dividends. There was no existing demand for railroad freight or passenger traffic for virtually the entire proposed route. Since no towns or cities of any size yet existed on the western prairies, there was no commercial activity between Nebraska and the California border. Nor were there any branch lines running either north or south of the proposed route that would have been able to feed their traffic to a new transcontinental railway. As a result, private investors refused to invest. In spite of this, the entire railroad scheme was proposed as a " going concern" – a financially viable enterprise that relied on "below-market" financing and then could continue to function as a business enterprise, covering its operating expenses with freight and passenger revenues while providing profits for investors and interest payments to the US government for the borrowed capital (at the federal rate based upon the U.S. government bond rates), and ultimately retiring its debt to the U.S. government.

Opposition

Opponents of the Pacific Railroad Acts felt the construction and its routing were being developed without regard for creating a viable and profitable transportation enterprise. They believed the whole project was a bare-faced fraud by some capitalists to build a "railroad to nowhere" and to make tremendous profits doing so, while getting the United States government to bear the costs.

Formation of Crédit Mobilier of America

George Francis Train George Francis Train (March 24, 1829 – January 18, 1904) was an American entrepreneur who organized the clipper ship line that sailed around Cape Horn to San Francisco; he also organized the Union Pacific Railroad and the Credit Mobilier in th ...

and Thomas C. Durant, the vice president of the Union Pacific Rail Road, formed Crédit Mobilier of America in 1864. Crédit Mobilier of America was a deliberate façade. Train and Durant aimed to present to both the government and to the public the appearance that an independent corporate enterprise had been impartially chosen as the principal contractor and construction management firm for the project. In fact, Crédit Mobilier was created to shield the company's shareholders and management from the common charge that they were using the ''construction'' phase of the project, as opposed to the ''operating'' phase, to generate profit. Because the conspirators believed they could not expect conventional profits from the operation of the railroad, they created the sham company so they could charge the U.S. government extortionate fees and expenses during the construction phase.

Allegations

In simplified terms, the scheme worked as follows: * The Union Pacific contracted with Crédit Mobilier to build the railway at rates greatly above cost. However the UP usually paid with UP shares, which were not highly rated because of the uncertainty that the huge project could be completed and would generate future profits. * The railroad was eventually a success and made money from selling land. Thus it eventually brought high profits to Crédit Mobilier, which was owned by

Durant Durant may refer to: People * Durant (surname) Fictional characters * Durant (Pokémon), a species in ''Pokémon Black'' and ''White'' * ''John Durant'' (General Hospital), a character on the soap opera ''General Hospital'' Places * Durant, ...

and the Union Pacific's other directors and principal stockholders. * The outsize profits were divided among the Union Pacific stockholders. The directors of the Union Pacific also engaged in stock manipulation circumventing requirements that they receive full payment for stock issued at par by instead paying Crédit Mobilier in bank checks, which Crédit Mobilier then used to purchase Union Pacific stock. In every major construction contract drawn up between the Union Pacific and Crédit Mobilier, the contract's terms, conditions, and price were offered and accepted through the actions of the same corporate officers and directors, operating on both sides of the contract. The underlying fraud of a common and unified ownership of two companies that shared principal officers and directors was not revealed for years.

Coverup

The principal means of the scheme was the method of indirect billing. The Union Pacific presented genuine and accurate invoices to the U.S. government, as evidence of actual construction costs billed to them by Crédit Mobilier of America for payment. Any audit of the Union Pacific invoices to the government would have revealed no evidence of fraud or profiteering, because the fraud took place one level deeper, on the invoices from Crédit Mobilier to Union Pacific. Union Pacific was accepting for payment genuine Crédit Mobilier invoices (based on fraudulent accounting) and was applying only an overhead expense for management and administration. If the Union Pacific's corporate officers had openly undertaken the management and construction of the railroad, this scheme to make windfall profits immediately from charges made during construction would have been exposed to public scrutiny by the opponents of the railroad project from the start.

Extent

The Union Pacific paid $94,650,287 to Crédit Mobilier via the project, while Crédit Mobilier incurred operating costs of only $50,720,959. Thus, the deal generated $43,929,328 (equivalent to over $724.9M in 2020) in profits for Crédit Mobilier, counting the Union Pacific shares and bonds that Crédit Mobilier bought and paid itself. The Crédit Mobilier directors reported this as a cash profit of only $23,366,319.81, a financial misrepresentation since these same directors were the recipients of the undisclosed $20,563,010 Union Pacific share of the total profits.

Bribery

Maury Klein, in his wide-ranging analysis of the scandal boils down the issue: "Did the builders of the road defraud the government? And did they attempt to gain influence in Congress through bribery? The evidence suggested that the answer to the first was no, and to the second a qualified yes." In 1867, Crédit Mobilier replaced Thomas Durant with Oakes Ames. Ames, a member of Congress, distributed cash bribes and discounted shares of Crédit Mobilier stock to fellow congressmen and other politicians in exchange for votes and actions favorable to the Union Pacific. Ames offered to members of Congress shares in Crédit Mobilier at its discounted par value rather than the market value, which was much higher due to its superb (but fraudulent) profits and exclusive contract with the Union Pacific Railroad. It also declared substantial quarterly

dividends A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...

on its stock. Those allowed to purchase shares at par value could reap enormous

capital gain Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares ...

s simply by offering these discounted shares on the market, knowing that they would be purchased at a higher price by investors desiring to own stock in such a profitable company.

Revelation and political impact

Following a disagreement with Ames, Henry Simpson McComb leaked compromising letters to '' The New York Sun'', a reformist newspaper highly critical of incumbent President Ulysses S. Grant and his administration. On September 4, 1872, the ''Sun'' broke the story. The newspaper reported that Crédit Mobilier had received $72 million in contracts for building a railroad worth only $53 million. After the revelations, the Union Pacific and other investors were left nearly

bankrupt Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debto ...

Congressional investigation

In 1872, the (Republican) House of Representatives submitted the names of nine politicians to the (Republican) Senate for investigation: * Representative William B. Allison of Iowa * Former Senator

James A. Bayard Jr. James Asheton Bayard Jr. (November 15, 1799 – June 13, 1880) was an American lawyer and politician from Delaware. He was a member of the Democratic Party and served as U.S. Senator from Delaware. Early life Bayard was born in Wilmington, D ...

of Delaware * Former Representative

George S. Boutwell George Sewall Boutwell (January 28, 1818 – February 27, 1905) was an American politician, lawyer, and statesman from Massachusetts. He served as Secretary of the Treasury under U.S. President Ulysses S. Grant, the 20th Governor of Massachuse ...

of Massachusetts (then serving as

United States Secretary of the Treasury The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal ...

) * Senator

Roscoe Conkling Roscoe Conkling (October 30, 1829April 18, 1888) was an American lawyer and Republican politician who represented New York in the United States House of Representatives and the United States Senate. He is remembered today as the leader of the Re ...

of New York * Senator James Harlan of Iowa (retiring) * Senator John Logan of Illinois * Representative James W. Patterson of New Hampshire * Senator

Henry Wilson Henry Wilson (born Jeremiah Jones Colbath; February 16, 1812 – November 22, 1875) was an American politician who was the 18th vice president of the United States from 1873 until his death in 1875 and a senator from Massachusetts from 1855 to ...

of Massachusetts, also Grant's current running mate for Vice President * Vice President

Schuyler Colfax Schuyler Colfax Jr. (; March 23, 1823 – January 13, 1885) was an American journalist, businessman, and politician who served as the 17th vice president of the United States from 1869 to 1873, and prior to that as the 25th Speaker of the United ...

All of those named were Republicans except Bayard, a Democrat who was largely dropped from the investigation after he wrote a letter disavowing any knowledge. Ultimately, Congress investigated 13 of its members in a probe that led to the censure of Oakes Ames and James Brooks, a Democrat from New York. During the 1872 campaign, Grant's running mate Henry Wilson initially denied involvement. However, in the February 1873 Senate investigation, Wilson admitted involvement and provided a complicated explanation claiming he had paid for stock in his wife's name, and with her money but had never taken possession of the shares. According to Wilson, when his wife (and later he himself) had concerns about the transaction, the transaction was reversed. Wilson's wife had died in 1870, so senators had to rely on Wilson's word and that of Ames, whose account corroborated Wilson's. The Senate accepted Wilson's explanation, and took no action against him, but his reputation for integrity was somewhat damaged because of his initial denial. Senator Henry L. Dawes of Massachusetts was also implicated. Dawes had purchased $1,000 in stock and had received a dividend. Dawes later had doubts about the propriety of the stock purchase and cancelled it. Ames returned the purchase price to Dawes with interest and Dawes returned the dividend to Ames. Dawes received $100 in interest on his returned purchase price, but he was not further implicated.

Department of Justice investigation

A Department of Justice investigation was also made with Aaron F. Perry as chief counsel. During the investigation, the government found that the company had given shares to more than 30 politicians from both parties, including James A. Garfield, Colfax, Patterson, and Wilson. No charges were filed against any of the participants in the scandal. James A. Garfield denied the charges and was elected president in 1880.

In popular culture

This scheme was referenced in the AMC television series '' Hell on Wheels,'' (broadcast during 2011-2016) with the portrayal of Thomas Durant. The scheme and scandal was proposed as a topic for a musical cabaret in season 10 of the FXX television series ''

Archer Archery is the sport, practice, or skill of using a bow to shoot arrows.Paterson ''Encyclopaedia of Archery'' p. 17 The word comes from the Latin ''arcus'', meaning bow. Historically, archery has been used for hunting and combat. In mo ...

''.

References

External links

* * * {{DEFAULTSORT:Credit Mobilier Of America Scandal Political scandals in the United States History of rail transportation in the United States 1872 in the United States Congressional scandals Investigations and hearings of the United States Congress Union Pacific Railroad