Crédit Mobilier of America scandal
Encyclopedia
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.
. 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.
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. 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.
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.
Oakes Ames. 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 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 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.
. 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.
Union Pacific Railroad
The Union Pacific Railroad , headquartered in Omaha, Nebraska, is the largest railroad network in the United States. James R. Young is president, CEO and Chairman....
and the Crédit Mobilier
Crédit Mobilier
Crédit Mobilier was a French banking company, and one of the most important financial institutions of the world during the 19th century. It had a major role in the financing of numerous railroads and other infrastructure projects in Europe, North Africa and the Middle East by mobilizing the savings...
of America construction company in the building of the First Transcontinental Railroad
First Transcontinental Railroad
The First Transcontinental Railroad was a railroad line built in the United States of America between 1863 and 1869 by the Central Pacific Railroad of California and the Union Pacific Railroad that connected its statutory Eastern terminus at Council Bluffs, Iowa/Omaha, Nebraska The First...
. The distribution of Crédit Mobilier shares of stock
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
by Congressman Oakes Ames along with cash bribes to congressmen took place during the Andrew Johnson
Andrew Johnson
Andrew Johnson was the 17th President of the United States . As Vice-President of the United States in 1865, he succeeded Abraham Lincoln following the latter's assassination. Johnson then presided over the initial and contentious Reconstruction era of the United States following the American...
presidency in 1868. The revelation of the congressmen who received cash bribes or shares in Crédit Mobilier took place during the Ulysses S. Grant
Ulysses S. Grant
Ulysses S. Grant was the 18th President of the United States as well as military commander during the Civil War and post-war Reconstruction periods. Under Grant's command, the Union Army defeated the Confederate military and ended the Confederate States of America...
administration in 1872. The scandal's origins date back to the Abraham Lincoln
Abraham Lincoln
Abraham Lincoln was the 16th President of the United States, serving from March 1861 until his assassination in April 1865. He successfully led his country through a great constitutional, military and moral crisis – the American Civil War – preserving the Union, while ending slavery, and...
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 RiverMissouri River
The Missouri River flows through the central United States, and is a tributary of the Mississippi River. It is the longest river in North America and drains the third largest area, though only the thirteenth largest by discharge. The Missouri's watershed encompasses most of the American Great...
. 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.
George Francis Train
George Francis Train
George Francis Train was an entrepreneurial businessman who organized the clipper ship line that sailed around Cape Horn to San Francisco; he organized the Union Pacific Railroad and the Credit Mobilier in the United States, and a horse tramway company in England while there during the American...
and Thomas C. Durant
Thomas C. Durant
Thomas Clark Durant, was an American financier and railroad promoter. He was vice-president of the Union Pacific in 1869 when it met with the Central Pacific railroad at Promontory Summit in Utah Territory...
, a vice president of the Union Pacific Railroad
Union Pacific Railroad
The Union Pacific Railroad , headquartered in Omaha, Nebraska, is the largest railroad network in the United States. James R. Young is president, CEO and Chairman....
, formed the Crédit Mobilier in 1864. The original company, Pennsylvania Fiscal Agency, was a loan and contract company chartered in 1859. 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
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
in the Union Pacific at par value
Par value
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par , over par and under par ....
, 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
Durant
- People :* Adrian Durant , sprint athlete from the U.S. Virgin Islands* Albert Durant , Belgian water polo player* Ariel Durant , co-author of The Story of Civilization with husband Will 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.
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
In 1867, Dr. Thomas C. Durant was replaced as head of Crédit Mobilier by CongressmanUnited States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
Oakes Ames. In that year Ames offered to members of Congress shares of stock in Crédit Mobilier at its discounted value rather than market value
Market value
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...
, which was 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
Political corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
in American history.
The story was introduced to the public 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
Ulysses S. Grant
Ulysses S. Grant was the 18th President of the United States as well as military commander during the Civil War and post-war Reconstruction periods. Under Grant's command, the Union Army defeated the Confederate military and ended the Confederate States of America...
. Henry Simpson McComb, a future executive of the Illinois Central Railroad
Illinois Central Railroad
The Illinois Central Railroad , sometimes called the Main Line of Mid-America, is a railroad in the central United States, with its primary routes connecting Chicago, Illinois with New Orleans, Louisiana and Birmingham, Alabama. A line also connected Chicago with Sioux City, Iowa...
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.
Investigation and outcome
A Congressional investigation of thirteen members led to the censure of Ames and also James BrooksJames Brooks (Whig)
James Brooks was a U.S. Representative from New York during the latter half of the American Civil War.He was born on November 10, 1810, in Portland, Maine. As a student, he attended public schools and then the academy at Monmouth, Maine. By the age of 16, he was teaching school, in Lewiston, Maine...
. A federal investigation was also enacted with Aaron F. Perry
Aaron F. Perry
Aaron Fyfe Perry was a U.S. Representative from Ohio.Born in Leicester, Vermont, Perry attended the public schools and Yale Law School. He was admitted to the bar of Connecticut in 1838. He moved to Columbus, Ohio, where he was admitted to the bar in 1840 and commenced practice...
serving as chief counsel. A number of other political figures had their careers theoretically damaged, including James A. Garfield
James Garfield
James Abram Garfield served as the 20th President of the United States, after completing nine consecutive terms in the U.S. House of Representatives. Garfield's accomplishments as President included a controversial resurgence of Presidential authority above Senatorial courtesy in executive...
, Schuyler Colfax
Schuyler Colfax
Schuyler Colfax, Jr. was a United States Representative from Indiana , Speaker of the House of Representatives , and the 17th Vice President of the United States . To date, he is one of only two Americans to have served as both House speaker and vice president.President Ulysses S...
, James W. Patterson
James W. Patterson
James Willis Patterson was a United States Representative and Senator from New Hampshire.-Biography:Born in Henniker, he pursued classical studies, graduated from Dartmouth College in 1848, and was principal of the Woodstock Academy in Connecticut for two years...
, and Henry Wilson
Henry Wilson
Henry Wilson was the 18th Vice President of the United States and a Senator from Massachusetts...
. During the investigation, it was found that the company had given shares to more than thirty representatives of both parties including future President
President of the United States
The President of the United States of America is the head of state and head of government of the United States. The president leads the executive branch of the federal government and is the commander-in-chief of the United States Armed Forces....
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
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
ticket for renomination as Vice President
Vice President of the United States
The Vice President of the United States is the holder of a public office created by the United States Constitution. The Vice President, together with the President of the United States, is indirectly elected by the people, through the Electoral College, to a four-year term...
, ironically, by Henry Wilson who was also implicated in the scandals.
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).