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Wall Street History
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07/29/2005
Credit Mobilier
Four years ago I wrote of the Credit Mobilier scandal and the
administration of President Ulysses S. Grant. As this case was
part of the legacy of the Transcontinental Railroad, I thought it
was a good time to take another look. I’ve added additional
material from new sources.
---
By the end of the American Civil War, no man was more
admired, next to Abraham Lincoln, than Ulysses Grant. His
efforts on behalf of the Union made him so. And in the South,
they respected the magnanimous side of the war leader, for it was
Grant who told his men at Appomattox that there would be no
cheering after General Lee’s surrender. “The war is over - the
rebels are our countrymen again.”
And so it was that in 1868, with zero prior political experience,
Republicans made him their choice to be president and Grant
won in convincing fashion in the electoral vote, 214-80, over the
Democrat Horatio Seymour.
The post-war era was known as the “Gilded Age” in America.
Business leaders certainly didn''t want the government meddling
in their affairs; unless, of course, it was the building of the
railroads, whereupon the robber barons were more than willing
to receive federal grants of free public land.
To the moneyed folk, President Grant was like a “chairman of
the board,” someone who would defer to them on matters of
business. For his part, Grant didn''t believe in an activist
presidency either. Let the peoples’ elected officials pass the laws
and he’ll administer them.
An example of this laissez-faire attitude was contained in Grant’s
first annual message. “The appropriations estimated for river
and harbor improvements and for fortifications are submitted.
Whatever amount Congress may deem appropriate for these
purposes will be expended.”
Patronage was the name of the game back then (actually, it still is
today) and the practice would enmesh the Grant administration in
all manner of scandals, one of which was Credit Mobilier of
America. As historian Charles Morris notes, the name is the
bane of history students, for the company had nothing to do with
the French bank of the same name. And the story would get
more confusing when in 1867 the French Credit Mobilier
collapsed, meaning that for a time a “Credit Mobilier scandal”
was being investigated in both countries.
Back in 1859, businessman George Francis Train noticed that
there was a little Pennsylvania corporation called the
Pennsylvania Fiscal Agency, which wasn’t doing any business to
speak of yet offered something in its charter that Train and future
associates like the legendary Will Durant wanted; a provision
that limited liability for company stockholders. In other
words, investors would not be liable for the corporation’s debts
to the full extent of the individual’s personal worth. Instead,
owner liability would go only as far as each had invested. So in
March 1864, Train offered $25,000 for the charter, Will Durant
was named president and the name was changed to Credit
Mobilier of America.
Meanwhile, the Union Pacific Railroad had been formally
chartered by the federal government in 1865 to build out one of
the links in the transcontinental line. In return for constructing
the railroad, and the costs (and dangers) were huge, the
government would then grant the operators millions of acres
along the route, land that would become much more valuable
once it was accessible by the railroad.
The owners of Union Pacific then turned to Credit Mobilier to be
the construction company. Credit Mobilier even had an office
next to UP’s headquarters (not exactly legal). Credit Mobilier
then raised capital in its name to finance the railroad’s
construction, but charged exorbitant fees along the way, knowing
it would be repaid (with healthy interest, of course) from the loan
proceeds that Union Pacific received.
Through this scam, the stockholders of Credit Mobilier made
millions as a result of the wild overcharging, while Union Pacific
and its stockholders were bled dry. In one of my earlier pieces I
wrote of chief engineer Dey initially estimating the cost of a large
section of track to be $30,000 a mile. But Credit Mobilier asked
for, and received, $60,000. [That’s when Dey, a man of
principle, resigned.]
As for the shareholders, John Steele Gordon writes in “An
Empire of Wealth”:
“In 1867 Credit Mobilier paid its first dividend to its
stockholders, amounting to 76 percent of their investment.
Future dividends ranged up to 350 percent. In the second
dividend of 1868 alone, a person holding $10,000 par value in
Credit Mobilier stock received $9,000 in cash, $7,500 in Union
Pacific bonds then selling at par, and forty shares of Union
Pacific stock worth $1,600, a return on capital of 181 percent.”
And who were the Credit Mobilier stockholders that profited so
nicely? Many members of Congress, 13 to be exact, though it
took a number of years for the activity to be made public.
The ringleader was Congressman Oakes Ames, himself a
shareholder. Since the owners of Credit Mobilier had to make
sure there was no interference from Washington, they enlisted
the help of Congress as well as members of the Grant
administration, who were then given stock in Credit Mobilier. As
for the Union Pacific executives, they received sweetheart deals
which enabled them to buy CM stock, financing this through
UP’s huge dividends. Among those receiving shares was
Schuyler Colfax, who would become President Grant’s first vice
president.
Finally, in 1872 the scam began to unravel. While the list of CM
stockholders was to be kept confidential, Oakes released them.
The 13 congressmen, plus Colfax, were implicated. Ames and
one other pled guilty to bribery, while the other congressmen and
Colfax were found innocent of receiving bribes after a lengthy
trial, because, in the words of Charles Morris, “they did not
understand his nefarious purpose.” Morris goes on, “The notion
that congressmen as a class were entitled to a defense of
diminished responsibility delighted the nation''s editorial writers.”
The news of the scandal was trumpeted as “the most damaging
exhibition of official and private villainy and corruption ever laid
bare to the gaze of the world.” Two vice presidents (Colfax was
Grant’s first term veep, Henry Wilson the second), the Speaker
of the House, a future president (James Garfield) and almost
every important committee chairman were involved. As a
Philadelphia paper wrote, “All of them are proven, by irrefutable
evidence, to have been bribed.” The correspondent then goes on
to say that “the public has long known, in a vague sort of way,
that the Union Pacific Railroad was a gigantic steal:” the federal
bond subsidies had been enough to build and equip the road, he
said, but the public had been bilked when the Union Pacific was
allowed to issue first-mortgage bonds ahead of the government’s.
On top of that were the tens of millions of acres of the public
domain. [Source: David H. Bain]
While much of the activity took place before Ulysses Grant’s
election, and while he had no direct involvement whatsoever, it
certainly hurt his legacy.
In 1873, Mark Twain co-wrote “The Gilded Age” with friend
Charles Dudley Warner, an instant best-seller whose title
literally defined the era for future generations. Historian Steve
Fraser notes in “Every Man a Speculator”:
“Twain captured the ridiculousness, the cant, and the
pretentiousness of a post-Civil War America where ‘the air is full
of money, nothing but money, money floating through the air.’
Who today can fail to hear the risibly familiar in the following
contemplation: ‘Beautiful credit! The foundation of modern
society That is a peculiar condition of society which enables a
whole nation to instantly recognize point and meaning in a
familiar newspaper anecdote, which puts into the mouth of a
distinguished speculator in lands and mines this remark – “I
wasn’t worth a cent two years ago, and now I owe two million
dollars.” ’”
Sources:
“Empire Express,” David H. Bain
“American Heritage: The Presidents,” Michael Beschloss
“Every Man a Speculator,” Steve Fraser
“The Presidents,” Henry Graff
“The Great Game,” John Steele Gordon
“An Empire of Wealth,” John Steele Gordon
“A History of the American People,” Paul Johnson
“Money, Greed, and Risk,” Charles Morris
“America: A Narrative History,” George Brown Tindall and
David Shi
Wall Street History will return August 12.
Brian Trumbore
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