Railroad Corporation Cheats

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The Crdit Mobilier scandal (.mw-parser-output .IPA-label-smallfont-size:85%.mw-parser-output .references .IPA-label-small,.mw-parser-output .infobox .IPA-label-small,.mw-parser-output .navbox .IPA-label-smallfont-size:100%French pronunciation: [kʁedi mɔbilje]) was a two-part fraud conducted from 1864 to 1867 by the Union Pacific Railroad and the Crdit Mobilier of America construction company in the building of the eastern portion of the first transcontinental railroad from the Missouri River to Utah Territory. The story was broken by The New York Sun during the 1872 campaign of Ulysses S. Grant.[1]

A new company, Crdit 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, Crdit 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.[2]

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.[3][4][5][6]

The scandal's origins dated to 1864, when the Union Pacific Railroad was chartered by Congress and the associated corporation Crdit Mobilier of America was established. This company had no relation to the major French bank Crdit Mobilier.

The railroad would have to be built for 1,750 miles (2,820 km) 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.[7]

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.[citation needed] As a result, private investors refused to invest.[citation needed]

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.[citation needed]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.

Crdit Mobilier of America was a deliberate faade. 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, Crdit 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,[citation needed] they created the sham company so they could charge the U.S. government extortionate fees and expenses during the construction phase.

In every major construction contract drawn up between the Union Pacific and Crdit 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.

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.

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."[10]

In 1867, Crdit Mobilier replaced Thomas Durant with Oakes Ames.[11] Ames, a member of Congress, distributed cash bribes and discounted shares of Crdit Mobilier stock to fellow congressmen and other politicians in exchange for votes and actions favorable to the Union Pacific.[12] Ames offered to members of Congress shares in Crdit 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 on its stock.

Those allowed to purchase shares at par value could reap enormous capital gains 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.

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.

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.[14] 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.

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.

The attempt of a consolidated interstate carrier to escapeliability for debts of a constituent, upon the ground thatpermission to assume such liability was never applied for orobtained under 20(a) of the Interstate Commerce Act, although,according to the state law under which the consolidation tookplace, the liability was one which attached to the consolidatedcorporation upon its creation, cannot be upheld in this case inview of a consistent and longstanding interpretation placed upon 20(a) by the Interstate Commerce Commission, in relation to thisparticular carrier system and with full knowledge of its affairs,as not requiring such

permission, and in view of the fact that to reject thatinterpretation now would result in the enrichment of stockholderequity which itself was capitalized, with no thorough scrutiny bythe Commission, by virtue of that interpretation. P. 314 U. S.372.

Appeal from a Judgment affirming a judgment of the municipalcourt of the City of New York in favor of the above-named appelleein an action against the appellant to recover interest due on bondsissued by the Northern Ohio Railway Company which were guaranteedby the Lake Erie & Western Railroad Company. 175 Misc. 902, 24N.Y.S.2d 846. The latter company was a constituent of the appellantin this case, a consolidated railroad corporation embracing anumber of railroad systems. The case was first argued at the 1940Term, and the judgment below was affirmed by an equally dividedCourt, 313 U.S. 538. Rehearing was granted, 313 U.S. 596.

Many Progressives feared that concentrated, uncontrolled, corporate power threatened Republican government. Public opinion feared that large corporations could impose monopolistic prices to cheat consumers and could squash small independent companies.

Roosevelt's Justice Department launched 44 anti-trust suits, prosecuting railroad, beef, oil, and tobacco trusts. Henry Clay Frick, the steel baron complained, "We bought the son of a bitch and then he didn't stay bought." The most famous anti-trust suit, filed in 1906, involved John D. Rockefeller's Standard Oil Company. It took five years for Roosevelt to win his case in the Supreme Court. In the end, however, Standard Oil was broken into 34 separate companies.

Theodore Roosevelt did not oppose bigness in and of itself. He only opposed irresponsible corporate behavior. He distinguished between "good trusts" and bad trusts" and advocated regulating big corporations in the public interest by means of a government commission.

Growing labor unrest accompanied industrialization. The greatest strikes first hit the railroads only because no other industry had so effectively marshaled together capital, government support, and bureaucratic management. Many workers perceived their new powerlessness in the coming industrial order. Skills mattered less and less in an industrialized, mass-producing economy, and their strength as individuals seemed ever smaller and more insignificant when companies grew in size and power and managers grew flush with wealth and influence. Long hours, dangerous working conditions, and the difficulty of supporting a family on meager and unpredictable wages compelled armies of labor to organize and battle against the power of capital.

Cyrus McCormick had overseen the construction of mechanical reapers (used for harvesting wheat) for decades. He had relied on skilled blacksmiths, skilled machinists, and skilled woodworkers to handcraft horse-drawn machines. But production was slow and the machines were expensive. The reapers still enabled massive efficiency gains in grain farming, but their high cost and slow production times put them out of reach of most American wheat farmers. But then, in 1880, McCormick hired a production manager who had overseen the manufacturing of Colt firearms to transform his system of production. The Chicago plant introduced new jigs, steel gauges, and pattern machines that could make precise duplicates of new, interchangeable parts. The company had produced twenty-one thousand machines in 1880. It made twice as many in 1885, and by 1889, less than a decade later, it was producing over one hundred thousand a year.4

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