Double Your Money – Part Twenty Eight
The Credit Mobilier scandal
America is a vast country and one of the engineering feats which went some way to creating a national identity as well as facilitating coast-to-coast trade was the construction of the Transcontinental railway. Congress passed an act in 1862, the Pacific Railroad Act, under which a company, the Union Pacific Rail Road, was incorporated with the mission to build a railway line running from Council Buffs on the banks of the Missouri in Iowa to join up with the Central Pacific Railroad line which was being constructed from San Francisco. The two lines met on 10th May 1869 at Promontory Summit in Utah.
Even though the Civil War was in progress the railway was seen as being of prime strategic value, shoring up the Union, and so much of the construction work was funded ultimately by the Federal government. But where there is an almost limitless source of money, there is an enormous temptation to siphon some of it off, one that the directors and officials of Union Pacific (UP) could not resist. The appropriately named George Train and UP’s vice president, Thomas Durant, set up a publicly quoted company, Credit Mobilier in 1864.
The idea was that Credit Mobilier would construct the railroad on behalf of UP under an exclusive contract. To outsiders, it would seem that UP had chosen an independent company outside of the control of UP. In reality, though, it was there for two purposes – to shield the directors of UP from any criticism that they were using the construction phase to line their pockets and to provide a seemingly independent vehicle to overcharge for the work done. After all, the construction work had not been put out to public bid and so no one knew for sure how much it would cost. This gave Credit Mobilier license to charge UP what they wanted – always above the cost of the actual construction work – ensuring that it traded profitably, boosting the value of its share price. UP were not inconvenienced by this arrangement as they could recoup their expenditure from the government.
The figures involved were mind-boggling. Congress paid Credit Mobilier via UP over $94 million whilst construction costs were just over $50 million. This form of indirect billing would have stood up to independent scrutiny as the invoices presented by UP matched the invoices prepared by Credit Mobilier. Perhaps a more forensic analysis would have revealed that there was a common ownership between the two companies and that the signatories to contracts between UP and Credit Mobilier were often the same.
The danger, of course, was that Congress would wake up to what was going on or, even worse, renege on the arrangement which was so financially beneficial to UP. Naturally, the directors of Credit Mobilier had this one covered. From around 1867 a Massachusetts Congressman, Oakes Ames, replaced Durant and began offering shares in Credit Mobilier to fellow members of the Congress at knock down prices. All they had to do was to sell the shares to realise a healthy profit. Other congressmen received bribes.
The fraud was revealed in 1872, thanks to the leaking of confidential papers and the dogged investigative journalism of The Sun, a New York paper, opposed to the re-election of Ulysses S Grant. The scandal almost caused UP to declare itself bankrupt. In the subsequent inquiry, more than thirty individuals on both sides of the house, including the future President, James A Garfield, had benefited from Eames’ corporate munificence. The inquiry recommended that Eames be expelled but he died before action could be taken against him and was later exonerated by the Massachusetts legislature. Surprisingly, most of what transpired at Credit Mobilier, whilst improper, was legal under the law at the time.
