Crédit Mobilier Scandal

Crédit Mobilier Scandal
Crédit Mobilier Scandal

As with many other conspiracy theories, the Crédit Mobilier scandal involved large sums of money being controlled by “elites” or “special interests.” The Crédit Mobilier company of the United States originated as a construction company to help construct the Union Pacific Railroad.

Oakes Ames, Thomas C. Durant, and others formed the company in 1864 out of an existing Pennsylvania charter as the Pennsylvania Fiscal Agency. Ames and other Union Pacific investors headed the new firm, meaning that they could sell contracts from the railroad to their own company.

Union Pacific bonds, which were to sell at $100 per share, in fact sold well below that. To cover the costs of construction, Durant and Ames founded Crédit Mobilier, in which the railroad would give grossly inflated construction contracts to the company and Crédit Mobilier would use those contracts to purchase Union Pacific stock at par value.

Ames then resold the stock on the open market at market prices, covering the difference with some of the inflated construction costs. In 1867, for example, Ames assigned contracts for the construction of nearly 670 miles of railroad that brought the Crédit Mobilier owners between $7 and $23 million and left the railroad in financial trouble.

Ames ensured the acquiescence of Congress by bribing the members through stock offers: Ames (who was also a U.S. congressman) sold shares of the railroad at a discount to other lawmakers, even allowing them to purchase the stock on credit, paying for the stock out of the dividends earned by the securities.

Sending a list of names to receive stock to an associate, Ames made certain to enlist the services of Representatives Schuyler Colfax and James A. Garfield and Senator James W. Patterson, although Ames’s list soon found its way into Charles Dana’s newspaper, the New York Sun. Publication of the “preferred customer” list set off a firestorm in 1872—an election year.

Congress undertook an investigation of the company. Already, allegations circulated about President Ulysses Grant’s involvement in the “Gold Corner” of 1869 (an attempt by speculators to “corner” the market in gold and thus manipulate prices), while the Reconstruction governments being established in the South were gaining a reputation for graft. Bribing public officials to build railroads, or to benefit from existing routes, was nothing new.

For two decades, Cornelius Vanderbilt had battled Jay Gould, Daniel Drew, and Jim Fisk over several railroads, especially the New York Harlem Railroad. But, as one contemporary writer observed about Crédit Mobilier, “there was a film of decency thrown over the transaction by Mr. Ames,” and many members of Congress willingly accepted the shares.

Famous railroader Collis P. Huntington of the Central Pacific Railroad—the other end of the transcontinental—and other important “captains of industry” were called to testify before Congress about construction costs. Although Congress issued a pair of reports, which tarnished the reputations of Colfax, Patterson, and Rep. James Brooks of New York, as well as Ames, only Brooks and Ames were censured, and no one was prosecuted.

Brooks, ironically, had only received his position as a government director on the railroad after he, as a former Whig, had come out in opposition to the impeachment of the Democratic president, Andrew Johnson. Since the Crédit Mobilier scandal occurred on Grant’s watch, and was followed by the “Whiskey Ring” (the resignation of Grant’s secretary of war for accepting kickbacks), the “salary grab,” and other scandals, the episode damaged Grant’s public image. Crédit Mobilier also made a permanent enemy of cartoonist Thomas Nast, who lost $329 in the scandal, and who supported the Democratic Party after that.

A larger problem stemmed from the federal funding of the railroads through the subsidy system, which encouraged graft and corruption. The government gave land grants to transcontinental railroads to sell as a means to raise construction cash. However, the grants were based on miles of rail laid, ensuring that both the Union and Central Pacific Railroads would lay far more track than needed to link them together.

Indeed, at times, the railroads built away from each other, delaying the connection in order to continue receiving funds. This stood in stark contrast to James J. Hill’s Great Northern Railroad, which received no federal subsidies, and which did not suffer financially in the panic of 1873.

More than the delays in building the Union and Central Pacific Railroads; more than the circuitous routes they used; and more than their ultimate financial distress caused by their original privileged subsidized positions, the Crédit Mobilier scandal revealed the dangers of linking large-scale business projects with the government, outside the control of the market and the discipline of prices.

For the conspiracy-minded, however, the bribery of public officials dovetailed with the influence of such shadowy forces as the Bank of England or the Masons. Crédit Mobilier also implicated Grant, weakening his presidency. Coming on the heels of the infamous “Tweed Ring” (the network of political and financial corruption in New York City presided over by William Tweed from the 1860s), Crédit Mobilier convinced many that government was corrupt at every level.