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The Crédit Mobilier of America scandal of 1872 involved the Union Pacific Railroad and the Crédit Mobilier of America construction company.
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Background
Crédit Mobilier of America was a construction management and construction company formed by George Francis Train, the vice-president in charge of publicity for the Union Pacific Railroad. The creation of Crédit Mobilier of America was a deliberate attempt to falsely present to the Federal Government 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 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.
If the Union Pacific’s corporate officers had openly undertaken the construction of the railroad themselves; this scheme (to make windfall profits immediately through the construction of the railroad), would have been exposed to public scrutiny; and it would have given proof to the opponents of the transcontinental railroad, who believed that the whole project was in fact an ambitious fraud to build a “railroad to nowhere”; to make tremendous profits doing so; all the while getting the US Government to pay for it. And most importantly, to construct the railroad in such a way; and going to such locations; that the project had no regard for trying to create a worthwhile and profitable transportation enterprise, when it was completed.
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 US 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 US 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 road.
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 largely, not at the time, illegal.
Scandal
In 1867, Dr. William Coles Keeter was replaced as head of the firm by Congressman 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 very much higher. The high market value of the stock was due to the superb performance of Crédit Mobilier Company; which was in turn due to the fact that 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 undersubscribed 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 arena during the Presidential election campaign of 1872 by the newspaper New York 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.
Investigation
A Congressional investigation of thirteen members led to the censure of Ames and also
See also
External links
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