Monday, January 6, 2020

Blast From the Past: Le Scandal de Crédit Mobilier


Falling in love with a French woman is one thing. A French-sounding company, though, did not give a group of congressmen the happy-ever-after they longed for.

[Crédit Mobilier of America is] the source of the most tremendous legislative scandal in American history. The national government in 1864 had chartered a “Union Pacific Railroad,” with $100,000,000 capital, to complete a transcontinental line west from the Missouri River; and offered to assist it by a loan of $16,000 to $48,000 a mile according to location, over $60,000,000 in all, and a land grant of 20,000,000 acres, worth $50,000,000 to $100,000,000. Even this offer attracted no subscribers; it meant building 1,750 miles of road through desert and mountain, at enormous cost of freightage for supplies, with frequent bloody encounters with Indians, and no probable early business to pay dividends. 
Then a House committee, of which Oakes Ames (q.v.) was a member and probably advised the plan, added an authorization to the railroad to issue its own bonds dollar for dollar with the government's, the former to be first mortgage and the latter second; the bonds might be issued 100 miles in advance of construction. In other words, the government assumed all the risk. Still the stock had no marketable value on its own basis as an investment, but only through the government's offers in excess of probable cost, which made it worth while for capitalists to take up the stock and earn these offers. Mr. Ames, chief of the enterprise, and a few associates, knew that this cost would not be much more than half the government's loan and gift together. 
To gain possession of the balance, it was decided to form the stockholders of the Union Pacific into a duplicate corporation under another name, as a construction company, to which the railroad company should turn over its bonds and stocks as payment for work and supplies. Thus the Union Pacific would be stripped of everything but its roadbed and equipment, while its double would pay business rates and pocket the remainder. Besides Mr. Ames, the chief managers were Thomas C. Durant, vice-president of the Union Pacific (John A. Dix being president), Cornelius S. Bushnell and John B. Alley. 
They and their associates bought up a moribund Philadelphia concern called the “Pennsylvania Fiscal Agency,” chartered in 1859 and organized as a loan and contract company in 1863, and rebaptized it the “Crédit Mobilier of America,” oddly, as its French prototype was bankrupt and not in good savor. The Union Pacific stockholders took the same amount of stock in it as in the road. The history of the details by which it accomplished the objects of its being cannot be given here. In 1866 the government extended its offer to such mileage as the Central Pacific should build east from its California lines, and the two companies began a race to secure the benefits. 
Probably the Central Pacific gained as much profit as the Crédit Mobilier, but that was legitimately earned for its stockholders; and even the Crédit Mobilier's action would have been less obnoxious but for the collusion of government directors and public representatives. 
The net result was that the nation paid $94,650,287.28, and the Crédit Mobilier $50,720,958.94, leaving a profit of $43,929,328.34. counting at par the stock and bonds with which the Crédit Mobilier paid itself; on the statement of the trustees, they realized only $23,366,319.81 in cash. But this was certainly much understated; and even so, it was all gained in two years, to December 1868. But the rise of Crédit Mobilier stock in a few months from five cents on the dollar to three or four hundred and then out of the market, the payment of over 500 per cent a year dividends, the knowledge that there was only one place they could come from, and the inference that the government trustees must be incompetent or worse, aroused suspicious excitement. 
Then the promoters began to quarrel bitterly over the division of spoils, and to sue each other, and one of them came within an ace of exposing the whole, and outsiders demanded a share as the price of silence or assistance. The Crédit Mobilier needed additional legislation, and procured it by “special legal expenses”; and in the latter part of 1867 the suit of an outsider, H. S. McComb, to obtain stock to which he alleged a claim, laid the mine for the final explosion. Representative Elihu B. Washburne of Illinois had moved an investigation and the fixing of transportation rates, and in alarm Mr. Ames (also a representative) came to Washington with 343 shares of stock, then commanding 100 per cent premium, but which he sold to congressmen and leading government officials at par. In a phrase that became classic, he afterward said that he had put the stock “where it would do the most good.” 
McComb asserted his right to 375 shares, and to quiet him Mr. Ames, in February, 1868, told him the names of the public men to whom he had “sold” the stock. McComb bided his time, and in the presidential campaign of 1872 published those names, or what he alleged to be those; but he added others, or was misinformed, as some of the accused had perfectly clean hands. The list was shocking: the Vice-President of the United States (Colfax), the Vice-President-elect (Wilson), the speaker of the House (Blaine), and many other eminent names. When the third session of the 42d Congress opened in December 1872, the speaker descended to the floor and demanded a committee of investigation containing a majority of his political opponents; which was appointed, with Luke P. Poland of Vermont as chairman. 
It made a report 18 Feb. 1873, which proved that the speaker had been offered the stock but had refused to touch it, as had Conkling, Bayard, Boutwell and others. Some had taken it but returned it when lawsuits were threatened, without retaining the dividends; some kept it and justified it openly as a business investment; some kept it and the dividends till investigation was imminent and possibly kept the dividends altogether, a few kept both and attempted to deny or explain away the ownership. 
The report recommended the expulsion of Oakes Ames for using the stock to influence the votes of members of Congress; and of James Brooks, a government director of the Union Pacific, for using his position to obtain stock for himself or his family. The vote on the report was deferred for a week, and the House merely censured both, who by a strange coincidence died shortly after, only a week apart. In the Senate, an investigating committee recommended the expulsion of Senator Pomeroy of Kansas, but no action was taken upon it.
Encyclopedia Americana, 1920