February/March 1991 | Volume 42, Issue 1
The S&L crisis has been described again and again as the worst case of business and government corruption since the Crédit Mobilier scandal of the Grant administration, and the similarities extend far beyond the staggering amounts of money involved. In both cases the U.S. government virtually gave the businessmen involved license to loot the Treasury; the looting went on for years, and when it finally came to light, it was apparent that close attention by Congress or the administration could have prevented it.
The story begins with the 1862 legislation chartering the Union Pacific Company to build a transcontinental midway. It authorized the sale of $100 million dollars of stock, promised $16,000 to $48,000 per mile in thirtyyear government bonds, to be issued as track was completed, and provided for a two-hundred-foot-wide right of way across the continent. The directors and stockholders of the new company claimed—with some justification—that it would be difficult to get businessmen to invest in a risky transcontinental railroad. And so, with the help of bribes, they persuaded Congress to pass a second transcontinental-railroad act in 1864. This allowed the company to sell bonds of its own and back them with the railroad’s real estate. In addition, that real estate was doubled and made to include iron and coal rights.
The businessmen behind the venture proceeded in effect to mortgage the land for twenty-seven million dollars, and the unbuilt road for ten million. And they devised a holding-and-construction company to route profits to themselves; by owning both financial shell and construction firm, they could pay themselves inordinate amounts to erect the railway. They found the perfect structure, the Pennsylvania Fiscal Agency, a little investment firm that the government had chartered to buy and sell railroad bonds and had empowered “to borrow and loan money without limit upon the resources or without the resources of the company.”
In organizing the structure, two often bickering factions emerged. One was headed by George Francis Train, who had built the Atlantic and Great Western Railroad in Ohio, and Thomas C. Durant, a vice president of the Union Pacific who said forthrightly that his goal was to “grab a wad from construction fees—and get out.” Train, who had admired new French organizations devised to amass credit, rechristened the agency the Crédit Mobilier of America.
The other faction was headed by two brothers named Oakes and Oliver Ames. Oakes Ames was the perfect man to head Crédit Mobilier, which had decided to place its stock “where it will do most good for us"—he happened to be a Republican member of Congress from Massachusetts.
With Crédit Mobilier using Union Pacific’s government-authorized stocks and bonds to pay itself roughly twice the cost of building the road, there was always the danger of congressional investigation, so stock shares went to approximately twenty congressmen and the Vice President of the United States. Ames assured his fellow congressmen that Crédit Mobilier was a “diamond mine.” If they could not afford to buy shares, he simply gave key members the stock, promising to pay for it out of its dividends. In one year Crédit Mobilier paid a dividend of 348 percent; in another, five dividends totaling 805 percent.
By the time of Grant’s second presidential campaign, in 1872, the railroad was completed. Union Pacific was bankrupt, stripped of what Congress had intended to be a permanent endowment. Crédit Mobilier was out of business, having made a profit estimated at between thirty-three and fifty million dollars on an original investment of less than one million. Train boasted that he had three generations of his family living off Crédit Mobilier.
The unprecedented dividends had produced rumors of a scandal, but nothing substantial surfaced until the fall of 1872, when a squabble among the factions over the division of the spoils resulted in the publication of some incriminating letters of Oakes Ames’s in the New York Sun . At a hearing the next year, Ames read the list of men he had sold or given stock to, and they included some big names: the future President, James A. Garfield; Speaker of the House James G. Blaine; and Vice President Schuyler Colfax.
A congressional investigation whitewashed almost everyone except Ames. The committee recommended his expulsion, but the House refused to take action. Ames’s defenders argued that he had done nothing wrong except the patriotic act of building a railroad, and everybody built railroads with bribery and corruption (which was probably true).
Grant, with a new running mate, won the election of 1872, but most historians agree that the Crédit Mobilier scandal, the first of many to be exposed during Grant’s second term, played a significant role in bringing on the panic of 1873.
The government eventually took Union Pacific to court for misappropriation of funds, but the Supreme Court ruled that the government could not sue until 1895, when the company’s debt matured, and that it had no real cause for complaint anyway. After all—and herein lies the greatest difference between Crédit Mobilier and the S&L mess—the country had come out of it all with a transcontinental railroad.