The Union Pacific Railroad and the Crédit Mobilier Fraud

The Central Pacific Railroad was funded privately by four major investors who put their own money on the line until they received government bonds for financing. The Union Pacific Railroad took an entirely different route. Although the infamous Ponzi Scheme came into being in the 1920s, decades after the building of the Union Pacific, it appears it was a cousin to the form of fraudulent financing scheme entered into by some major players in the Union Pacific management.

Dr. Thomas C. Durant, Union Pacific Vice President

At the meeting of stockholders on October 9, 1863, John A. Dix was elected president. Dr. Thomas C. Durant was chosen as vice-president. Durant turned out to be the real leader of the corporation. He had graduated from Albany College of Medicine at the youthful age of 20 but disliked his humdrum position as assistant professor of surgery. Daring, adventurous, and energetic, he threw all of his constructive genius and fortune into the enterprise of building the Union Pacific Railroad.

To Thomas Durant, the official financial incentives were not enough. As a part of their scheme to take advantage of the government subsidies, Durant and entrepreneur, George Francis Train, joined together in March 1864 in a business venture to buy out the Pennsylvania Fiscal Agency, changing its name to Crédit Mobilier. The company was one of the first to take advantage of the new limited liability financial structures. Previously, investors were responsible for the finances of a company if it had problems.

Under limited liability, their only responsibility was for money paid in. Durant created this limited liability company to encourage Union Pacific investors to agree to take on the railroad's construction after contracted employee, Herbert Hoxie, announced that he would fail to meet his deadline for building 247 miles of track. Investors thought that this contract, given the high construction cost, was too great a risk, but the protection offered by Crédit Mobilier convinced them to take on the construction. Durant then manipulated Crédit Mobilier's structure so that he wound up in control of it. Union Pacific effectively paid him via Crédit Mobilier to build the railroad. Durant covered his tracks by having various politicians, including future President James Garfield, as limited stockholders.

Members of Crédit Mobilier

This company was supposedly independent, and thus impartial, from the Union Pacific Railroad. In actuality, it was a front company put together to purchase construction goods for the railroad and issue contracts for construction managers. This extra layer of corporate complexity allowed Durant to pay himself and his cronies to build his railroad. Union Pacific directors funneled projects through Crédit Mobilier, which charged inflated prices or its products and services.  Many of those directors were also investors in Crédit Mobilier. Those inflated charges were paid to this transparent holding company by the bonds. The true cost of the goods and services were paid, and the investors pocketed the difference. Durant achieved considerable profits for himself by this arrangement.

The Union Pacific contracted with Crédit Mobilier to construct 667 miles of the railroad. The actual cost to Crédit Mobilier was about $44,000,000. The contract, using government subsidized funding, was for more than $94,000,000.

How did they get away with it?

The principal means of the fraud was the method of indirect billing. The Union Pacific presented genuine and accurate invoices to the U.S. government, as evidence of actual construction costs incurred and billed to them by Crédit Mobilier of America for payment. The railroad then prepared and presented meticulously detailed invoices to the U.S. government, requesting payment for these bills, accrued by the Union Pacific from Crédit Mobilier, for the construction of the line. The bills reflected only a small additional fee over the cost stated on the Crédit Mobilier invoices for the Union Pacific's operating and overhead expenses, incurred during the line's construction at a time when no traffic (freight or passenger) was being carried.

Any audit of the Union Pacific and its invoices to the U.S. government would not have revealed any evidence of fraud or profiteering. Union Pacific was accepting for payment genuine Crédit Mobilier invoices and which it applied an auditable overhead expense for management and administration of the Union Pacific during construction of the railroad.

The underlying fraud of a common and unified ownership of the two companies, as regards their principal officers and directors, was not revealed for years. Nor was it 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.

Congressman Oakes Ames, Massachusetts

One of the early Union Pacific stockholders was Congressman Oakes Ames. In the 1860's the attention of Oakes Ames, a congressman from Massachusetts, and his brother was drawn to the Union Pacific and the generous subsidies it was receiving from Congress. The two, having made a fortune in the management of their father's shovel works which boasted of an average yearly production of over 1,400,000 shovels a year, bought enough stock that they acquired control over the Union Pacific.

Ames decided that Crédit Mobilier could not work with Durant anymore. Ames took Durant to court and fired him from Crédit Mobilier in May 1867, ousting Durant from his position managing Crédit Mobilier.

Crédit Mobilier replaced Thomas Durant with the Congressman Oakes Ames. In that year, Ames offered to members of Congress shares of stock in Crédit Mobilier at its discounted par value rather than the market value, which was much higher.

The high market value of the stock resulted from the superb performance of Crédit Mobilier of America as a corporation, which in turn succeeded due to its major contract with the Union Pacific. Crédit Mobilier declared substantial quarterly dividends on its stock.

Speaker of the House, Schuyler Colfax, later Vice President

In order to avoid Congressional investigation, a large block of Crédit Mobilier stock held by Congressman Ames as trustee was ostensibly "sold" to influential congressmen for one-third of its actual value. Congressmen included Schuyler Colfax,  then-Speaker of the House (who, by 1872, was the sitting Vice President). However, the "sale" did not require actual money. The sales price was paid from the dividends resulting from the profits on the railroad construction. The congressmen and others allowed to purchase shares at a discount could reap enormous capital gains simply by offering their shares on the market, knowing that they would be purchased at a higher price by investors desiring to own stock in such a "profitable" company. These same members of Congress made the company appear to be profitable by voting to appropriate government funds to cover Crédit Mobilier's inflated charges.

Congressman James Brooks, New York

Most of the Members got rid of their stock quickly, nullifying the large returns they could have received. However, Representative James Brooks of New York (who also served as a government director for the Union Pacific) profited from a large block of shares.

The Crédit Mobilier fraud orchestrated by Thomas Durant and continued by Oakes Ames came to a head on September 4, 1872 when the New York Sun revealed that several members of Congress had accepted cash bribes or shares of Crédit Mobilier stock.

The paper opposed the re-election of Ulysses S. Grant and was regularly publishing articles critical of his administration. Following a disagreement with Ames, Henry Simpson McComb, an associate of Ames and a later executive of the Illinois Central Railroad, leaked compromising letters to the newspaper. The Sun reported that Crédit Mobilier had received $72 million in contracts for building a railroad worth only $53 million. The revelations left the Union Pacific and other investors nearly bankrupt.

Although no one was indicted, the scandal resulted in a Congressional investigation. When the scandal became public, Speaker James Blaine of Maine appointed a select investigation committee chaired by Representative Luke Poland of Vermont in December 1872. Speaker Blaine noted that “A charge of bribery of members is the gravest that can be made in a legislative body. It seems to me . . . that this charge demands prompt, thorough, and impartial investigation.”

 

Political cartoon depicting Uncle Sam telling Ames he should commit hari-kari

On February 27, 1873, the House censured Ames and Brooks for using their political influence for personal financial gain. Congressman Ames died several months later, his reputation ruined.

As for Thomas C. Durant, President Ulysses S. Grant fired him from Union Pacific after it was discovered he had violated the 1862 Pacific Railroad Act by using his control of the Crédit Mobilier to become the majority stockholder in the Union Pacific Railroad. There was also suspicion that Durant had taken money from the company, but those around him feared exposing him. Like many others, he lost a great deal of his wealth in the Panic of 1873. He sold his remaining stock in Union Pacific and started a new railroad company, Adirondack Railroad. He spent the last twelve years of his life fighting lawsuits from disgruntled partners and investors. However, he weathered the financial crisis while numerous Crédit Mobilier investors went bankrupt.

 Escape from Gold Mountain, which was released last month, is now available on Kindle Unlimited. 
Please CLICK HERE for the book description on Amazon. The print version is also available on Barnes & Noble, which you can reach if you CLICK HERE. 



My new Christmas novel, Two Sisters and the Christmas Groom, is also now available. Please CLICK HERE for the book description and purchase link. I appreciate any and all reviews on Amazon and GoodReads.

Sources:

https://www.up.com/timeline/index.cfm/credit-mobilier-scandal

Museum Memories, Volume 1 (Salt Lake City, Utah: International Daughters of Utah Pioneers, 2009), Pgs. 408-410.

https://history.house.gov/Historical-Highlights/1851-1900/The-Cr%C3%A9dit-Mobilier-scandal/

http://www.wyomingtalesandtrails.com/sherman3.html

https://www.history.com/topics/19th-century/credit-mobilier

Wikipedia

CPRR Through Nevada & Utah by Zina Abbott

On an earlier blog post, which you may find by CLICKING HERE, I talked about the Chinese laborers who worked years grading, using explosives, and building track for the Central Pacific Railroad through the Sierra Nevada Mountains—a construction feat many engineers of the 1800s said could not be done.

August 28, 1867 – The Sierra Nevada Mountains were finally "conquered" by the Central Pacific Railroad, after almost five years of sustained construction effort by its mainly Chinese crew about 10,000 strong, with the successful completion at Donner Pass of its 1,659-foot (506 m) Tunnel #6 (a.k.a. the "Summit Tunnel").

December 1, 1867 - Central Pacific opened to Summit of the Sierra Nevada for a total of 105 miles.

June 18, 1868 - The first passenger train crosses the Sierra Nevada to Lake's Crossing (modern day Reno, Nevada) at the eastern foot of the Sierra in Nevada.

However, the CPRR did not stop at eastern foot of these mountains.  The year 1868 was one of feverish activity for both railroads. Two years earlier, the Central Pacific has successfully lobbied Congress to add an additional Amendment to the Railroad Act. The CPRR was no longer bound by a 150 mile limit from the California border, and the companies were permitted to grade 300 miles ahead of the end of track with the meeting point still undetermined.

 

Last remaining passenger car at Promontory Summit, May 10, 1869. Note the terrain.

The two railroad companies—Central Pacific RR and Union Pacific RR—could draw two-thirds of the government bonds as soon as the grade had been completed and before the track was laid. Congress had utilized the power of competition within the free enterprise system to speed construction. Both railroads took advantage of this provision. Once they reached the Promontory Mountains in Utah, they both kept grading track while they passed each other, sometimes within shouting distance. For the sake of the money involved, they probably would have continue building until they reached the opposite oceans if some sane heads in Washington D.C. had not called a stop to the travesty and insisted on a central meeting place.

Once they reached the relatively flat country of Nevada, Charles Crocker, the CPRR construction manager, announced a construction goal of a mile of track every working day. The route ahead was over a terrain that offered none of the difficulties encountered in the mountains, and the "mile-a-day" push went into high gear. Over 10,000 employees responded with almost superhuman effort. Approximately six thousand horses sped the work along. Canvas towns sprang up as the railhead was pushed steadily eastward. On October 1, 1868, the line reached Winnemucca, 325 miles from Sacramento.

 

End of track taken in 1868 in Nevada

They continued through the territories of Nevada and Utah. From 1865 to 1869, as many as 20,000 Chinese laborers worked on the Central Pacific Railroad, which ran from Sacramento to Promontory Summit, Utah.

 

Construction train in Alkali desert - ctsy of Union Pacific RR Museum, Ogden, Utah

I did not find a lot of information about the work effort through this region. What I know from traveling along Interstate I-80 which pretty much follows the route of the railroad tracks (as well as the earlier California Trail and the First Continental Telegraph) is that there is a whole lot of desert and very little water or vegetation other than scrubby sage in places. Out of necessity because the railroad needed water for its steam engines, the track was laid as close to water sources as possible.

Railroad in Nevada 2018, early summer after an exceptionally wet spring

Chinese Railroad Workers

 

Because of discrimination, the tens of thousands of Chinese workers—at one point constituting over 80% of Central Pacific's workforce (some estimate as much as 90%)—have been mostly forgotten, despite their contribution to an enormous feat of civil engineering and the terrible hardships they endured. While the Irish workers were paid $35 per month and provided housing, the Chinese were only paid at first $27 and then $30 per month but not provided housing. All of this in spite of the freezing temperatures, avalanches, and the dangers of their work that cost perhaps thousands of their lives. The Chinese workers likely put up with these injustices because many of them had come from Guangdong Province in China, which at the time was stricken with poverty and political upheaval. To them, laying tracks for the transcontinental railroad might have seemed a better place to be than back home.

Although originally, there was speculation that the Chinese were too small in stature to make good rail workers, this group proved all the nay-sayers wrong. The Chinese took daily sponge baths. Since they drank only tea made from boiled water, they were not subject to the diseases caused by drinking from contaminated streams and lakes. Young Chinese employees carried tea to the workers by means of yokes over their shoulders with clean recycled powder kegs hanging from each end. Thus, their tea was known as “powder tea.”

They also had their own cooks, and their healthful provisions were purchased from Chinese merchants. While the Americans dined on boiled beef and potatoes, beans, and coffee, the Chinese ate a variety of food, including oysters, fish, abalone, Oriental fruits, and scores of vegetables, including bamboo sprouts, seaweed, and mushrooms. Although they used opium on Sundays, they did not drink alcohol and returned to work on Mondays free of the hangovers that plagued their American counterparts. As a whole, the Chinese remained healthy.

 

Chinese Railroad Workers

Unfortunately, even though the Chinese workers had been essential to the success of building the Central Pacific Railroad, the owners and managers had no more respect or consideration for these laborers than most Americans. Once the railroad was completed, the workers were dismissed from employment without provisions to transport them back to California. They were forced to make their own way.

(Author’s note: Many of them chose to stay in Utah, even working their way down to Salt Lake City and probably points south. While perusing the microfilm of the early Salt Lake County death records for death and burial information on my great-great grandparents as well as other family members, I noticed several entries over the decades for single Chinese men who had found work in the county.)

I found this interesting personal story in Museum Memories, Volume 1, published by the Daughters of Utah Pioneers:

“Nearly all of the Chinese laborers saved money while working for the Central Pacific. Some returned to China with their savings, and other settled in California where they raised families and became an integral part of the population.

“Frank Woo said that his great-grandfather saved almost every cent that he earned while employed by the railroad and took it home to China. While working in Nevada and Utah, he raised chickens which were able to live off the land. Woo traded eggs for rice and other foods. He improved his diet by eating red berries from the wolfberry plant, which was indigenous to the Great Basin. He understood herbal medicine and knew the pharmaceutical properties of native plants. For example, he used dandelions to heal bruises. He obtained unclaimed clothing from his buddies who were doing laundry for the construction crews.”

CPRR Locomotives

Until the completion of the Transcontinental Railroad and the Central Pacific Railroad's opening of its own shops, all locomotives had to be purchased by builders in the northeastern U.S. The engines had to be dismantled, loaded on a ship, which would embark on a four-month journey that went around South America's Cape Horn until arriving in Sacramento where the locomotives would be unloaded, re-assembled, and placed in service.

 

Governor Stanford 4-4-0 locomotive

The Central Pacific's first three locomotives were of the then common 4-4-0 type. With the start of the American Civil War in the East, the CPRR had difficulty acquiring engines from eastern builders. What was available to them were the smaller 4-2-4 or 4-2-2 models. 

CPRR#113 FALCON, a Danforth 4-4-0, at Argenta, Nevada, March 1, 1869 (Photo: J.B. Silvis)

Locomotives at the time came from many manufacturers, such as Cooke, Schenectady, Mason, Rogers, Danforth, Norris, Booth, and McKay & Aldus, among others. The railroad had been on rather unfriendly terms with the Baldwin Locomotive Works, one of the more well-known firms. It is not clear as to the cause of this dispute, though some attribute it to the builder insisting on cash payment (though this has yet to be verified), which was particularly difficult until after the line had been built to a point where the railroad qualified for the Federal grant money.

The CPRR eventually purchased 53 miles of UPRR-built grade from Promontory Summit to Ogden, Utah Territory, which became the interchange point between trains of the two roads. 

Escape from Gold Mountain will initially be offered on more than one vendor. The release day is scheduled for September 4, 2019. It is currently on a pre-order sale on both Amazon and Barnes & Noble. On September 5th, the book will move to its regular ebook price. If you are a Nook reader, the book will only be available for Nook purchase for a short time before it will be offered digitally exclusively on Amazon and in the Kindle Unlimited program.

The book will also be offered in print format and will continue to be offered for sale as a paperback on both vendors.

Here are the purchase links:

Amazon  |  Barnes & Noble

Sources:

http://sciencenetlinks.com/blog/snl-educator/apahm-2014-building-transcontinental-railroad/

https://www.wbur.org/onpoint/2019/05/07/chinese-transcontinental-railroad-ghosts-of-gold-mountain-gordon-chang

Museum Memories, Volume 1 (Salt Lake City, Utah: International Daughters of Utah Pioneers, 2009), Pgs. 404-407.
Wikipedia