The Credit Mobilier Scandal

The Crédit Mobilier scandal was a widespread fraudulent manipulation of contracts for the construction of a portion of America’s first Transcontinental Railroad conducted from 1864 to 1867 by officials of the Union Pacific Railroad and their fictitious construction company called Crédit Mobilier of America.

The scandal involved a complex business arrangement whereby a few individuals awarded lucrative government contracts to themselves for the construction of the railroad. In the process, those involved realized enormous profits while defrauding the U.S. government and bankrupting the Union Pacific. After the plot was finally revealed in 1872, and it became known that some members of Congress had been involved, the House of Representatives investigated the scandal. Along with ruining the careers of several politicians, the scandal left much of the American public distrustful of Congress and the government during the laissez-faire “Gilded Age” of the late 19th century. 

Background 

Since the start of America’s Industrial Revolution, entrepreneurs had dreamed of a railroad that would connect the nation’s East and West Coasts. Signed into law by President Abraham Lincoln on July 1, 1862, the Pacific Railroads Act of 1862 authorized extensive grants of land and the issuance of government bonds to the Union Pacific Railroad and Central Pacific Railroad companies for the construction of a "transcontinental railroad.”

The Railroads Act did not pass without opposition. Opponents alleged that the entire project was a fraud in which a few already wealthy capitalists would reap tremendous profits from building a “railroad to nowhere” paid for mainly by the U.S. government, thus taxpayers. Opponents also argued that the routing and obstacles to the construction of the western portion of the railroad eliminated any chance that the completed railroad could be operated profitably. 

While most Americans agreed that the railroad was badly needed, many disagreed on how to pay for it. Just laying track through, over, or around the solid granite peaks of the Sierra Nevada Mountains—some over 7,000 feet high—would cost millions. When the Civil War began in April 1861, Congress found the idea of funding such an expensive project even less appealing. However, President Lincoln, desperately wanting to prevent California from seceding from the Union, convinced Congress to pass the Railroads Act. 

During what historian Vernon Louis Parrington called “The Great Barbeque” years following the Civil War, the federal government aggressively promoted the settlement of the western territories and the exploitation of their resources with little oversight, regulation, or consideration of its impact on Indigenous Peoples. This “laissez-faire” approach to settlement and resource extraction without consequence enjoyed broad support within Lincoln’s Republican Party. 

Under the Railroads Act, the Union Pacific Railroad was provided $100 million— equivalent to over $1.6 billion in 2020 dollars— in initial capital investment to build the portion of the railroad running from the Missouri River to the Pacific coast. The Union Pacific also received land grants and government loans of from $16,000 to $48,000 per mile of track, depending on the difficulty of construction, for a total of more than $60 million in loans. 

Obstacles to Private Investment

Despite the sizable contribution from the federal government, Union Pacific executives knew they would need money from private investors to complete their portion of the railroad. 

Union Pacific’s tracks would have to be built over 1,750 miles (2,820 km) of desert and mountains. As a result, the cost of shipping supplies and equipment to the construction sites would be extremely high. As if that were not risky enough, it was assumed that Union Pacific’s construction crews would be facing violent conflicts with Native American tribes who had long occupied western territories, all with no promise of early business income to pay dividends.

With no towns or cities of any size yet located on the western prairies, there was virtually no existing demand for paying railroad freight or passenger transportation anywhere along Union Pacific’s proposed route. With no potential commercial activity, private investors refused to invest in the railroad. 

Indigenous Peoples’ Resistance

The Indigenous People who lived in the American West encountered the transcontinental railroad as part of the larger process of America’s westward expansion, colonization, and settlement. They realized that by making it possible for ever-greater numbers of people to settle in the West, the railroad threatened to hasten their displacement and associated loss of natural resources, food sources, sovereignty, and cultural identity.

The Union Pacific company began laying track westward from Omaha, Nebraska, in 1865. When their crews entered the Central Plains, they began to experience resistance from Native American tribes, including the allied Oglala Lakota, Northern Cheyenne, and Arapaho tribes.

Agreed to in 1851, the Treaty of Fort Laramie had promised the tribes protection from American settlers and a yearly payment of food and supplies by the United States as compensation for damages caused by the migrants. In return, the tribes agreed to allow migrants and railroad work crews to cross tribal lands safely.

While it created a short period of peace, all of the treaty’s terms had soon been broken by both sides. Tasked with protecting settlers and the railroad, the U.S. Army pursued a policy of total war, killing Native American men, women, children, and the elderly

One of the greatest tragedies for Native Americans was the Sand Creek Massacre. In November 1864, U.S. Army troops, with the blessing of Colorado’s territorial governor, attacked a peace-seeking village of Cheyenne and Arapaho people camped at Sand Creek, near Denver. The American forces killed more than 230 Indigenous people, two-thirds of whom were women and children.

In retaliation, Cheyenne and Arapaho warriors attacked railroad crews, destroyed telegraph lines, and killed settlers. As the interracial fighting intensified Union Pacific railroad executives demanded that U.S. military troops—fresh from fighting in the Civil War—protect the railroad. It soon became common for both soldiers and settlers to kill Native Americans on sight, whether they were part of the fighting or not.

The Fraud Scheme 

Railroad executives of the day had learned from experience that more profit could be made from building railroads than from operating them. This was especially true in the case of the Union Pacific railroad. While extensively supported by government land grants and bonds, the Union Pacific would be responsible for spanning the vast, mostly unpopulated expanse of land between Omaha, Nebraska, on the Missouri River, and the Great Salt Lake in Utah—a territory with little potential to produce much immediate revenue from freight transportation fees.

To ensure himself and his partners of making fortunes from building the railroad, Union Pacific executive Thomas C. Durant create a fictitious railroad construction company he called Crédit Mobilier of America, falsely portraying the company in a way to make potential investors believe it was associated with a completely legitimate major French bank of the same name. Durant then paid his friend Herbert M. Hoxie to submit a construction bid to Union Pacific. Since no one else was asked to bid, Hoxie's offer was unanimously accepted. Hoxie immediately signed the contract over to Durant, who then transferred it to his own Crédit Mobilier of America.

Durant created Crédit Mobilier to greatly inflate Union Pacific’s railroad construction costs. While Union Pacific’s actual construction costs never exceeded about $50 million, Crédit Mobilier billed the federal government for $94 million, with Union Pacific executives pocketing the excess $44 million. 

Using some of the excess cash along with $9 million in discounted shares of Crédit Mobilier stock, Durant with the assistance of U.S. Rep. Oak Ames, bribed several members of Congress. In return for the cash and stock options, the lawmakers promised Durant that there would be no federal oversight of either Union Pacific or Crédit Mobilier, including their financial and business dealings. In defending his actions, Ames wrote, “We want more friends in this Congress, and if a man will look into the law (and it is difficult to get them to do it unless they have an interest to do so), he cannot help being convinced that we should not be interfered with.”

Along with helping to cover up the fraud, the bribed congressmen approved additional unnecessary subsidies for the cost of the railroad and issued regulatory rulings that allowed Union Pacific to keep its actual construction costs to a minimum.

In essence, Durant hired himself to build the railroad, paying his own Crédit Mobilier with money given to the Union Pacific by the federal government and risk-taking private investors. He then subcontracted the railroad work to real construction crews while using inflated estimates to ensure significant profit for himself. Facing no liability himself, it didn't matter to Durant if the railroad ever actually got built. When a twisting, ox-bow-shaped route headed west out of Omaha added an unnecessary nine miles of profit-generating track to the construction, Durant’s money-making scheme took off like a runaway locomotive.

Uncovering and Political Fallout 

The chaotic post-Civil War Reconstruction era was riddled with corporate corruption that involved not only lesser state officials but also elected federal government officials. The Crédit Mobilier affair, which was not publicly investigated until 1873, is an example of the corrupt practices that characterized the period.

The New York City newspaper, The Sun, broke the Crédit Mobilier story during the 1872 presidential campaign. The paper opposed the re-election of Ulysses S. Grant, regularly publishing articles critical of alleged corruption within his administration.

Following a disagreement with Rep. Oak Ames, Henry Simpson McComb, an executive of the Illinois Central Railroad, leaked compromising letters to the newspaper. On September 4, 1872, The Sun reported that Crédit Mobilier had received $72 million in contracts for building a railroad that had cost only $53 million. 

Shortly after the story ran in The Sun, the House of Representatives submitted the names of nine politicians to the Senate for investigation. These included Republican Senators William B. Allison, George S. Boutwell, Roscoe Conkling, James Harlan, John Logan, James W. Patterson, and Henry Wilson, Democratic Senator James A. Bayard, Jr., and Republican Vice President Schuyler Colfax. When it was hinted that Sen. Bayard had been named only to make it appear that Democrats were also involved in the scandal, he was generally excluded from further investigation.

In December 1782, Speaker of the House James Blaine of Maine appointed a special investigating committee. “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,” Speaker Blaine noted. 

In February 1873, Speaker Blaine’s committee investigated 13 Senators and Representatives. On February 27, 1873, the House censured Ames and Brooks for using their political influence for personal financial gain. In a separate Department of Justice investigation, several other important officials were implicated including vice presidential candidate Henry Wilson along with Congressman and future president James A. Garfield.

The scandal had little effect on Garfield, who after denying the charges against him, was elected president in 1880. Serving less than a year in office, Garfield was assassinated on September 19, 1881.

The scandal was exposed as President Ulysses S. Grant was running for election to a second term in 1872. All of the politicians implicated in the scandal by Speaker Blaine’s committee were Republican colleagues of Grant’s, including outgoing vice president Schuyler Colfax and Blaine himself.

The Republican Party had removed Colfax from the 1872 ticket due to his implication in the scandal. During the investigation, the new vice presidential candidate, Henry Wilson, had admitted his involvement in the scandal but claimed to have returned his shares of Crédit Mobilier stock and all dividends they had paid him. The Senate accepted Wilson’s explanation and took no action against him. Though his reputation for integrity had been damaged, Wilson was elected vice president in March 1873.

With Henry Wilson as his new running mate, Grant was reelected in 1872. However, most historians agree that the Crédit Mobilier scandal had been the first of many cases of corruption to be exposed during his second term, and played a significant role in bringing on the financial panic of 1873.

In the Whiskey Ring scandal of 1875, it was revealed that high-level government officials within Grant’s administration had conspired with distillers to illegally pocket taxes paid on the sale of whiskey. An investigation of the affair implicated Grant’s longtime friend and White House secretary, Civil War hero, General Orville Babcock. He was criminally indicted twice on corruption charges but was acquitted thanks largely to Grant’s testimony on his behalf—a first for a sitting president. When Babcock’s attempt to resume his duties in the White House met with a public outcry, he was forced to resign. 

In 1876 Grant’s secretary of war, William Belknap was impeached after it was proven that he had taken thousands of dollars in bribes in exchange for a lucrative appointment to operate the lucrative military trading post at Fort Sill in Native American territory. Minutes before the House of Representatives was scheduled to vote on articles of impeachment, Belknap raced to the White House, handed Grant his resignation, and burst into tears.

While Grant was never accused of any crime, the parade of scandals during his second term in office greatly diminished his public popularity as a Civil War hero. Disheartened, Grant assured Congress and the people that his “Failures” had been “errors of judgment, not of intent.”

In March 1873, the government sued Union Pacific for misappropriation of public funds. In 1887, however, the U.S. Supreme Court ruled that the government could not sue until 1895 when the company’s debt was due to come due. The Court also ruled that the government had no real grounds for its complaint because it had gotten what it wanted from the contract—a transcontinental railroad. “The company has completed its road, keeps it in running order, and carries all that is required by the government,” wrote the Court. 

What Became of Thomas Durant?

During the Grant presidency, Crédit Mobilier became increasingly associated with corruption and secrecy within the federal government. Tired of seeing the government not being paid back for the loans it had extended to Union Pacific and the continued swindling at Crédit Mobilier, Grant ordered Durant removed as director of Union Pacific. 

After losing much of his wealth in the Panic of 1873, Durant spent the last twelve years of his life fending off lawsuits filed against him by disgruntled partners and investors in Crédit Mobilier. With his health failing, Durant retired to the Adirondacks and died without leaving a will in Warren County, New York, on October 5, 1885. 

Sources

• ^{“The Crédit Mobilier Scandal.” U.S. House of Representatives Historical Highlights, https://history.house.gov/Historical-Highlights/1851-1900/The-Cr%C3%A9dit-Mobilier-scandal/.}
• ^{Mitchell, Robert. “Buying ‘friends in this Congress’: The smoking gun that triggered a political scandal.” The Washington Post, July 18, 2017, https://www.washingtonpost.com/news/retropolis/wp/2017/07/18/buying-friends-in-this-congress-the-smoking-gun-that-triggered-a-political-scandal/.}
• ^{Mitchell, Robert B. “Congress and the King of Frauds: Corruption and the Credit Mobilier Scandal at the Dawn of the Gilded Age.” Edinborough Press, November 27, 2017, ISBN-10: 1889020583.}
• ^{“The King Of Frauds: How the Credit Mobilier Bought Its Way Through Congress.” The Sun. New York, Sept. 4, 1872.} 
• ^{Parrington, Vernon Louis. “Main Currents in American Thought: The Beginnings of Critical Realism in America.” University of Oklahoma Press, November 1, 1987, ISBN-10: 0806120827.}
• ^{Stromberg, Joseph R. “The Gilded Age: A Modest Revision.” Foundation of Economic Education, September 21, 2011, https://fee.org/articles/the-gilded-age-a-modest-revision/.}  
• ^{“Impeachment Trial of Secretary of War William Belknap, 1876.” United States Senate, https://www.senate.gov/about/powers-procedures/impeachment/impeachment-belknap.htm.}