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Crédit Mobilier of America -- The Gilded Age's Big Financial Scandal 

3/15/2016

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The Second Gilded Age is no stranger to corporate scandal. Martin Shkreli, Bernie Madoff, Enron and Volkswagen are names that come to mind, yes the most devastating has to be the subprime mortgage crisis.

Just as Wall Street tricked investors and took advantage of the Securities & Exchange Commission in the subprime mortgage crisis, Thomas Durant, the vice-president of Union Pacific Railroad, did the same to the federal government in Crédit Mobilier of America Scandal in 1872.

In 1864, the U.S. government chartered the Union Pacific Railroad, a project that would connect the Missouri River to the Pacific Coast. The government was going to invest in the project, too -- much to the chagrin of Union Pacific VP, Thomas Durant.

Looking to capitalize on the federal government's investment, Durant set up the company Crédit Mobilier of America using a foreign-sounding name to make it look like Union Pacific impartially chose a company with which it had no previous ties. However, Crédit Mobilier was made up of Union Pacific executives and shareholders with large stakes in the company. 

Naturally, Union Pacific gave all of the project's contracts to Crédit Mobilier. Through the guise of Crédit Mobilier, Union Pacific was able to charge the U.S. government whatever rate it desired. It even falsified detailed invoices from Crédit Mobilier to further its appearance of authenticity.

Crédit Mobilier used the money from the construction contracts to buy stock in Union Pacific and then sold stocks and bonds to investors. And who were those investors? Congressmen of the United States government.

Crédit Mobilier struck a deal that appealed to a good number of congressmen. It would offer Crédit Mobilier stock at a discounted rate for those members of Congress that agreed to support additional government funding for Union Pacific. Mutually beneficial, right?

It was a great deal for the right person. And the ideal persons were congressmen. Crédit Mobilier targeted members of Congress and congressmen  started getting more involved, buying more stock and cutting more deals under the table. Massachusetts Representative Oakes Ames went so far as to replace Durant as head of Crédit Mobilier. Ames then started selling discounted shares to other congressmen in return for guaranteed support.

In wasn't until election season 1872 that the scandal was exposed -- eight years after the federal government issued the railroad charter. The Sun broke the story, first stating that Crédit Mobilier was inflating prices by tens of millions of dollars. Soon after, the entire scheme was exposed.

While there are differences in the Wall Street housing crisis and the Crédit Mobilier scandal, several similar themes prevail:

1. Fraud -- Both Wall Street and railroad giant Union Pacific falsified documents to cover up what they were really doing. Each sold stocks that they had illegally created and acquired.

2. Government involvement -- Although the SEC knew banks were dealing in shady practices, they failed to put a stop to it. In the Crédit Mobilier scandal, congressmen sold their votes in exchange for stock in a profitable company that was directly funded as a result of their support. While there were not the anti-corruption laws 1872 for something like Crédit Mobilier to be illegal for congressmen, it was still regarded as highly unethical and a case of "dirty politics.'

3. "Too Big to Fail" --  In the same way that Crédit Mobilier would not fail as long as it had the support of Congress, Wall Street would not fail as long as the SEC continued turning a blind eye, and it had the support of Congress. Laws were (and are) drafted and interpreted in its favor.

4. Economic Crisis -- While Crédit Mobilier  of America didn't trigger a worldwide economic crisis, it did deal a significant blow to investors' previous enthusiasm in the industry. And when investors got weary of investing in the railroads themselves, the loss of capital triggered the Panic of 1973.
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    Curious like a KAT: The Blog is dedicated to intellectual musings, cultural insights and contemporary and historical analysis.

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