Credit Mobilier Scandal
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When the Union Pacific Railroad was authorized to construct a transcontinental railroad with substantial financial support from the federal government, officers and directors of the company devised a plan to make an immediate profit from its construction by fraud. The vehicle for this fraud was a company called Credit Mobilier of America.
The method was to have Credit Mobilier, which was entirely controlled by the same people, bill the Union Pacific for the costs of constructing the railroad. There was no "market value" of the work, as there were no other bidders, so UP paid much more than Credit Mobilier spent. As a publicly traded company, Credit Mobilier could point to a record of profits that demonstrated that it was efficient and profitable, so its shares traded at a high price.
In 1867, Congressman Oakes Ames of Massachusetts, whose family business had made him a fortune producing shovels and similar items, became the head of Credit Mobilier. Since the United States Treasury was indirectly the source of payment for Credit Mobilier`s invoices to UP, and since everything depended on the continued willingness of Congress to make appropriations, Ames distributed shares of Credit Mobilier to members of Congress at prices well below market. Those members merely had to sell the stock at market to reap large profits.
The scandal broke into public view during the election of 1872. During the subsequent Congressional investigation, it was found that more than thirty individuals representing both parties had received benefits, including the future president James A. Garfield.
While improper, most if not all of the activities of Credit Mobilier were legal at the time. Ames was censured and his expulsion was recommended, but he died shortly afterwards. Years later, the Massachusetts Legislature "exonerated" Ames for his activities.