Crédit Mobilier of America scandal - Business in United States of America

The Event: Revelation by the New York Sun that a construction company had bribed U.S. representatives with cheap stock to facilitate the company’s illegal manipulation of railroad contracts
Date: 1872
Place: Washington, D.C.
Significance: The Crédit Mobilier of America scandal entered the annals of American business as an example of corruption typical in post-Civil War commerce, especially in railroad construction.
During the 1860’s, westward expansion of the railroad system was of prime importance to the economy of the United States, and the government was prepared to provide substantial subsidies to ensure the project’s completion. In 1862, George Francis Train, a vice president for publicity of Union Pacific Railroad, created two companies, Crédit Mobilier of America and Crédit Foncier, to oversee the railroad’s western expansion. Both companies were modeled after French companies and introduced new concepts of corporate organization into the American system. Crédit Mobilier was one of the first companies to take advantage of limited liability in its financial structure. Stockholders were liable only for the amount of their investment in the company, rather than to the full extent of their personal assets.
Seeing an opportunity for enormous profit, Thomas C. Durant, Union Pacific’s major investor, quickly assumed control of Crédit Mobilier, the company involved with financing the railroad’s construction. In 1864, he arranged for Herbert W. Hoxie to bid on construction of one hundred miles of rail from Omaha, Nebraska, west. There were no other bidders. Hoxie obtained a contract, which he signed over to Durant, who immediately transferred it to Crédit Mobilier as a subcontractor. Crédit Mobilier billed Union Pacific twice the normal fees for track work. The company also sold members of Congress shares of stock at extremely low cost in exchange for their advocacy of additional funding for the project.
When construction failed to proceed at a reasonable pace, President Abraham Lincoln asked U.S. representative Oakes Ames to remedy the situation. In 1867, Ames arranged for his brother Oliver Ames II, to become president of Union Pacific and he became president of Crédit Mobilier. Ames continued the practices of giving stock options to representatives and of overcharging for the construction.
In 1872, Ames got into a serious disagreement with one of his associates, Henry Simpson McComb, who gave information to the New York Sun newspaper. During the presidential campaign, the newspaper, which opposed the reelection of President Ulysses S. Grant, revealed that Crédit Mobilier had charged Union Pacific $72 million for $53 million worth of work, almost bankrupting the railroad company. It also exposed the fact that members of Congress had received large amounts of the resulting profit. The congressional investigation by chief counsel Aaron F. Perry resulted in accusations against thirteen representatives and a recommendation that Ames be expelled from Congress. Congress, however, decided merely to censure him.