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Scandals
of Gilded Ages
January
19, 2002
by Jack Rabbit
At the end of every storm, clouds are seen to have a silver
lining. When an age is as burdened with political scandal
as ours has been, the result is often the reform that had
been badly needed for a long time. Our time is one of great
economic growth into new industries, much as the America of
the Gilded Age that followed the Civil War. That age was also
a time of numerous political scandals involving shady businessmen
seeking wealth and using their influence to make the government
look the other way. That age culminated in an age of reform.
We may well expect the same of our age.
When news broke about how the Bush administration had reason
to know of the impending collapse of the Enron Corporation
and that the corporation had played a shell game with investors
and government regulators for years, many in the press began
looking for an appropriate scandal of the past to which to
compare the new one. Some have suggested Whitewater, although
the only reason Whitewater would seem to be mentioned is its
proximity to Enron in time. As far as many are concerned,
Whitewater wasn't a presidential scandal as much as a scandal
on the part of an abusive special prosecutor who embarrassed
himself as much as President Clinton by spinning a tacky tryst
into an impeachable offense.
Teapot Dome is another candidate often mentioned. However,
Teapot Dome was a case of classic government corruption. It
was actually a rather mundane affair. The chiefs of two oil
companies paid the Secretary of the Interior, Albert Fall,
for the rights to drill on federal land in California and
Wyoming; furthermore, when Secretary Fall resigned his cabinet
post in 1923, we went to work for one of the companies, Sinclair
Oil. In the case of Enron, there is no suggestion that any
money was passed under the table.
Watergate, as always, is mentioned. But Watergate is unique
in the annals of scandals in that it is to date the only one
that involved the active participation of a sitting President
actually engaged in crimes of commission. In other presidential
scandals, the President either didn't know what he should
have known or committed crimes of omission in failing to do
whatever needed to be done to put a halt to the wrongdoing.
It would appear that in the case of Enron the worst thing
that Bush did was nothing when something was clearly in order.
For a good fit in scandals of the past to compare to Enron
one must go back to the Gilded Age following the Civil War
and examine the scandal that, like Enron, bears the name of
a corporation that wielded a corrupting influence on government
officials: the Credit Mobilier.
The Credit Mobilier, a finance and construction company,
was a subsidiary of the Union Pacific Railroad. It was founded
in 1859 as the Pennsylvania Fiscal Company and came under
the control of Union Pacific in 1864. As an experiment in
history, America is an empire with a republican form of government.
As an empire spanning the North American continent, there
was (and still is) a great need for vast networks of communications
and transportation.
Over the years, as technology advanced, this network has
taken the form of wilderness trails, telegraph lines, railways,
highways, airports and now the Internet. All of these have
had both a personal and commercial utility. In the mid-nineteenth
century, men of vision saw that the best, most efficient way
to transport goods from one coast to the other would be a
transcontinental railroad.
To this end, congress passed the Pacific Railroad Act in
1862. The act provided for the incorporation of two railroad
companies, the Central Pacific and the Union Pacific. At the
time, it was possible to ship goods by rail from the east
coast to the Missouri River; the purpose of the act was to
build a railway from the Missouri River to California. The
Central Pacific would build the railroad from Sacramento eastward
while the Union Pacific would build westward from Omaha. The
act also granted the two companies sections of government
land and a sum of anywhere from $16,000 to $48,000 per mile
of track laid, depending on the difficulty of the terrain
in question. The tales of the Central Pacific are scandalous
and colorful in their own right; however, it is the Union
Pacific that concerns us here.
The Union Pacific began construction on its end of the line
in December 1863, eleven months after the Central Pacific
began construction in California. A year later, the Union
Pacific's chief engineer, Peter Dey, resigned his post in
a dispute about the financing of the railroad. Dey believed,
with good reason, that something was not right. Dey has calculated
the cost of building the first hundred miles of track at $30,000
per mile; however, the Union Pacific contracted the work to
its subsidiary, Credit Mobilier, at $60,000 per mile. This
was pure profit to Credit Mobilier and back to Union Pacific.
Since the money wasn't Union Pacific's but the federal government's,
it was pure profit at government expense.
Now, of course, when government funds are being drained like
that, one would expect a congressional investigation to set
things right. However, Credit Mobilier was prepared for such
a pesky eventuality. Oakes Ames, a member of the board of
directors of Credit Mobilier, was also a member of the US
House of Representatives from the commonwealth of Massachusetts.
Ames offered to sell stock to his colleagues at a considerable
discounts. These transactions were - as one would expect,
should we say? - private and discreet. Ames was also a very
accommodating stock broker. He would even lend his colleagues
the money to buy the stock, if necessary.
Meanwhile, since Credit Mobilier was getting double what
it actually cost to build the railroad, it was swimming in
profits and its congressional investors were rolling dividends.
They declined to look into the matter of misuse of government
money. In 1869, the transcontinental railway was completed
when the Central Pacific and the Union Pacific joined in Utah.
All this remained under wraps until 1872, when the New York
Sun got word of the scheme from a disgruntled Credit Mobilier
stockholder. The Sun named sixteen members of Congress as
participants in the scheme, including Ames, Schulyler Colfax,
who had been Speaker of the House as the stock scheme was
active, and a young congressman from Ohio named James A. Garfield.
With the scandal public, the House had no choice but to investigate
its own members. The investigating committee worked at determining
the facts, at finding who was guilty and deciding what sanctions
should be given to the wrongdoers. The committee, chaired
by Congressman J. W. Wilson of Indiana, determined that Credit
Mobilier overcharged Union Pacific - and indirectly the federal
government - $23 million.
The committee recommended the expulsion of Mr. Ames, but
the full House voted merely to censure him; old and broken,
Ames died a short time later. The committee also determined
the Colfax was guilty, but this proved to be something of
a problem. As one might expect, no one a crooked as Colfax
could long remain Speaker of the House; indeed, he was no
longer Speaker, having left the House in 1869. Colfax was
now Vice President.
The suggestion was made that he be impeached, but Colfax
was a Republican and so were a majority of the members of
the House. Consequently, they decided that since Colfax could
not be impeached from the Vice Presidency for offenses committed
while he was Speaker of the House. Nevertheless, 1872 was
a presidential election year and President Grant, with the
support of the Republican Party, decided to pick a different
running mate. Colfax left Washington in disgrace.
The committee determined that Mr. Garfield was offered ten
shares of Credit Mobilier at about half the market value and
declined the offer. He was cleared of all wrongdoing. In 1880,
Garfield was elected President. After only a short time in
office, President Garfield was shot and killed by a disappointed
and incompetent office seeker.
(Click here
for a more detailed account of the Credit Mobilier scandal.)
In our time, we also have new technology providing new opportunity
for wealth. The lure of get-rich-quick tempts many. The Enron
Corporation was only a few months ago touted as one of the
great innovative corporations of history. This was, we were
told, a new kind of business enterprise for a new economy.
It was called by some a "virtual" company that would make
new, deregulated markets workable and efficient for consumers
and profitable for producers.
As Thomas Frank said in his expose of Enron ("The Enron Outrage,"
salon.com, December 13):
"Once a simple natural gas pipeline concern, Enron turned
itself into an energy trader with awesome ambitions, buying
and selling contracts to deliver power across the country.
Who needed pipelines and power plants and other mundane physical
assets in the age of the Internet?"
In other words, Enron made its money in market speculation.
It was a middle man that bought paper kilowatts and sold them
for a profit. On Wall Street, they call this kind of thing
"financial wizardry." Perhaps we who are uninitiated aren't
supposed to understand this kind of wizardry. Wall Street
financiers, who are initiated into this magic circle, turned
on Enron's spigot and out came profits; California rate payers,
on the other hand, turned the same spigot and out came rolling
blackouts and outrageous utility bills.
To this last group, Enron wasn't magic, it was a scam. It
couldn't last, and it didn't. Last fall, Enron, once the darling
of the financial world and the America's seventh largest corporation,
filed the largest bankruptcy in history.
We are indeed living in a new Gilded Age. We don't yet know
everything about the Enron debacle. We don't yet know exactly
what government officials did anything wrong or what criminals
act were committed or whether the problem was lax enforcement
of the law. We know that many high-ranking officials of the
Bush administration were at one time executives at Enron.
We know that Enron and its CEO, Kenneth Lay, gave generously
to the rising political career of one George W. Bush and that
Bush and Lay are good friends. We know that Enron established
a number of private partnerships which its executives used
to hide about half a billion dollars worth of debt. We know
that as the scheme started to unravel, corporate executives
unloaded their stock and made millions while their employees
found their pension funds frozen and were unable to sell of
their soon-to-be worthless shares of the company they worked
to build. We know that the accounting firm hired by Enron
to audit the books, Arthur Andersen, destroyed many pertinent
documents; we also know that Andersen had consulting contracts
with Enron.
We also know that at this time last year, Enron and other
energy-producing corporations were taking advantage of a dysfunctional
deregulated market in California and making huge profits off
inflated wholesale electricity prices while federal regulators
hesitated about granted relief to rate payers. And we know
that Kenneth Lay was interviewing potential energy regulators
for the Bush administration and helping Vice President Cheney
in dishing an administration energy policy whose principle
purpose was to promote the sale of fossil fuel and waste of
resources, all for the profit of corporations like Enron.
We know that Enron is a scandal. We can surmise that executives
in Enron and Andersen will be facing serious legal problems
in the near future, that high ranking officials in the Bush
administration will be submitting their resignations and that
those seeking to win public office, including Mr. Bush himself,
will be dogged by their past relationship with Enron.
There are similarities and differences between Enron and
Credit Mobilier. One obvious difference is that Credit Mobilier
was a Congressional scandal while Enron is a scandal where
members of the executive branch were either duped or persuaded
to participate in shady activities. Credit Mobilier used stock
sold at discounts under the table as bribes, while Enron paid
off politicians above board with a modern and perfectly legal
form of bribery, the campaign contribution.
Credit Mobilier fleeced the public of money through the federal
government. Enron fleeced California utility rate payers of
money through lack of needed regulation and oversight after
buying influence with the elected officials who appoint the
regulators; when the Federal Energy Regulatory Commission
(FERC) ruled last year that the market in California was dysfunctional,
they should have, but did not, grant immediate relief to California
utility rate payers. Relief was finally granted, but weeks
later. Meanwhile, the state of California, in order to stabilize
rates on its own, engaged in an expensive purchasing of long
term energy contracts at a time when rates were at their peak.
At the root of the Credit Mobilier scandal was a system that
many in the public felt was inherently corrupt. Calls for
reform of government practices went out and ways were sought
to make those who regulate industry more impartial and professional
and less beholden to the whims of political appointment. People
demanded civil service reform to replace the spoils system.
At the root of the Enron scandal would appear to be a special
relationship established between an elected official and a
major corporate contributor to his campaign.
This, too, is seen by many in our time as inherently corrupt.
A major campaign contributor can get rules changed to favor
his immediate interests. Enron, or so it would appear, could
get the regulatory dogs called off first to fleece rate payers
and then to cheat its own employees. Just as the scandals
of the past Gilded Age gave birth to the civil service reforms
of the 1880's, perhaps, too, the Enron debacle will bring
about campaign finance reform in our own Gilded Age.
Additional
sources:
Stewart Hall Holbrook, The Story of American Railroads (Bonanza
Books: New York, 1947)
John M. Taylor, Garfield of Ohio: The Available Man (W. W.
Norton and Company: New York, 1970)
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