Democratic Underground

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,", 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)

Printer-friendly version
Tell a friend about this article Tell a friend about this article
Discuss this article