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Transcontinental Railroad

Transcontinental Railroad

Economy in Transcontinental Railroad

Financing America's Future

One reason it took as long as it did for anyone to get around to building the transcontinental railroad was that, for the longest time, no one was sure how to pay for it, or even who would bear the financial burden. Consider these figures: the entire antebellum canal system of the United States had cost a grand total of $2 million. The railroad system as it was in 1859 had been built for about $1 billion. Completing the national rail network would run up another $10 billion.12 No less a believer in the importance of railroads than Abraham Lincoln once described the costs involved as "heart-stopping." But like Lincoln, many Americans in the mid-nineteenth century seemed to believe that a transcontinental railroad was a necessity, an idea whose time had come. They believed that a transcontinental railroad could bind the Union together, and perhaps it would, but somebody still had to pay for it. And in the 1800s, this question of financing had long been a sticky issue.

One of the most vigorous and important debates in nineteenth-century politics centered on the issue of "internal improvements"—in other words, the construction of the nation's infrastructure—and who was going to pay for them. This boiled down to a fundamental question of governance (and one that is still with us): big or small, centralized or decentralized. On one side of the debate, politicians like Henry Clay pushed for federal government funding of massive public works construction projects. On the other side, they were met by President Andrew Jackson and the popular view that the federal government ought to leave the infrastructure of the states to the states themselves and to private firms and individuals. For a time, the Jacksonian argument won out (with important consequences), but as Americans looked increasingly toward the construction of a railroad to the Pacific, the question was begging to be revisited.

Ultimately, it became clear that no individual, no group of individuals, no corporation in the history of American business had the money or organization to tackle a project the size of the transcontinental railroad. It became clear, then, that if America wanted the railroad built, the federal government would have to step in, one way or another. As it turned out, some government officials wanted the railroad completed more than anyone else.

So it was that the federal government, through the Pacific Railroad Bill of 1862, came to front a portion of the cost of construction. Transfer of cost translated to transfer of risk, which made the project begin to look not only feasible but quite a bit more attractive to private investors. One of those investors was Thomas C. Durant, known as the Doctor or "Doc" for his education in medicine, but soon to be known largely for the innovative and highly unethical financial schemes he ran as the general manager and vice president of the newly incorporated Union Pacific Railroad.

Doc Durant's Business Plan

Durant's interest in his own fame and fortune considerably outstripped his interest in running a solid railroad. In fact, the Doctor wasn't convinced that the railroad itself would ever really make any money. The men who got the contracts to build it, on the other hand, stood to make a government-backed fortune. With that in mind, Doc Durant created the Crédit Mobilier of America, a new kind of corporation and one that, conveniently, was still legal in the U.S.

When Durant secured the Union Pacific construction contract for Crédit Mobilier, he was running a scheme that today's economists call "self-dealing." And when the Union Pacific (UP)—of which Durant was the head—paid Crédit Mobilier, Durant was paying himself with little or no third party oversight. As the money moved around and construction costs mounted, Durant could make himself rich several times over whether the railroad ever turned a profit (or laid a mile of track) or not.13

Although the idea (which cropped up in similar form among the Central Pacific Railroad's big investors) was his, Crédit Mobilier soon involved more than just Durant. When Representative Oakes Ames invested in the company and promoted it within Congress, he brought the scam to the highest levels of American government. And while Ames, Durant, and the other big investors in Crédit Mobilier were rich and getting richer, the Union Pacific—then America's largest corporation—languished near bankruptcy. Stockholders in the rail itself lost out. Workers' payments were delayed. At one point, the Doctor famously stiffed the Mormon workers who built the line through Utah for hundreds of thousands of dollars. General progress on the line came in maddening fits and starts, all while Crédit Mobilier paid out staggering returns on investment (a reported 280% in 1868 alone).14

Naturally, this aroused no small amount of suspicion and resentment; sooner than later, something had to give. Under pressure from President Ulysses S. Grant himself, Durant resigned from the UP shortly after it met the Central Pacific in Utah territory in 1869. Forcing Durant out may have been a sound and long overdue business move, but for anyone hoping it would stop the public unraveling of the Crédit Mobilier scheme, the move did too little and came too late.

White Collar Criminals and History as Judge

"The King of Frauds: How the Credit Mobilier Bought Its Way Through Congress."15 This 1872 headline in the New York Sun broke the story to the public, and the scandal and subsequent fallout became a defining event for Gilded Age America. In just three years, the men who presided over the transcontinental railroad had gone from being the heroes of the nation to publicly vilified scoundrels. They had bilked the government. They had lied to investors. They had nearly bankrupted the Union Pacific and gotten rich in the process. The media, and in turn the American public, wanted an explanation, if not the heads of Crédit Mobilier insiders.

A congressional committee launched an investigation, and one by one, the executives of Crédit Mobilier, the UP, and the CP (whose directors had adopted similar if wisely lower-profile business strategies to those of Durant) were called upon to testify before Congress. If the story that emerged from the testimony was complicated and often contradictory, the paper trail was an impossible labyrinth—literally impossible in the case of the CP, where director Mark Hopkins had burned many files.

Ultimately, the investigation didn't hand down much in the way of formal punishment beyond a fairly ho-hum censure of a couple of Congressmen. It ruined Oakes Ames but brought little other than public scrutiny to anyone else. The bigger significance was the lasting taint of corruption—on the railroads, the government, and the era. The outrageous and sometimes ethically questionable wealth accumulated by some of the railroad men put quite a bit of the "gilding" on the Gilded Age, and aroused an interest in federal regulation and reform that would build toward the Populist Movement at the end of the nineteenth century and the Progressive Era of the early twentieth.

As time has passed, historians have developed two distinct interpretations regarding the corruption of the transcontinental railroad financiers. One argues that the Crédit Mobilier scandal was just the tip of the proverbial iceberg and hardly takes into account the innumerable side rackets (land speculation, hidden subcontracts, high interest loans directed back to the railroads, and inside tracks into the resource extraction projects, to name just a few) that the UP and CP execs indulged in. All of which is correct, but as the other interpretation counters, it's hard to argue with results. The railroad did get built, the government recouped most of what it loaned, and the financiers took on a task that few others seemed willing or able to manage. The Crédit Mobilier scandal calls to mind the greatest corporate crime of our own time: Enron, another group adept at shuffling money between sham corporations. In favor of the Crédit Mobilier and the Union Pacific, one can note the grim irony that at least they produced something useful.16

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