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Saturday, June 07, 2008

A SHORT HISTORY OF FRAUD IN AMERICA

I have come to the conclusion that no one should be handed a masters or Phd in economics from any American University without an intimate understanding of the history of fraud in America. We have buried this knowledge, as if afraid of teaching our best and brightest how to cheat, despite there being clear evidence that no such primer is needed. The energetic, ambitious and greedy have always and always will find a way to cheat the public. And the mantra of deregulation is just more proof that a good education in cheating might at least warn the suckers. For example, did you know that one of the men who did the most to advance the greatest fraud upon the American people in the 19th Century was “Honest” Abe Lincoln?Lincoln’s break through case as a lawyer involved the May 6, 1856 destruction of the “Government Bridge”, the first bridge over the Mississippi River, between Rock Island, Illinois and Davenport, Iowa. Just two weeks after the bridge was opened to trains a steamboat, the “Effie Afton”, ran into one of the bridge piers which caused a fire that destroyed the boat and one span of the bridge. The owners of the Effie sued The Mississippi and Missouri Railroad, which owned the bridge, claiming that bridges were a navigational hazard to commerce.
The mercurial Charles Durant, one of the railroad’s officers, hired Lincoln to defend the bridge. In lieu of payment, Lincoln accepted $3,000 in railroad stock (the equivalent of about $66,000 in 2008). After winning the case (he got a hung jury) Lincoln traveled all the way to Kansas to inspect the intended route of the future transcontinental railroad, which would be built by corporations that Durant ran and manipulated. And then, one of the first bills signed into law by President Lincoln was “The Pacific Railroad Act of 1862” which officially authorized the Central Pacific railroad to build east from California and the Union Pacific (whose vice president was Charles Durant) to build west from Council Bluffs, Iowa, meaning that Lincoln now held some very valuable stock.To pay for the construction the railroad company was re-embursed for the cost of building the rail line. But they made their profit from the grants of land on either side of the rails, which they could then sell. The completed rail line made the land valuable. But the fact that Lincoln traveled all the way to Kansas to see the property with his own eyes showed that he knew enough not to trust the word of Charles Durant. And yet he had just turned this rapacious man loose upon the American taxpayers. Well, Lincoln had an excuse; he was a little distracted by the outbreak of the Civil War.Doctor Charles Durant (Medicine was his formal training), immediately showed his true genius by first buying out Union Pacific stockholder Herbert Hoxie for $10,000. This gave Durant control of the railroad, even though the “Railroad Act” had limited individual stock ownership to avoid just the kind of manipulation Durant had in mind. Then Durant bought stock in competing railroads (on margin, of course), and spread rumors that they would soon be joined to the Union Pacific line, thus giving them a piece of the projected profits from the transcontinental trade. When those stocks then went up, Durant sold them out. Eventually the suckers realized there would be no joining, and the stocks fell to below their original value. With the Civil War raging Durant cleared about $5 million from those scams (the equivalent of about $100 million in 2008). Durant was hot tempered, erratic and prone to manic depression. But his manuvers over the U.P. were just the prologue. Doctor Durant now came up with a great idea he had learned from the French. In early 1864 the good Doctor Durant sent his director of publicity, George Francis Train, on a search for just the right corporate vehicle. Train found it in the Pennsylvania Fiscal Agency, one of the innumerable stock schemes chartered by the states to fund "The American people’s railroad to the Western Sea.” None of these shell companies ever went anywhere, but this one still had an effective charter and it was cheap. Train bought the company and renamed it Credit Mobilier. Then he sold shares in the new company for nominal amounts (often on credit) to the principle stockholders of the Union Pacific Railroad - the majority going, of course, to Doctor Durant.
As the final act the Union Pacific signed an exclusive “no bid” contract with Credit Moblier (themselves) to supply the railroad with all labor, grading, rails, ties, spikes, bridges, abutments, rolling stock and engines needed to actually build and run the railroad. The original engineer of the Union Pacific had calculated that the first 100 miles of track would cost $30,000 per mile to build. But Credit Moblier billed the railroad $60,000 per mile, which was taken from the pocket of the federal government, making, by the end of construction in 1869, a profit for the stockholders of Credit Mobilier of $50 million (equal to $770 million in 2008 dollars). Better yet for the principle investors, the Union Pacific Railroad was something new on the American scene, a “limited liability corporation”. Under the old rules stockholders were liable for any debts the company ran up. A bankrupt company meant bankrupt executives. But investors in the Union Pacific Railroad Limited, including Doctor Durant, Mr. Train and several members of Congress who had been given Credit Mobilier stock because they controled any investigations into fraud in the railroad dealings, were liable only for the amount they had invested in the U.P. And in many cases that was nothing.
So by 1875 the Union Pacific Railroad, "the people’s railroad to the western Sea", was bankrupt. It had been looted by Credit Mobilier. The U.P. stock wasn’t worth the paper it was printed on. And, of course, by then, the principle investors in Credit Mobilier were off looking for other railroads to loot.
Only after literally thousands of more scams just like this one would congress close the loophole in this particular invitation to fraud, making shell companies like Credit Mobilier illegal, allowing for the seizure of all profits made from them, and assessing fines for even setting them up.It’s enough to make you realize that if Lincoln had not been murdered, his memory might have been more closely tied to Doctor Durant. But it is not as if any of the truly powerful in this nation have ever been caught red handed; otherwise the bank executives called before Congress would never have the guts to blame speculators or working class citizens for taking on home loans they could not afford. In the area of economic crime, experience and history makes me suspicious of the people with degrees in finance who drew up the contract. I blame them long before I blame the schmuck who signed the contract. And if you don’t agree, you just don’t know your American history like you should.
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