A Short History Of Fraud

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 paper (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 paper. * To pay for the construction the railroads were directly granted money to build the road, and land long the tracks, which they could then sell at inflate prices. 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 Civil War. * Doctor Charles Durant (that was his formal training), immediately showed his true genius by first buying out Union Pacific stockholder Herbert Hoxie for $10,000, which gave Durant control of the railroad, even though “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 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). But that was just the prologue. Because 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 America’s “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. And then 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 then paid by the federal government, making a profit for the stockholders of Credit Mobilier by the end of construction in 1869 of $50 million ($770 million in 2008 dollars). * Better yet, the Union Pacific Railroad was something new on the American scene. This first great deregulation of American corporate business had produced the “limited liability corporation”. Under the old rules stockholders were liable for any debts the company was liable for. But investors in the Union Pacific Railroad Limited, were liable only for the amount they had invested. And by 1871, the Union Pacific Railroad, the People’s Railroad to the Western Sea, was bankrupt. Its stock wasn’t worth the paper it was printed on. And, of course, by then, the original investors were off looking for other railroads to loot. Only after literally thousands of more scams like this would congress close the loophole in this particular invitation to fraud, making shell companies like Credit Mobilier illegal, and allowing for the seizure of all profits, plus 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. Not like any of the truly powerful in this nation are ever caught red handed; otherwise the oil company executives called before Congress last month would have never had the balls to blame speculators for jacking up the price of oil. Experience and history makes me suspicious that the oil executives and

the oil speculators are intimately related. And if you don’t think so you just don’t know your American history like you should.