One of the goals of the 1803 Lewis and Clark expedition was to find a short-cut to Asian markets. A New York merchant, Asa Whitney in 1844, made a proposition to the U.S. Congress. He proposed that Congress sell him a strip of land, at sixteen cents an acre, from Wisconsin to the Pacific Ocean. It should be 60 Miles wide and on it would be built a railroad. Congress debated on the proposition but no one believed that only one railroad would be built. No one could agree on the location.
An exhaustive investigation of the American West began in 1853 with geologists, engineers and mapmakers from the Department of War. The report of 1855 came to the conclusion that there were several practical routes for a Pacific Railroad. The Secretary of War, Jefferson Davis, supported a southern route but northern Congressmen wouldn't support him. Along came the Civil War in 1861, and Davis left to become the President of the Southern Confederacy. Lawmakers assumed that the federal government would have to provide most of the capitol with some financial assistance from private investors.
In May and June 1862 both congressional bodies passed the Pacific Railroad Act and President Lincoln signed the bill one July 1.
It sought to entice private investment by endowing the railroad corporation with a grant of government lands and a loan of government bonds. The corporation was known as The Union Pacific Railroad Company.
The Central Pacific Railroad, in California, was chartered with the same government benefits and was to be built eastward. The Union Pacific was to build west across the plains and through the mountains to join with the rails of the Central Pacific. President Lincoln designated Omaha as the eastern starting point.
The government grants of land were measured by the miles of track laid. For each mile, the railroad would receive ten sections of land (640 acres to each section of land), but they had to alternate the sections ten miles back from each side of the track. Federal aid consisted of a loan of government bonds based on trackage laid. On level ground it was $16,000 per mile, $32,000 in foothills and $48,000 per mile in the mountains. The loans were for three years at 6 percent interest.
One December 2, 1863 the official groundbreaking began for the Union Pacific Railroad at Omaha, Nebraska. Eighteen months later not a single rail had been laid.
Rail money was also needed in California. Leland Stanford, president of the Central Pacific, had the geologist’s and surveyor’s reports altered to show that the Sierra Mountains really started at Sacramento. This meant an increase of over $1 million in federal loans. At least $12.5 million more was needed. Both railroads, it seems, had a money problem.
The Civil War ended in 1865 and a young Major General Granville M. Dodge, who had a background in civil engineering plus railroad construction, was hired as chief engineer of the Union Pacific.
However, the financial community looked upon the western railroads as a poor risk. The Union Pacific's charter required that $2 million in stock had to be subscribed before operations could begin but only $300,000 had been sold. Union Pacific President Durant decided he would put up 10% of the money himself, as a loan to any investor willing to buy. His friends subscribe to this idea to the tune of $2,180,000, three fourths of the money needed.
The Central Pacific had $8.5 million in capital stock but could only show assets of $24,000. Before construction could begin the eight partners would have to contribute $34,000 each.
Through extensive lobbying in Washington by both railroads, sweetened by bundles of money passed out to the legislators, a new Pacific Railroad Act was passed and signed by the President in 1864.
Land grants were doubled in size giving both railroads over 21,000,000 acres and a provision that when 20 miles of roadbed had been prepared, two thirds of the government money was to be released.
With the encouragement of President Lincoln, the Ames Brothers of Boston, Massachusetts endorsed $1.5 million to the speculation. Together with Durant, they set up a company called "The Credit Mobilier," which became one of the centuries great bonanzas.
The company was set up by the directors to perform the physical task of building the Union Pacific railroad line. Since most of the directors had construction firms, they would, in effect, he doing business with themselves.
Construction costs were grossly inflated, with the stockholders pocketing the difference between actual costs and stated costs.
Tremendous financial returns were realized from this venture. A contract of $50,000 for laying in mile of trackage actually cost $30,000. One length of 667 miles of trackage netted "The Credit Mobilier" nearly $50 million in profit.
Out in Sacramento, the Central Pacific's four directors set up a scheme to milk the company of its construction finances. Through their "Contract and Finance Company" it was estimated they pocketed at least $63 million, held most of the Central Pacific's capitol stock (valued at $100 million) and controlled 9,000,000 acres of land granted to the Central Pacific by the government.
A battle raged at Union Pacific headquarters between Durant and financier Ames. Ames insisted that President Lincoln had deputized him to take all the railroad’s finances under control. The end of "The Credit Mobilier" was in sight when a congressional investigation revealed the firm’s shady dealings. The scandal involved the Vice President of the United States James A. Garfield along with current U.S. President Ulysses S. Grant. The Company was dissolved and officers went into a comfortable retirement.
Congressional investigation into the finances of "The Contract and Finance Company" of the four Central Pacific directors concluded that no crime was proven so no indictments were brought. They all retired and "destiny treated them kindly for the balance of their lives."
A third railroad, which barely got off the drawing board, at the time, called the Northern Pacific, had it’s financial affairs riddled with scandal and their operations ground to a rapid halt.
This was a key link, in a chain of events, which led to the financial panic of 1873, which paralyzed the country for the next five years and the worst depression that United States had known to that point in history.