In the decades between the end of the Civil War and the turn of the twentieth century, new technologies, cheap immigrant labor, maturing methods of industrialization, and a mechanized, streamlined transportation system of railroads and steam-powered ships proved a formula for astoundingly rapid growth in the business sector. Government, however, could not keep pace with these changes. Governments were naïve about business and the ways that individuals and companies made money, both legally and illegally. They were not able to deal with many cutthroat business practices, so these were allowed to continue. Competition was intense and business managers often had to adopt practices they disliked or be forced out of business.

America was founded on a philosophy of “hands off” of business, an approach known as “laissez-faire,” which is French for “leave to do.” Even when it became clear that some regulation was necessary, especially of credit and corporate practices, government did not know where or how to apply controls. Americans disliked many of the abuses they saw in business, but were reluctant to advocate government interference for fear of doing anything to cool the remarkable engines of progress and production.

Earlier in the century, businesses had been allowed to incorporate by obtaining a charter from a state government. Among other advantages, the owners of an incorporated business were shielded from most of the liabilities incurred by the business. This was beneficial since before incorporation was allowed, if a business failed, the owner was wholly liable for all the debts. In some cases businesses failed through no fault of the owner. Creditors could then take everything, even the owner’s home, and turn him and his family destitute into the street.

Without incorporation, business owners naturally tended to be very cautious in their dealings. If a company was owned jointly by stockholders, company managers were also reluctant to risk not only the stockholders’ investment but also their personal assets. Sometimes this excessive caution prevented beneficial and needed investment.

After incorporation was allowed, big companies discovered they could buy other companies and hold them under the umbrella of the parent company. This in itself was not bad, but unscrupulous holding companies could buy a company, transfer all the assets from it to another company that was also owned by the holding company, and bankrupt the first company. This caused the first company to default on all of its financial obligations and the stock and bondholders to lose their investment.

Another unscrupulous practice sometimes employed was to have a company form another company with the same board of directors running both companies. This duplicated board was called an interlocking directorate. Again, in itself this was not bad unless the intent of the directors was to build both companies, transfer all the benefits to one company and bankrupt the other, again at the expense of the stock and bondholders. This practice was so blatantly harmful that the government had to step in to outlaw it.

The worst scandal involving an interlocking directorate occurred when the American government decided to underwrite a transcontinental railroad. The western half was built by the Union Pacific Railroad Company with substantial federal subsidies. The Union Pacific directors created a company called Crédit Mobilier that was to supply materials and labor. Though they were also the directors of Crédit Mobilier, they kept their involvement with that company quiet.

The Union Pacific built its half of the transcontinental railroad, but within a few years of operating the railroad, the company was bankrupt in spite of heavy infusions of government money. A New York newspaper exposed the scandalous co-ownership of the companies in 1872, and charges were confirmed by congressional investigation. Crédit Mobilier tried to divert attention by giving congressmen shares of its valuable stock that paid dividends of as much as 348%. Two congressmen and Grant’s Vice President were censured for accepting these bribes.

Investigators discovered that Union Pacific paid Crédit Mobilier hugely inflated prices for all its services and materials. In this way the directors transferred the assets of the railroad to the supply company. The losers were not only the thousands of Union Pacific shareholders who had invested millions in the railroad and lost their money, but also the American public that had supported Union Pacific through tax dollars. The Crédit Mobilier scandal broke during Grant’s presidency, tarnishing his reputation even though most of the corruption occurred during previous administrations.

In the wake of Andrew Johnson’s impeachment, the American public grew tired of politicians and political wrangling. In 1868, the Republicans nominated the popular Civil War hero Ulysses S. Grant for president. Grant won the election, but though an excellent general, he was wholly unprepared to be president. Grant presided over an era of unprecedented growth in the nation, but also one of unprecedented corruption. Honest to a fault himself, Grant was either unable or unwilling to stop the graft. Besides Crédit Mobilier, Grant’s administration was held responsible for the Whiskey Ring Scandal, Gould and Fiske’s attempt to corner the gold market, and Secretary of War William Belknap’s bribe-taking from Indian reservation suppliers.

One of the few bright lights in Grant’s cabinet was Secretary of State Hamilton Fish who negotiated the Treaty of Washington in 1871. During the Civil War, the Alabama, a British fighting ship with Confederate officers, did enormous damage to Northern merchant ships, sinking 64. In the Treaty of Washington, Britain agreed to pay the U.S. $15.5 million in reparations for damages done by the Alabama. Fish also averted war with Spain by persuading Grant to remain neutral in Cuba’s struggle for independence.

Adding to the problems in Gilded Age politics was the spoils system, whereby a newly elected official distributed favors to his friends, relatives, and political supporters. Often these favors came in the form of government jobs. Nepotism, or giving jobs to one’s relatives, combined with patronage, or giving jobs in payment for political favors, sapped the vitality of government. Besides passing out political jobs to more than the usual number of party cronies, Grant reportedly installed several dozen of his wife’s relations in jobs with the federal government.

Hamilton Fish reorganized the State Department and attempted to adhere to the merit system in civil service where an applicant for a job had to demonstrate competency, often by examination, in order to be considered for a position. Grant’s failure to embrace civil service reform throughout the rest of the federal government caused widespread protest. This dissatisfaction led to the creation of the Liberal Republican Party, which nominated Horace Greeley, the editor of the New York Tribune, for president in 1872.

In spite of the opposition of many people and organizations, including President Hayes who won the election of 1876, the spoils system continued unabated until disaster struck. By the election of 1881, the Republican Party had divided into two factions, the Stalwarts and the Half-Breeds. The Stalwarts supported Grant, radical reconstruction in the South, and the patronage system. The Half-Breeds opposed Grant and radical policies for the South and advocated civil service reform.

The 1881 Stalwart Republican candidate, James A. Garfield, won the election but was fatally shot just six months later by a lawyer named Charles J. Guiteau, who was distraught at not being given a government job. Garfield‘s successor, Chester A. Arthur, supported civil service reform in the wake of public demand for an overhaul of the spoils system of filling government posts through patronage rather than merit. The Civil Service Commission was created during Arthur’s tenure as president, but originally affected only about ten percent of all government jobs. It had a provision, however, that the president could expand the categories of jobs protected by Civil Service. Each new president then had an incentive to enlarge this percentage in order to protect his own appointments from being replaced by the next president. Much of government thus came to be under Civil Service and the merit system.

Copyright 2006 The Regents of the University of California and Monterey Institute for Technology and Education