The Founding Fathers of Insider Trading

To this day, the U.S. government has not provided a clear legal definition of insider trading. This allows the feds to engage in periodic witch hunts against unpopular business people such as Martha Stewart, the purpose of which is to divert the public’s attention away from the government’s own failed policies and blame it all on "capitalism."

But there is a particular type of insider trading – political insider trading – that has been clearly understood for generations. Because this kind of insider trading involves politicians themselves, however, there are no laws against it. A good example of political insider trading appeared recently on an episode of "The Sopranos," the HBO television series about a New Jersey Mafia family. The "don," Tony Soprano, is friends with a sleazy and corrupt state legislator, who gives Tony an inside tip that the legislature is about to give the go ahead to commercial development along the riverfront. Tony quickly purchases some land in the area, and his insider information allows him to buy low and sell high, after the development is announced, and make a killing. The state legislator does the same.

The great historian of the American west, Dee Brown, describes the historical origins of political insider trading in his book, Hear that Lonesome Whistle Blow: The Epic Story of the Transcontinental Railroads, which was recently brought to my attention by John Denson. The book tells the story of a group of men who might be called the founding fathers of political insider trading, the most prominent of which was Abraham Lincoln. The rest were some of the founding fathers of the Lincoln’s Republican Party; many of them served as generals in the union army.

In the mid to late 1850s Lincoln was a prominent railroad lawyer. His clients included the Illinois Central, which at the time was the largest corporation in the world. In 1857 he represented the Chicago, Rock Island and Pacific Railroad, which was owned by four men who would later become infamous as "robber barons" for receiving – and squandering – millions of dollars in federal subsidies for their transcontinental railroad. Granting these men their subsidies would become one of the first orders of business in the Lincoln administration.

These men – Thomas Clark Durant, Peter Dey, Grenville Dodge, and Benedict Reed – were easterners from New England and New York State who had "a store of hard experience at canal and railroad building and financing," writes Dee Brown. And they must also have been quite expert at stealing taxpayers’ money for useless government-funded boondoggles. Prior to the War between the States, government subsidies for railroad and canal building were a financial disaster. So disastrous were these government pork barrel projects that by 1860, according to economic historian Carter Goodrich, Massachusetts was the only state in the union to have not amended its constitution to prohibit taxpayer subsidies to private corporations (Carter Goodrich, Government Promotion of American Canals and Railroads, 1800–1890, p. 231).

In a dispute with a steamship company the above-mentioned men "sought out a first-rate lawyer, one who had a reputation for winning most of his cases," writes Dee Brown. "They found him in Springfield, Illinois and his name was Abraham Lincoln." The jurors in the case failed to reach a decision, but Lincoln’s performance "won him a considerable amount of attention in the Chicago press and among men of power, who two years later would push him into the race for President of the United States." One of those "men of power" was Chicago newspaper editor Joseph Medill, whose newspaper trumpeted the Lincoln candidacy on behalf of the railroad interests of Illinois.

This powerful clique of New England/New York/Chicago business interests "aroused the suspicions of the South," says Brown, since they were so vigorously lobbying Congress to allocate huge sums of money for a transcontinental railroad across the Northern states. Southern politicians wanted the route to pass through their states, naturally, but they knew they were outgunned politically by the political clique from "the Yankee belt" (New England, Pennsylvania, Ohio, the upper Midwest).

These Northern political insiders, who would form the core of leadership of the Republican Party and later, in some cases, of Lincoln’s army, positioned themselves to earn great riches from the proposed railroad subsidies. John C. Fremont, who would be a general in Lincoln’s army, was a wealthy California engineer who conducted an extensive engineering survey "to make certain that the most favorable route would end up not in San Diego but in northern California, where Fremont himself claimed sizable land holdings." Another wealthy Yankee, Pierre Chouteau, "put his money into a St. Louis factory to make iron rails and went to Washington to lobby for the 38^th parallel route."

Illinois Senator Stephen Douglas "owned enough strategically located land in Chicago to be a millionaire if his favored route westward through Council Bluffs and Omaha was chosen . . ."

And "Abraham Lincoln, the future President evidently agreed with his debating partner that the route through Council Bluffs-Omaha and the South Pass was the most practical. Lincoln acquired land interests at Council Bluffs" (emphasis added). A short time later, after the Chicago/New England/New York "men of power" propelled him into the White House, Lincoln began signing legislation giving these men millions of acres of public lands and other subsidies for their railroads.

Virtually all of the "leading lights" of the Republican Party got in on the political insider trading game by demanding bribes for their votes in favor of the subsidies. Pennsylvania congressman Thaddeus Stevens "received a block of . . . stock in exchange for his vote," but he also demanded "insertion of a clause [in the subsidy legislation] requiring that all iron used in the construction and equipment of said road to be American manufacture." In addition to being a congressman, Stevens was a Pennsylvania iron manufacturer. At the time, British iron was far cheaper than Pennsylvania iron, so that Stevens’s "restrictive clause" placed a bigger burden on the taxpayers of the North who, at the time, were already being taxed to death to finance the war.

Congressman Oakes Ames, "who with his brother Oliver manufactured shovels in Massachusetts, became a loyal ally [of the subsidy-seeking railroad companies] and helped to pressure the 1864 Pacific Railway Act through the war-corrupted Congress." (It took a lot of shovels to dig railroad beds from Iowa to California).

During the post-war Grant administration the Republican Speaker of the House of Representatives, Schuyler Colfax (later Grant’s vice president) visited the western railroad routes to attend a ceremony in his honor but, writes Dee Brown, "he preferred cash above honors, and back in Washington he eagerly accepted a bundle of Credit Mobilier stock from his follow congressman Oakes Ames, and thus became a loyal friend of the Union Pacific."

Another of Lincoln’s generals, General John Dix, was the Washington lobbyist for the railroads who "spent most of his time strutting about Washington in a general’s uniform." (Dix was the same general who Lincoln ordered in 1862 to shut down all the opposition newspapers in New York City and arrest and imprison the editors and owners).

General William Tecumseh Sherman was also sold land at below-market prices and, after the war, he would be in charge of a twenty-five year campaign of ethnic genocide against the Plains Indians, which was yet another form of veiled subsidy to the railroad corporations. After the war Grenville Dodge, who was also a Union Army general despite his lack of military training, proposed making slaves of the captured Indians and forcing them "to do the grading, with the Army furnishing a guard to make the Indians work, and keep them from running away."

These men – the founding fathers of insider trading – were responsible for the massive corruption of the grant administrations which was only the beginning of what historians call "the era of good stealings."