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.
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
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
Promotion of American Canals and Railroads, 1800–1890, p.
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
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).
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 38th parallel route."
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 . . ."
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
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.
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).
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."
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
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