This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
The history of the Standard Rope and Twine Company, which was formed in 1895 to take over the assets of the insolvent United States Cordage Company, illustrates some of the possible methods of exploiting a corporation to the personal advantage of the officers. The first president was accused - whether justly or unjustly cannot be definitely determined - of discriminating against the Standard Company in favor of a competing concern in which he was a partner, turning the less profitable contracts toward the former and the more profitable ones toward the latter. In 1896 the president proposed that the Standard Company should take over certain processes controlled by him for forcing oil into rope. The company made a contract which gave the president authority to spend $25,000 of the company's money in perfecting his invention, and, as a matter of fact, much more than this originally authorized amount was spent. In the end the process proved worthless and the company had to bear a heavy loss amounting to over $126,000.*
One of the worst scandals in American financial history was that connected with the famous Credit Mobilier. In 1864, while the Union Pacific Railroad was under construction, one of the vice-presidents through a "dummy" secured a contract for the construction of a large section of the line. This contract was assigned to the Pennsylvania Fiscal Agency, the name of which was later changed to "Credit Mobilier." Stockholders of the Union Pacific were allowed to obtain Credit Mobilier stock and thus become stockholders in both concerns. As a result of this arrangement, all incentives to economy of construction were removed. Credit Mobilier obtained all the contracts it cared for on very attractive terms, and made profits variously estimated at from $17,000,000 to $23,000,000, in which the officers of the railroad had a large share.*