BRIA 24 4 The Teapot Dome Scandal

CONSTITUTIONAL RIGHTS FOUNDATION
Bill of Rights in Action
SPRING 2009 (Volume 24, No. 4)

Reform and Change

The Teapot Dome Scandal  |  Woodrow Wilson’s Quest to Change the World | John Stuart Mill and Individual Liberty 

The Teapot Dome Scandal

The Teapot Dome scandal unfolded in the 1920s during the presidency of Warren Harding. It remains one of the most shocking stories of government corruption. President Harding died in office before most of the scandal became public. As the Senate investigated the scandal, the press and the public demanded to know how two of the richest oil barons in the country had bribed government officials to obtain leases to oil fields on government land. It took six years, two civil trials, and six criminal trials to track down what one senator called “the slimiest of slimy trails beaten by privilege.”

By the end of World War I, the demand for oil was growing. During the war, the U.S. and British navies converted their ships from coal to oil. Cars were rolling off the assembly lines in huge numbers. By 1920, oil production had soared to 450 million barrels in the U.S., and the oil industry was booming.

One man who made huge profits from the oil boom was Edward Doheny. Doheny struck oil in April 1893 near the La Brea Tar Pits in Los Angeles, and within a year had 81 wells pumping in Los Angeles. By 1916, he had expanded his oil empire into Mexico. But President Carranza of Mexico wanted to take back the country’s oil fields. Doheny needed help from the U.S. government to get rid of Carranza, and he began to court people in high places in Washington.

Another man who had accumulated a huge fortune from oil was Harry Sinclair. Sinclair leased oil fields in Kansas and Oklahoma and by 1920 had amassed one of the largest fortunes in the United States. Like Doheny, Sinclair was expanding overseas with oil fields in Venezuela and Columbia. He also needed friends in high places to help build his foreign empire and also to help him lease the Teapot Dome oil field in Wyoming.

Doheny, Sinclair, and many other oil barons decided that the best way to get access to more oil was to elect a president who would help them. Prior to Harding’s election the conservation movement had been going strong. In 1909, President Taft had signed an executive order designating land known to have rich oil underground into “reserves” for the exclusive use of the navy. Three Naval Petroleum Reserves were created in 1912. Two were in Kern County, California, and one was at Salt Creek, Wyoming, known as Teapot Dome because of the shape of the land. The oil industry wanted to get leases to the navy reserves. But during the Wilson administration, the navy had refused all their requests for a lease.

Friends in High Places

The oil barons were happy when Wilson left office and Harding—a Republican—was elected in 1920. Many had donated large amounts of money to Harding’s campaign in hope of overturning the conservationist policies of previous administrations. Sinclair himself donated $1 million to Harding’s campaign and became a good friend of the new president. When Sinclair came to Washington, he joined in the White House poker parties and was often invited to stay over night as Harding’s guest. Doheny had not made a huge donation to Harding’s campaign (he had contributed $25,000), but after the election, he sent congratulatory letters to the president and offered Harding the use of his 375-foot yacht for a post-election vacation cruise.

The oil barons’ wishes came true when Harding announced that he had appointed Albert Fall, a former senator from New Mexico, as secretary of the interior. Fall was a rancher, mine owner, and former prospector.

He was an “old pal” of Doheny. Fall had hopes that when he left the Cabinet (he planned to stay for only one year) that Doheny would hire him. Fall knew that Doheny had hired the previous secretary of the interior.

Fall was also a good friend of Harding, whom he played poker with two or three times a week. When he served in the Senate, Fall had strongly opposed the conservation policies put in place under Presidents Roosevelt, Taft, and Wilson. He believed that the government’s land should be placed in the hands of private interests and exploited as soon as possible.

Fall wasted no time in helping the oil barons get leases to public lands. One of the first things he did as secretary of the interior was to persuade Harding to transfer authority over the naval reserves from the secretary of the navy to the Department of the Interior. Two months after being inaugurated, Harding signed an executive order putting the reserves in the hands of Secretary Fall.

That same month, Fall went to the Kentucky Derby as Sinclair’s guest. He also wrote a letter to his friend Doheny, stating that he had everything worked out with the Department of the Navy. He assured Doheny that he will “conduct the matter of the naval leases under direction of the President” without having to consult with the navy.

Many officers in the Navy opposed Harding’s executive order. One admiral complained that if the reserves were turned over to the Interior Department, “we might as well say good-bye to our oil.”

Fall Delivers Oil

The naval reserves were a big prize. The two oil-rich California reserves were about 70,000 acres of land. The Teapot Dome reserve in Wyoming was much smaller but was thought to have more oil. It was estimated to hold about 150 million barrels of oil. Many—indeed most—of the oil companies in the country would have jumped at the opportunity to lease oil from those reserves. But the leases were never put up for public bidding. Instead, Secretary Fall negotiated leases for the naval reserves in secret, on terms that brought him a lot of personal gain.

The first lease, for the California reserves, was negotiated with Doheny in November 1921. Under the terms of the proposed lease, Doheny’s company, Pan-American Petroleum and Transport Company, was to build storage tanks in Pearl Harbor, Hawaii, to store oil for the navy, to put crude oil in the tanks, and to pay royalties on the oil drilled from the reserves at a low price. It was a great deal for Doheny. He estimated it would give him a profit of $1 million. In return, Doheny made a “loan” of $100,000 to Fall. On November 28, 1921, three days after Doheny made his offer, his son, Ned Doheny, carried a black satchel containing the $100,000 in cash to Fall’s hotel apartment and watched him count the money.

Negotiations on the Teapot Dome lease took place a month later. Fall was at his New Mexico ranch when he received a telegram saying that Sinclair and his lawyer wanted to see him “on a very urgent and important matter.” Sinclair and his party arrived at the ranch on December 31, 1921, and stayed for three days. During the day, they went hunting for deer, quail, and wild turkeys. At night, they negotiated a deal for the Teapot Dome reserves. The final lease, which was signed on April 7, 1922, gave Sinclair’s Company, Mammoth Oil, the exclusive right to extract oil and gas from the Teapot Dome reserve for 20 years.

A month after the lease was signed, Fall sent his son-in-law and business partner, M.T. Everhart, to see Sinclair in his private railroad car in the Washington railroad yard. Sinclair gave Everhart $198,000 in Liberty Bonds to be delivered to Secretary Fall. Soon afterward, Everhart received from Sinclair another $35,000 in bonds and a “loan” of $36,000 in cash. The bonds went to Fall’s bank accounts in New Mexico and Texas. After receiving them, Fall began to pay back taxes on his land, which he had owed since 1912.

The Scandal Unfolds

Fall intended to keep the leases secret. But an inside source leaked information to the Wall Street Journal, which ran a front-page story about the Teapot Dome lease on April 14, 1922. The news caused an immediate uproar in the oil industry. Complaints poured in demanding to know why there hadn’t been competitive bidding. Anger also came from Congress, but the president stood by his friend Fall and sent a letter to the Senate endorsing Fall’s plan to lease the naval reserves. He said that he had seen a report from Fall, and the plan had his “entire approval.” And when Fall told the president that was going to resign early in 1923, Harding offered him a seat on the Supreme Court.

The Senate decided to investigate the leases, including whether the president had the authority to transfer the leases to the Department of the Interior. Hearings began in October 1923, after Fall had resigned. When called as the first witness, Fall claimed that he had legal authority to lease the navy reserves and had negotiated the leases at good prices to protect national security. In December, both Doheny and Sinclair appeared before the committee. They also testified that the leases were in the best interest of the nation and denied that Fall had received any benefit or profit from the deals. (Sinclair failed to state that only six months earlier, he had paid Fall $25,000 to accompany him on a trip to Russia to explore the possibility of an oil deal with the Russian government.) Fall was asked about whether he had received any compensation from Sinclair for the trip to Russia and responded with the first of many lies: “I have never even suggested any compensation and have received none.”

Gradually evidence began to emerge about Fall’s business dealings with the oil barons. Witnesses from New Mexico testified that during 1922 (after Ned Doheny delivered the black satchel), Fall had bought property next to his ranch (for $91,500) and spent more money on other improvements and purchases. In January 1924, Doheny reappeared before the committee and testified that he had indeed paid $100,000 to Fall as a “loan.” In December, Fall said he was too ill to testify. But he wrote a letter to senators on the committee stating that he had never approached either Doheny or Sinclair, “nor have I received from either of said parties one cent on account of any oil lease or upon any account whatsoever.” When the committee recalled Fall, he declined to testify “on the ground that it may tend to incriminate.”

By now the members of the committee believed that crimes had taken place. After Fall refused to testify, the head of the Senate investigating committee, Senator Walsh, introduced a resolution. It stated that it appeared that the leases were made “under circumstances indicating fraud and corruption.” It called on President Coolidge (President Harding had died in August 1923) to bring legal action to cancel the leases and “to prosecute such other proceedings, civil and criminal, as may be warranted by the facts.” While Congress was debating the resolution, President Coolidge announced that he was appointing a special counsel to take whatever action was necessary to make sure that justice was served.

Meanwhile, things got nasty in the Senate. The committee called Sinclair. He refused to testify on the grounds that after the special counsel was appointed, the committee had no authority to question him. (Sinclair was indicted and sentenced to three months in jail for contempt of Congress.) The committee also recalled Doheny, who was asked if he had ever employed Cabinet officers after they retired. Doheny testified—with some pride—to having employed five former members of President Wilson’s Cabinet, including the former Secretary of the Treasury William McAdoo, who was still in his employ. (At that time, McAdoo was the frontrunner for the Democratic nomination in the upcoming presidential election.) The impression was growing in the press and among the public that both political parties were smeared with corruption.

Six Years in Court

The special prosecutors appointed by President Coolidge spent six years working on the Teapot Dome scandal. Their first goal was to bring civil lawsuits in federal court to cancel the leases and recover the naval reserves. They filed one case in California and one in Wyoming, and both were successful. In California, the trial judge ruled that Doheny’s payment of $100,000 to Fall was tainted with fraud. He ordered that the leases be cancelled. “The injury that has been done to the nation,” the judge wrote, “as well as the distrust of public officers that it caused, cannot be overestimated.” The trial court in Wyoming dismissed the suit, but the government appealed. The Eighth Circuit Court reversed and held that the leases had been made fraudulently and should be set aside. “The entire transaction,” the court stated, “is tainted with favoritism, collusion, and corruption, defeating the proper and lawful functions of the government.”

The special prosecutors also filed four criminal cases. One charged Fall and Doheny with conspiracy to defraud the United States. Another similar case was against Sinclair and Fall. A third case charged Fall with bribery. And a fourth case charged Doheny and his son Ned with bribery. These cases, which were tried over a period of six years, were less successful. In the conspiracy cases, defense lawyers managed to convince the juries that Doheny and Sinclair had no intent to defraud the United States. The juries accepted the argument that the leases were made to help the navy prepare for war and to protect the country. They found the defendants not guilty. Doheny and his son were also found not guilty of bribery. Only Fall was convicted, for having accepted a bribe while acting in his official capacity. The prosecutors made a strong argument that the evidence showed “the criminal intent of Fall to make money out of his position of trust and honor,” and the jury agreed. Fall was sentenced to a year in jail and to pay a fine of $100,000. His appeal was denied on June 6, 1931, and he was sent to the New Mexico State Penitentiary.

* * * * *

As a result of the diligent investigation of the Senate committee and the persistence of the special prosecutors, the rich oil fields at Teapot Dome and in California were recovered and returned to the U.S. Navy. The government collected millions of dollars from Doheny and Sinclair as well as almost $50 million for the oil drilled in its reserves. The Harding administration has remained a symbol of corruption. The Teapot Dome scandal illustrates the dangers that money and corporate power can pose to democratic government. Even the appearance of corrupt influences can erode people’s faith in democracy.

For Discussion

1.  What was the Teapot Dome scandal about? Who were the main parties in the scandal?

2.  How was the scandal uncovered? What happened to the parties to the scandal? Do you think justice was done? Why?

3.  The last sentence says: “Even the appearance of corrupt influences can erode people’s faith in democracy.” What does this mean? Do you agree? Explain.

A C T I V I T Y

Potential Corruption

Government officials regularly deal with private citizens and corporations. These dealings are part of what government does. They also can give rise to problems of corruption, as in the Teapot Dome scandal. The danger of money corrupting politics will always exist. Below are four areas where people today voice concern of potential corruption, or the appearance of corruption, in government.

1.  Regulatory agencies being run by members of the regulated industry. Government agencies, such as the Energy Department and Food and Drug Administration (FDA), oversee sectors of the nation’s economy. Is it proper for former oil executives to head the Energy Department or former pharmaceutical executives to lead the FDA? Would these be cases of “foxes guarding the hen house”? Or, would they add needed expertise to the agency?

2.  Government officials leaving government to lobby. Many times when both appointed and elected officials leave government, they become high-paid lobbyists who lobby the same officials they once worked with. Two complaints are heard about this practice. (1) Government officials may work to garner high-paid lobbying positions while on the government payroll. (2) Former government officials may have too much influence with current officials. Are these complaints valid? Or, would it be unfair to stop companies from hiring people they think will do the best jobs as lobbyists?

3.  Individuals or organizations making large campaign contributions. The average cost to a person campaigning for a seat in the House of Representatives is $1 million. It costs more to campaign for the Senate or for president. Candidates must raise huge sums of money. They rely on donors for contributions. Do people or groups making large contributions gain too much influence over politicians? Or, are even large campaign contributions fundamental to democracy?

4.  Companies getting awarded government contracts without competitive bidding. In 2008, the federal government bought more than $500 billion in goods and services. Most of these goods and services require government contracts. Sometimes contracts are made without competitive bidding. Would requiring competitive bidding for all contracts make corruption less likely? Or, would it simply make government contracting less efficient?

Form pairs.

Each pair of students should rank the four practices in terms which students think pose the greatest threat of corruption today (1 being the greatest and 4 being the least). Then for the practice they believe poses the greatest threat of corruption, they should create a rule or policy to guard against this threat.

Join pairs to form a group of four. In these groups, students should discuss their rules or policies and select the best one to present to the class.

Each group should report its decision and reasons for it.

 


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