The quintessential "robber baron" of the 19th century was Jay Gould. In his time, he was widely identified in the press and popular imagination as the personification of all the evils of business.
From 1875 to his death in 1892, Jay Gould built a remarkable empire, buying and selling securities and companies in the high technology field of the day -- railroads.
Reading press reports of that era reminds us yet again that in high finance -- as in many things -- there are few new ideas, only new techniques. As the Mike Milken of his day, Jay Gould has generally been poorly treated by both history and historians.
In the great financial battles in which he engaged, he always allied himself with intelligent, powerful collaborators. Early in his business career he learned the importance of having the best people available assist him in his many schemes, mergers, and manipulations.
The man he chose as his chief legal adviser is evidence of his ability to spot and attract good talent.
One of Gould's longtime allies was Sydney Dillon, who served as president of the Union Pacific railroad -- one of the centerpieces of the Jay Gould empire. Dillon's nephew was a federal judge in Iowa, who was to play a significant role in the life and times of Jay Gould.
In 1871, one of the many legal controversies in which the Union Pacific was involved was the question of where the eastern terminus of the railroad was located.
The Pacific Railway Act required the Union Pacific to run a continual line to the western end of Iowa. When the railroad bridged the Missouri River in 1871, it was in the company's best interest financially to claim that Omaha, on the western riverbank across from Iowa, was the railroad's eastern terminus.
This maneuver would permit the company to sell separate bonds to finance the bridge, as well as charge a toll to cross over to Omaha.
The situation quickly led to litigation. Sydney Dillon's nephew, John Forrest Dillon, justice of the U.S. Circuit Court of the Eighth Judicial District, ruled against the Union Pacific and found Council Bluffs to be the eastern terminus fo the railroad. But, in Solomonesque fashion, he also declared that the Union Pacific was entitled to charge a toll for use of the bridge.
This was Jay Gould's first encounter with his future legal adviser.
The man who ruled against the magnate's interest, but did so with fairness and scholarship, must have impressed even Gould. John Dillon, a remarkable self-made man, was born in Northampton, N.Y., in December 1831, the grandson of Irish immigrants.
Seeking better opportunities in the West, his family moved to Davenport, in the Iowa Territories in 1837, becoming one of a small group of 500 pioneers to settle the town. He was to live there for the next 42 years.
After an unremarkable childhood, John Dillon commenced the study of medicine at 17. In the fashion of the time, he apprenticed with Dr. E.S. Barrows of Davenport, a prominent physician and surgeon f the town. After a year with Dr. oa rows, he entered the newly f rmed Rock Island Medical School as a member of its first class.
Soon after graduation, young Dr. Dillon set out to practice medicine in Farmington, Iowa. Since the life of a county doctor involved much solitary horseback riding, Dillon, a poor rider, soon tired of his profession. He made a quick decision to switch careers.
He "read" law from the fall of 1850 to the spring of 1852, when he was admitted to the bar of Scott County, Iowa. Within a year he was selected town prosecutor. At age 27 he was elected in 1868 to chief justice of the Supreme Court of Iowa.
His reputation was such that one nar later Dillon was appointed by President Ulysses S. Grant as justice of the U.S. Circuit Court for the Eighth Judicial Circuit.
Early in his legal career, he began to assemble a compilation of Iowa Supreme Court cases that was updated annually. Eventually known as "Dillon's Digest,' it covered court cases from 1839, the year in which it was first published, until 1860. Not only was this a helpful tool for lawyers practicing in the state, it also brought both income and recognition to the young judge.
Railroads and Municipal Debt
It was in his role as a judge that Dillon became exposed to the area of law for which he became well known.
Railroads were the major growth industry in the second half of the nineteenth century. In 1865, there were 3,272 miles of track west of the Mississippi River. By 1890 the mileage had risen to 72,473. Because of its geographical location, Iowa was at the center of the action.
Since railroads were very capital-intensive businesses, public funding of these enterprises was established from the outset with the Pacific Railroad Act. At the local government level, cities and towns were often induced to sell their own municipal bonds in order to purchase stock in a railroad. The town's capital contribution was an inducement to have the railroad come into their town, which presumably would "put it on the map" and bring prosperity to the inhabitants.
Unfortunately, many of the railroad companies were poorly funded and bankruptcies were common. This often left the towns and cities holding stock in worthless companies, while the municipal governments had debt outstanding that had been issued to finance to activities of private enterprise.
Many towns and cities repudiated their municipal bonds and let them go into default. In 1862, the Iowa Supreme Court ruled that cities and towns did not have the right to sell debt in aid of railroads.
The post-Civil War era was particularly chaotic for the municipal bond industry. Different analysts have estimated that during the decade of the 1870s, between 15% and 25% of all state and local debt issues were in default.
A significant amount of defaults resulted from debts incurred by Southern states and cities during the Civil War, which were repudiated by new legislatures after the war.
Judge Dillon's Masterwork
A Mississippi default, which occurred in 1857 on a $ 7 million loan, has had lassting consequences. As recently as 1987, the state was prevented from selling a taxable Eurobond issue in London, because it had not made restitution on the old debt.
It was in the midst of this crisis that Judge Dillon began working on his most famous work of legal scholarship, his "Law of Municipal Corporations," published in Chicago in 1872.
It became an overnight legal classic and best seller. The first edition of 2,500 copies sold so quickly that within a year the second edition was expanded into a two-volume work. The author earned over $5,000 in royalties the first year after its publication, and more than $50,000 over his lifetime.
It was followed in 1876 by "Law of Municipal Bonds." By writing the two definitive books on the subject, Judge Dillon became universally recognized as the expert in the field. In the words of a contemporary, "Judge Dillon knew everything about municipal bonds." Rapidly, other state courts deferred to Judge Dillon as the final word, and his opinions on municipal bond law were widely quoted and adopted as law in other jurisdictions.
One of his fundamental legal precepts has come to be known as "Dillon's Rule." Out of the chaos of early municipal financing, Judge Dillon felt that local governments should not be free to contract debt for any purpose, but rather only for purposes that were in the public interest and specifically permitted by state-enacted statutes.
Thus, he was limiting the use of municipal bonds as well as separating public from private purposes.
As his correspondence grew -- along with his ambition -- Judge Dillon accepted an invitation in the spring of 1879 to move to New York City to become professor of real property and equity jurisprudence at Columbia University Law School. At the age of 48, Dillon and his family resided at 671 Madison Avenue in New York City.
At that time, virtually all major American corporations had their headquarters in New York city. Dillon's uncle, Sydney, as president of the Union Pacific Railroad, found substantial amounts of legal work for his well-published nephew.
Dillon and Gould
Almost immediately upon taking up his duties at Columbia, he found himself working closely as legal adviser with the owner of the Union Pacific, the infamous Jay Gould. Within three years, Judge Dillon was spending so much time on Gould-related matters that in 1882 he resigned his position at Columbia to accept the position of general counsel for the Union Pacific.
Eventually, he served in a similar capacity for other Gould-controlled enterprises, including the Missouri Pacific Railroad, Western Union Co., and the Manhattan Elevated Railroad. From 1882 until Gould's death in 1892, Dillon was involved with the most dynamic businessman of the era, in all of his deals and companies.
An early example of Judge Dillon's expertise occurred in January 1880, when Gould was scheming to take control of Western Union, the largest telegraph company.
Western Union ran its telegraph lines alongside the tracks of the Union Pacific, under an exclusive lease from the railroad. Gould controlled American Union Telegraph, a rival of Western Union.
By close study of the Western Union lease, Judge Dillon found a loophole that enabled American Union Telegraph to break the exclusive arrangement Western Union enjoyed with Union Pacific. Quickly exploiting his opening, American Union quickly strung up lines and hurt Western Union's profitability.
This allowed Gould, a year later, to merge the two rival telegraph companies. In 1881, Judge Dillon, in one of his first acts for the newly merged company was to close the loophole and preserve the new Western Union Company's monopoly.
After leaving Columbia University, Judge Dillon operated out of the law offices of Dillon, Thompson & Clay at 115 Broadway in lower Manhattan. While gaining recognition as one of the foremost corporate attorneys of the day, at the same time he began to develop the legal practice of having an independent bond counsel opinion in connection with new offerings of municipal bonds.
Gould himself often had to purchase large blocks of municipal bonds in connection with the innumerable railroad wars he was always waging, and turned to Judge Dillon to be sure the bonds he was buying were legal and validly binding upon the town. Judge Dillon would usually review a transcript of the financing and deliver a favorable opinion if all was in order.
The Premier Bond Counsel
After Gould's death in 1892, Dillon still had several years of work as the executor of Jay Gould's estate, which was estimated at $ 72 million, but he began to spend less time on corporate legal battles and increasing amounts of time developing into the country's premier bond counsel.
Although initially, investors came to his Broadway offices for the opinions, over time the cities and towns who issued bonds began to come to him directly for advice in structuring their financings. Eventually, cities such as Kansas City and Memphis came to him for an approving opinion on their bonds.
As his reputation grew, despite his work for Jay Gould, additional honors presented themselves. In 1891, Judge Dillon became president of the American Bar Association and Storrs Lecturer at the Yale University Law School.
As he expanded the scope of his bond counsel practice, he solidified the position of New York City as the capital of the public finance industry.
The concept of a municipal bond issuer coming to New York lawyers for bond opinions continued, with a few local exceptions up until the mid-1970s, when the dominance of New York bond counsel declined.
Perhaps one of the greatest contributions made by Judge Dillon was his service as a member of the New York City Charter Commission in 1889, which resulted in the merger of all five formerly separate cities into the five Boroughs of Greater New York City. The commission did its work well enough that the structure lasted until changes were enacted in 1990.
Judge Dillon was still active in his retirement at Bernardsville, N.J., until his death in 1914.