by James Grant
From a quite unexpected quarter, however, the inflationists also got their way. In Australia, in the Klondike, and in the South African Rand, enormous new veins of gold were opened up. In 1896–900, twice as much bullion was produced in the world as in the comparable period a decade before. Money grew plentiful, prices and interest rates began to rise, and the Republic’s anxiety was redirected from deflation to inflation. Between 1900 and 1910, an index of general prices rose by an average of not quite 3 percent a year; between 1890 and 1899, the same index was hardly changed. Baruch, a lifelong gold partisan, in later years could marshal the sensible defense of the gold standard that it had worked.
Gold was an international money, and Wall Street was a cosmopolitan market. The New Yorkers kept an eye on gold shipments, world agricultural news, and especially developments on the London Stock Exchange. In the boom summer of 1897 some three hundred British dealers made markets in US stocks and bonds. On both sides of the Atlantic, arbitrageurs kept odd hours (rising before dawn in New York and working into the evening in London) in hopes of buying stocks cheap in one market and selling them dear in the other. The first thing that Baruch and his colleagues asked when they walked into the office was “What’s London?”
In New York, if not yet in the world, the Stock Exchange was the first market among many. Besides the aforementioned Curb, the city’s roster of exchanges included the Coal & Iron, Coffee, Cotton, Maritime, Metal, New York Fire Insurance, Produce, and the Consolidated Stock & Petroleum. The Consolidated dealt in speculative mining issues, in contracts for the future delivery of oil and in “odd lots” of fewer than 100 shares of stock. The odd-lot business was important because the cost to an investor, who bought a round lot of a $100 stock outright, not on margin, was $10,000 gold dollars before commissions, a small fortune. Of the three stock markets, the New York Stock Exchange was the longest established, charged the highest commissions, and demanded the greatest concessions from corporate applicants for listing. On the Curb no commission rate was fixed, while the Consolidated charged half the posted Stock Exchange rate of 12½ cents a share. Alone among the three, the Stock Exchange developed a procedure to require that listed companies divulge their profits and revenues and balance sheets to the public.
At the turn of the century, financial reporting was spotty. Railroad companies, then still the premier investment, regularly published their results, but industrial companies often did not. American Sugar Refining Company, for example, one of the most actively traded stocks of the 1890s and the one in which Baruch scored his first coup, disclosed nothing of its profits until 1909. (In 1890, in a master stroke of reticence, it refused to talk to the Census Bureau.) The annual report of the United States Leather Company in 1900 consisted of a simple balance sheet on a single piece of paper. When the Amalgamated Copper Company went public in 1899, the information it revealed about itself was contained in the following newspaper advertisement:
Amalgamated Copper Co. Capital, $75,000,000. This company is organized under the laws of the State of New Jersey for the purpose of purchasing and operating copper-producing properties. Its capital is $75 million divided into 750,000 shares of common stock on a par value of $100 each. It has no bonds or mortgage debts. This company has already purchased large interests in Anaconda Copper Co., Parrot Silver & Copper Co., Washoe Copper Co., Colorado Smelter and Mining Co., and other companies and properties.
(Signed)
Marcus Daly, President
H. H. Rogers, Vice President
William G. Rockefeller, Secretary and Treasurer
The offering was oversubscribed.
“As a general thing,” complained The Wall Street Journal about industrial management in 1899, “very few figures are published, and those figures are usually in such a form that it is impossible to canvass the integrity of net earnings. In fact the figures necessary for this process are the very figures which are most jealously guarded from competitors. Consequently in ninety-five cases out of a hundred the stockholder in an industrial company is obliged to take the word of the managers—with all that that implies—for the company’s net earnings.”
A question sometimes before the courts in those years was whether an insider, knowing what he did, was bound to divulge it before buying or selling his company’s stock in the open market. Out of some sixteen cases that dealt with the issue from the mid-nineteenth century until 1909, the verdict in eleven was no. Fraud and “active or intentional” concealment of information were illegal, but directors and other insiders could generally trade as they liked with the knowledge uniquely at their disposal. (Baruch later described his objections to this doctrine, but he too traded often and profitably on the basis of inside information.) Henry O. Havemeyer, president of American Sugar, was especially successful in his own company’s stock. “It has been a saying on Wall Street,” a New York Herald reporter wrote in 1897, “that each up and down movement in ‘sugar’ provided profits for Mr. Havemeyer to put up a new ‘skyscraper.’ ”
Long before the Securities and Exchange Commission came on the scene the Stock Exchange had taken steps to increase the amount of information available to the public (and thus to decrease, if only infinitesimally, the trading advantage of the insider over the outsider). By 1906, for instance, Sears, Roebuck & Company, in application for listing, was obliged to supply the following to the Committee on Stock List: certificate of incorporation; copy of bylaws; legal opinion as to proper organization; income statements and balance sheets signed by a public accountant; samples of stock certificates; list of real estate owned (and mortgages and encumbrances, if any). Sears promised to publish its financial results once a year and also to refrain from speculating in its own stock, “. . . except in the regular course of the legitimate business of said company, or for the purpose of retirement.” In the year of the Sears application, a member of the stock-list committee remarked to his colleagues that “to deal in any security without such duly certified information would be a gambling proposition of the extreme ultra type.”[6]
If the Stock Exchange aspired to self-regulation, the Curb attained spontaneity. Its rules were unwritten, it had no standing committees, no listing procedure, and no roof over its head. These raffish circumstances stemmed from both the Curb members’ independence and from a Stock Exchange rule that barred its members from dealing with another organized exchange in New York. The Consolidated, which was organized and which had rashly tried to compete with the Stock Exchange in its own securities, was officially off limits. The Curb, in its disorganization, enjoyed the senior exchange’s sufferance. Rain or shine, the brokers collected outdoors on Broad Street to trade in a list that incongruously encompassed Standard Oil, US Pneumatic Horsecollar, and United Copper (the latter, between 1904 and 1907, going from 70 cents a share to $77 and nearly all the way back down again).
On busy days the brokers spilled off the sidewalk and into the street. They were diamonds in the rough, these all-weather traders, and for merriment they sometimes exchanged exploding cigars and squirted each other with water pistols. According to the historian Robert Sobel, their weird dress and sudden gesticulations (they communicated in a kind of semaphore with clerks perched on the window ledges of nearby office buildings) spooked horses and snarled the traffic on Broad Street. Clerical standards outdoors were predictably casual. Not every legitimate transaction was noted by the official reporter, and phony ones sometimes were. In 1906 a New York Stock Exchange member, William H. Burger, told some fellow members that he wouldn’t have a ticker of Curb prices in his office, “. . . because I do not believe that 25 percent of the transactions out there are legitimate.” If this was an invidious opinion, the Hughes Commission, investigating stock-market practices in New York in 1909, apparently shared it. Said the commission of the Curb: “Quotations frequently represent ‘wash sales,’ thus facilitating swindling enterprises.”[7]
Another source of competition for the Stock Exchange was the bucket shop, in which the house offered to bet
the public on the short-term movement of stock prices. No actual securities changed hands, a condition that satisfied the Stock Exchange’s definition of gambling. Furthermore, the shops pirated Stock Exchange quotations, which were copyrighted, and deprived the members of commission revenue, which was unforgivable. Despite occasional legal action against them, however, the shops managed to flourish, and in 1905 the Stock Exchange heard complaints that sixty such dens of iniquity did a lively business in Pittsburgh. In Milwaukee the bucketing clientele included some of the city’s leading bankers.
At the turn of the century the Stock Exchange opposed gambling but condoned certain forms of price manipulation. Nowadays the Securities and Exchange Commission, principal arbiter in such matters, condones gambling but prohibits manipulation; a speculator may lay a bet on prices in the options market but he may not willfully jiggle them. In its day the Stock Exchange drew a subtle distinction. It banned fictitious transactions, so-called wash sales. However, it permitted another manipulative device called “matched orders” in which an order to buy a stock was given to one broker and an order to sell the same stock was given to another. The purpose of the feint was to create the illusion of market activity where none really existed, and so to entice the public. To the governors of the Exchange the practice had the redeeming feature that commissions were paid both coming and going. Moreover, the manipulator was at some risk, since the rules forbade him from telling his brokers that they were working at cross-purposes; thus he might buy too high through broker A and sell too low through broker B. No rules checked short selling, however, and stocks could be hammered just as they could be bulled, by brokers acting singly or in pools. Operations on either side of the market were facilitated by margin requirements (as noted) of as little as 10 percent.
A master of the arts of trading and manipulation was Baruch’s favorite broker, Harry Content, a polished and soft-spoken man who in 1905 bought control of the National Lead Company in a single session without unduly disturbing the price of its stock. To put that coup in relief, National Lead was at the time a component of the Dow Jones Industrial Average. Content’s prowess was described by an eyewitness on the Stock Exchange floor in the fall of 1899:
I stood at the [Brooklyn Rapid Transit Company] crowd at the close and saw the tactics of the brokers to mark down the price of that stock. If one wanted evidence of professional skill in manipulation he could see it then. The stock was 83¾ bid. Mr. Content suddenly received a message which made him act furiously for about ten minutes. Nobody had time to bid for the stock before it was offered below what they intended to bid. The broker threw the stock at anyone who tried to buy it with the evident intention of creating as low a price as could possibly be made in the limited time before the close. The market recovered very rapidly and in fact would have closed quite strong which would have led to bullish articles in the press this morning. The bear party studies such a situation and naturally tried to work against any such condition and therefore all the professional skill to counteract the bullish effect of a strong closing was utilized.
Many years later, when public suspicion of Wall Street had reached a pitch that prompted the Money Trust hearings, the first federal inquiry into stock-market practices, Content was among the brokers called to testify. To a question about manipulative technique, the magician (whom one client described as “thunderless lightning”) replied blandly: “I cannot describe any from my personal knowledge.”
At all events, market rigging was a practice more easily condemned by moralists than brought off by speculators. No less a trader than James R. Keene went broke in the mid-1880s in a failed attempt to corner the wheat market. Content himself was wiped out in the Northern Pacific corner of 1901, and Jay Gould, the consummate Gilded Age railroad baron, was, according to his biographer, a failure at stock trading.
One of the oddest of failed manipulations had a literary inspiration. Friday the Thirteenth, a novel by Thomas W. Lawson that was published early in 1907, was about a man who managed to sell so many shares of stock short that he brought down the market. Lawson did more than dream up this fanciful yarn; he also declared it a foolproof formula for real-life success. Either the book or the author’s guarantee impressed a Philadelphia broker and accused bank wrecker named Albert E. Appleyard. On June 12, 1907, Appleyard, imitating art, sold short thousands of shares of stock, but there was no collapse except of his own finances. “Appleyard has disappeared,” The New York Times reported on the fourteenth from Philadelphia, “but it is not believed that he has gone to Boston to claim the $5,000 reward offered by Lawson for a practical demonstration that his theory would not work, although it is considered here that his demonstration was clear and convincing.”
Such was the neighborhood in which Bernard Baruch made his fortune.
4. Gates, famous as a barbed-wire salesman, stock market speculator, and gambler, organized the American Steel & Wire Company, one of the components of the US Steel consolidation. Drake was a financial and racing associate of Gates’s, and Smith was a real estate operator. Once in a baccarat game at the Waldorf, Baruch recounted, Gates drained the blood from the faces of Smith and Drake by betting them $1 million. with him, not against him. (Bet-a-Million, as Gates was fittingly known, won and lost a half million on that game—a heart-pounding draw.)
The Reid and Moore in the “Reid-Leeds-Moore” crowd were Daniel G. Reid and William H. Moore, important stockholders in the National Steel Company, American Tin Plate Company, American Steel Sheet Company, and American Steel Hoop Company. To each man’s enormous profit, the businesses were merged into US Steel. Before the consolidation, William B. Leeds was president of Tin Plate. Charles Schwab, Henry C. Frick, and Henry Phipps, of course, were also leading steel executives.
5. One ancillary reason for joining was the $10 death duty that the members customarily assessed themselves upon the passing of a colleague. If the mourning family had nothing else to show for the deceased’s career in the stock market, it at least had $10,000 from the Stock Exchange Gratuity Fund.
6. The Exchange took considerable pride in its pioneering work in investment disclosure. Among the documents it selected for immortal filing in the cornerstone of the new building in 1901 were the requirements for listing of new corporate securities laid out by the Committee on Stock List.
7. The New York Stock Exchange’s low assessment of the Curb was exactly the view that many reformers took of the senior exchange itself. Thus the Pujo Committee, investigating the alleged Money Trust, concluded acidly in 1913: “In other words, the facilities of the New York Stock Exchange are employed largely for transactions producing moral and economic waste and corruption; and it is fair to assume that in lesser and varying degree this is true or may come to be true of other institutions throughout the country similarly organized and conducted.”
Four
“Wealth Commenced to Pour In on Me”
Even if Baruch had burned to fight in the “splendid little war” with Spain (and nothing suggests that he did or wished that he had), there was Annie to consider. They had been married only six months when hostilities broke out in April 1898. Furthermore, there were his bad left ear, his partnership in A. A. Housman & Company, and his mother. (He was a demonstrably loving son; he greeted his mother with an enveloping hug and his father with a filial kiss in the middle of the forehead.) In any case, Baruch sat out the war on Wall Street.
Business was good in 1898—stock prices fell with the threat of war in the spring but rallied as victory drew near in the summer—and both the firm and its senior partner were coming into their own. Baruch at the age of twenty-seven was a broker, or “customer’s man,” with neither wealth nor public reputation, but Arthur Housman, in the estimation of The New York Times, was “the recognized representative of some of the most prominent and most powerful millionaires credited with having swung the biggest lines in the activity [of 1897].” This tribute accompanied the text of Housman’s New Year’s financial outlook, which the Times
saw fit to print alongside the views of such business luminaries as James J. Hill, the railroad builder, and Jacob H. Schiff, the investment banker. Fortunately for Baruch’s career and for his subsequent reputation for decisive action, Housman and the financial editor of The New York Times, Henry Alloway, stayed in touch with each other.
It was Alloway who tipped off Housman to news of the American naval victory at Santiago on Sunday, July 3, hours before it was officially confirmed in Washington; and Housman called Baruch, reaching him in Long Branch, New Jersey, where he and Annie and his family were weekending. Housman and Baruch agreed that the news meant a quick end to the war and a strong market. The New York Stock Exchange would be closed the next day, Monday, the Fourth of July, but London would be open as usual. The thing to do was to buy at the opening in London and to sell in New York for a trading profit. The difficulty was getting to the office in time for the opening bell in London, which was 5 a.m., New York time.
As no scheduled train was running to New York on Sunday before a national holiday, Baruch chartered his own. The special, consisting of locomotive, tender, and coach, pulled into the station at Long Branch about 2 a.m. Three men climbed aboard: Sailing, Baruch’s youngest brother and a Housman employee; Clarence Housman, the senior partner’s brother; and Baruch himself. As they sped to New York, Baruch reflected expansively on America’s gathering empire and on the looming imperial bull market. In the excitement, one workaday detail had slipped his mind—the key to the office door.