by James Grant
Weil incidentally mentioned that he happened to own 5,000 shares of Northern Pacific. Baruch, who had seen the stock sell for 2½ in 1895 and at 19 as recently as 1898, ventured the view that it was too high at 100. With that, he called the president of the railroad, Charles S. Mellen, to ask his presumably authoritative opinion. Mellen not only accepted the call and talked to Baruch and agreed with him, but he also put in an order to sell 2,500 of his own shares. His confidence rattled, Weil sold his Northern Pacific, at a price of about 102. Within two weeks, Northern Pacific, capping one of the most astonishing runs in Stock Exchange history, briefly touched 1,000. Weil subsequently computed the cost of Baruch’s advice at $2.5 million.
It might be noted here that the possibilities for error in the stock market are vast, and that the trail of every Wall Street fortune is crossed with wrong turns. One can buy and sell too early and too late. One can be right but unlucky. Baruch, in the spring of 1901, had the good fortune to be wrong but lucky.
This was the boom time of the McKinley market and the idea had gained currency that prices would go up forever. It was true in the past that bull markets had ended, but this was (as it was said) a New Era. US Steel had been capitalized for $1 billion or more, the gold standard was secure, and general prosperity was inevitable. In the stock market, the alliance of James J. Hill and J. P. Morgan had bought up a majority interest in the Chicago, Burlington & Quincy Railroad, thus sowing the hope that other lines might similarly catch the eye of a wealthy syndicate. Alexander Dana Noyes wrote of that self-confident age:
Probably 1901 was the first of such speculative demonstrations in history which based its ideas and conduct on the assumption that we were living in a New Era; that old rules and principles and precedent of finance were obsolete; that things could safely be done today which had been dangerous or impossible in the past. This illusion seized on the public mind in 1901 (in New York at any rate) quite as firmly as it did in 1929. It differed only in the fact that there were no college professors in 1901 who preached the popular illusion as their new political economy.
James J. Hill, in the ordinary run of events, had small use for New Eras, Wall Street, or perpetual bull markets. He was the builder and steward of railroads, notably of the Great Northern and the Northern Pacific, and he boasted that he had never bought a share of stock for “gambling purposes” in his life. But it was he, not his bankers at J. P. Morgan (nor the hired president of the NP, Mr. Mellen), who first spotted the telltale market action in Northern Pacific. Through April the stock had been rising. On Friday, the twenty-sixth, it spurted by 3 points on the startling volume of 106,500 shares. Hearing the news the same day in St. Paul, Hill set out Saturday evening for New York to investigate personally. It was obvious to him that somebody was accumulating the stock and that the logical buyer was E. H. Harriman.
Hill and Harriman got along tolerably well as neighboring railroad geniuses, but Harriman had no use for Hill’s banker, Morgan. Their enmity dated to 1887, when Harriman outmaneuvered Morgan to acquire the Dubuque & Sioux City Railroad. Next, in 1894, Harriman mounted a noisy campaign to block a Morgan plan to reorganize the bankrupt Erie, on which Harriman commuted to work. Morgan won the fight in court, but Harriman was vindicated by events: the plan failed just as he had predicted. Most galling to Morgan was the colossal success that Harriman had made of the Union Pacific Railroad in the late 1890s after he, Morgan, had given up the line as a lost cause in 1895. One day on the floor of the Stock Exchange, Baruch’s attention was drawn to a slight man, bespectacled and bowlegged, at the Union Pacific post. “Who’s that damn fellow buying all the UP?” he demanded. It was E. H. Harriman, making his fortune.
The first shot in the greatest struggle between Harriman and Morgan was the aforementioned acquisition of the Burlington by the Northern Pacific. The strategic value of the Burlington to the NP was that it provided a sorely needed link to Chicago. Harriman too needed a Chicago terminus for the Union Pacific, and he asked the NP interests, Hill and Morgan, to sell one-third of the Burlington. They refused. Harriman’s answer was audacity itself: he began to buy up the Northern Pacific. It was this stroke that Hill read between the lines of the April stock listings and which put Baruch accidentally in the way of a market killing.
When Hill stepped off the train in New York on Monday morning, April 29, he made his way downtown to his office and to a frank proposition. On hand to meet him were Harriman himself and his banker, Jacob Schiff, of the firm of Kuhn, Loeb. The two men announced that their holdings, added to Hill’s, would constitute clear control of the Northern Pacific. Would Hill throw over Morgan and join them? Hill most definitely would not. Thus were battle lines drawn in the famous Northern Pacific corner.
While Harriman, backed by the millions of the Standard Oil interests, continued to buy NP, Hill marshaled his bankers. On investigation it turned out that the house of Morgan had been selling Northern Pacific to Harriman because it thought that the price was too high. Morgan himself was in Europe. Not until Saturday did a cable reach him at the Grand Hotel in Aix les Bains, in the French Alps. Not until after the close of the market that day was his answering directive—buy all necessary stock—received in New York.
The same Saturday found Harriman ill and uneasy. On paper his control of the Northern Pacific was perfected. He owned a majority of the voting stock, common and preferred together, although not of the common alone. What he did or did not realize that day was that the directors could vote to retire the preferred on January 1, 1902. If the Hill and Morgan interests could postpone the annual election of directors until after that date, Harriman’s preferred, and a block of his votes, could be erased. For whatever reason, Harriman was moved to put in a call to Schiff’s office. He left an order to purchase enough stock to give him undisputed control of the common. Schiff was at synagogue. When the message was relayed to him there, he declined to interrupt his Sabbath, directing that the matter be held until Monday. But Monday proved too late.
Baruch, an early bird, customarily began his day at the arbitrage rail of the Stock Exchange, comparing prices in New York and London. Sometimes, especially on Mondays, the two markets fell out of step, so that the same stock could be quoted at widely different prices on either side of the Atlantic. In that case, Baruch would buy in London and sell in New York or vice versa, restoring order to the quotations as a curator might tidy up a gallery by straightening the pictures.
Bright and early on Monday, May 6, Baruch was perusing the London list at the old Produce Exchange, where the New York Stock Exchange had found makeshift quarters during the construction of its new building. Beside him stood Talbot Taylor, a Stock Exchange member and son-in-law of James Keene’s. In his friendly way, Baruch remarked to Taylor that, on the basis of its London price, Northern Pacific looked a little high in New York. Often, when Taylor was executing an order in New York and the stock was also listed in London, Baruch would handle the transatlantic end, buying or selling in London at a small arbitrage profit. On this occasion, Taylor regarded him evenly. Baruch related the following conversation:
“Bernie,” he said, tapping his lips with the butt end of his pencil, “are you doing anything in Northern Pacific?”
“Yes,” I replied, “and I’ll tell you how to make some money out of it. Buy London, sell here, and take an arbitrage profit.”
Taylor went on tapping his lips, then his forehead, with the pencil. At length he said, “I would not arbitrage if I were you.”
I did not ask why. If Taylor wanted me to know he would tell me. I offered to let him have some of my previous London purchases if they would help him any.
“All right,” he agreed, “you can buy NP in London, but if I need the stock I want you to sell it to me at a price and a profit that I will fix.”
To this I agreed. Taylor stood there for an instant. Then, taking my arm, he led me out of earshot of anyone else.
“Bernie,” he said in almost a whisper, “I know you will do nothing to interfere w
ith the execution of the order. There is a terrific contest for control and Mr. Keene is acting for J. P. Morgan.
“Be careful,” concluded Taylor, “and don’t be short of this stock. What I buy must be delivered now. Stock bought in London will not do.”
For the second time in a month, Baruch was made privy to nonpublic information concerning Northern Pacific. Mellen had an opinion, which backfired. Taylor, however, had facts, and Baruch proceeded to act on them. He resolved (a) to do nothing in Northern Pacific except to hold the stock that he had already bought in London and (b) to sell other stocks short in anticipation of a general collapse. He reasoned that traders who were mistakenly short of NP would be driven to raise cash to buy themselves out, and to raise cash they must sell stock. The list would plunge but rise again. What Baruch knew and deduced was known only to the inner councils of the warring camps. Asked on Monday by a St. Paul newspaperman what had gotten into NP, Hill replied blandly that he didn’t know but that he deplored speculation.
On Monday the stock opened at 114. More than 400,000 shares later, it closed at 127½. Harriman, unwilling to chase the price higher and convinced that his preferred was as good as his common (a point on which legal counsel subsequently reassured him), stepped aside. Hill and Morgan waded into the market for 150,000 shares. When, on Tuesday, the price reached 146, they stopped buying, convinced that they had control. But the rise in NP (“Nipper,” to traders) had scarcely begun.
The source of the new buying was short sellers. They believed, as Baruch did before Taylor had filled him in, that NP was unnaturally high, that it couldn’t stay up, and that it deserved to be sold. So widespread was this view that, by Wednesday, when the corner became common knowledge, 100,000 more shares had been sold than were ever engraved. For the shorts, the arithmetic meant ruin. Under the rules, a seller had only one day to deliver what he had sold. If he failed to deliver, the buyer was permitted to bid any price for what was owed him and to send the bill to the hapless seller.
In an ordinary corner a squeeze of the shorts is the object desired. In the Northern Pacific corner, it happened by accident. The buyers wanted stock to own, not the blood of bears. But in the end it was the plight of the sellers that overshadowed the struggle of the buyers and that brought Hill and Harriman together in settlement.
After the close of the market on Wednesday (after Nipper had put on another 16½ points, to 160, up 50-odd points since Saturday), desperate shorts gathered at the Northern Pacific post to beg or borrow some stock certificates. It was announced that none could be lent because each side was taking final inventory. To someone who buys a security the ultimate risk is known: a price of zero. For a cornered short seller, the ultimate risk is limitless and unknown, because the price of a stock or bond might go up indefinitely. To the panicked brokers who filled the public rooms of the Waldorf-Astoria that evening and waited in vain for news (bull-market affability gone, evening dress dispensed with), calamity loomed for Thursday. Baruch, a very solvent bystander, remembered:
Only the stoutest could maintain outward signs of composure. I saw Arthur Housman in the company of John W. Gates of “Bet a Million” fame. The bluff, breezy Chicagoan kept up his old bravado. He denied all rumors connecting him with a short interest in Northern Pacific, saying that he had not lost a cent and that if he had, he wouldn’t squeal. The latter part of this statement was true, if the first part was not.
On Thursday morning, NP opened at 170, traded at 400 before 11 a.m. and at 700 before noon. The market had become a series of spasms, successive trades at midmorning, for example, occurring at the prices of 300, 230, 300, 400, and 320. Money was lent to brokers overnight at the rate of 60 percent. There was a rumor that Arthur Housman had dropped dead. Before he could show his face on the floor of the Exchange in rebuttal, the lie was cabled to London. In Albany, Bache & Company hired a special train to rush some odd unsold Northern Pacific certificates to New York. (The Wall Street Journal reported a dilemma in brokerage-house ethics: “A broker had 100 shares of Northern Pacific owned by a man on his way to Europe. He knew that the customer would sell at 500, but he felt that he could not sell without an order to do so. Was he right?”) Just before 2 p.m., 300 shares changed hands at 1,000, cash.
The mirror image of the panicked rise in NP was the rout in the rest of the list. US Steel gave up 6¾ points, American Sugar 8⅜, and Amalgamated Copper 10. Then, late in the session, hope dawned: an announcement that delinquent short sellers would not be “bought in” that day. The market rallied and NP sank. By the closing bell, Nipper had settled back to 300, having traded as low as 190 and as high as 1,000. Another announcement followed: Hill and Harriman would settle accounts with short sellers at the unexpectedly lenient price of 150. The panic was over.
Forewarned, Baruch emerged richer. He sold short before the collapse and bought at the lows on Wednesday and Thursday. He bought Northern Pacific in London at a cost of $112 to $115 and sold it at a huge profit. He related that he cleared the biggest day’s profit of his career on Wednesday, which sum, however, he did not mention.[10]
As for Hill and Morgan, Schiff and Harriman, the battle ended anticlimactically. It was agreed that Morgan would name the next Northern Pacific board and that among the directors would be Harriman. Harriman, furthermore, would gain representation on the board of the Burlington, which would remain strictly neutral in competitive matters between the Union Pacific (the Harriman line) and the Northern Pacific.
Concerning Talbot Taylor, Baruch’s benefactor, he was divorced from Keene’s daughter, Jessica, in 1908. He ended his days in the south of France, devoting himself to his garden and regularly winning first prizes at the Riviera flower shows.
Shortly after his serendipitous turn in Northern Pacific, Baruch happened to pass an afternoon in the Waldorf with Herman Sielcken, a well-to-do coffee merchant. Sielcken was a customer of Housman’s, an occasional speculator in stocks and an all-around student of markets. That day he talked about copper, fixing Baruch with his sharp black eyes and sometimes animatedly watering his speech with saliva.
There was too much copper and the price was too high, he said. Inventories were building and exports falling. If the price fell, as it must, the price of the stock of Amalgamated Copper Company must also fall. Amalgamated was incorporated in 1899 with the aim of monopolizing the world’s copper market, which, said Sielcken, was impossible.
Baruch investigated Amalgamated for himself, and his findings corroborated Sielcken’s. Through the early summer, the price of the stock fell, from 130 in mid-June to 111 in mid-July. (Baruch took enough time out from research to buy a new Panhard horseless carriage and to have his picture taken behind the wheel by a photographer from the New York Herald. “Mr. Baruch is an Expert Chauffeur,” the caption under the newspaper picture said, “and His Handsome Motor Carriage is Much Admired along the Ocean Drive.”) When President McKinley was shot on September 6, stock prices broke. They rallied and gave way again. The sensational and entertaining disclosures about the birth of Amalgamated by Thomas W. Lawson—of which the nut was that the company was grossly overcapitalized—lay three years in the future. What led Baruch to sell was the imbalance of supply and demand. Not long after the assassination, when Amalgamated was in the neighborhood of 105 to 115 and sinking, he sold.
Two autumns before, when he had gone short of BRT, he was one short seller among many. This time circumstances were different. Amalgamated had been organized under the auspices of the Standard Oil interests (notably of William Rockefeller and Henry H. Rogers), and some of the ablest operators in the Street stood beside it. Keene owned the stock. When it got around that Baruch was bearish, Thomas F. Ryan took him aside. “Bernie,” he said, “I hear you are short of Amalgamated Copper. I just want to let you know that the big fellows in it are going to twist your tail.”
Coming in the wake of the Northern Pacific corner, such a warning was calculated to cause restless nights. Furthermore, the Wall Street establishment was rallying around
the list in the aftermath of the McKinley assassination, and J. P. Morgan pronounced himself bullish. Baruch held his ground. Some of his recollections of that time, dictated later without autobiographical touch-up, are as follows: “I became heavily short of it—heavy [sic] for me. All kinds of names were hurled at me and rumors spread about my integrity and ability and all the slimy stuff . . . but I listened to no one but the merchant Herman Sielcken.” And regarding his day-to-day routine on the Stock Exchange floor: “I never left the [Amalgamated] crowd but round and round I would walk, with brokers like Harry Content, Eddie Norton, and Charlie de Witt who were my brokers and would act for me. I was making the biggest play of my life. I was sure of certain facts and was looking for that bubble to burst.”
Baruch took the occasion of the death of the convalescing President on September 14 to sell a little more stock. On the nineteenth the market was closed for McKinley’s funeral. On Friday, the twentieth, the Amalgamated directors were expected to meet to consider the future of the $8 common dividend. Although newspaper reports were optimistic, selling on Wednesday indicated that insiders were not. Then, late Friday, Amalgamated rose, as if the dividend were secure after all. In fact, it had been cut to $6. Baruch was transported. In Saturday’s half session, the stock lost almost $7 a share. A decisive market verdict would come down on Monday.
Just then Baruch’s mother called to remind him that Monday was Yom Kippur. Now he fretted. Observance of this holiest of Jewish days would mean isolation from all temporal matters, in particular from the hammering of Amalgamated Copper. Baruch was not a religious man. Everything except filial devotion argued against a literal observance of the Day of Atonement. Devotion to his mother prevailed, however, and he laid plans in preparation for his absence from the floor. Eddie Norton, who in the Northern Pacific corner had sold short the famous 300 shares at 1,000, had been doing Baruch’s selling. He was instructed to continue bear operations, specifically, to hold some “hammer stock” over the market in order to discourage buyers. In case the price of the stock went the wrong way, Harry Content was instructed to buy, thus covering Baruch’s short sales. In this way each speculative flank was guarded.