by James Grant
Sarcastically, Einstein begged to remind him that the Gulf Sulphur Company was a corporation with bylaws, a board of directors, and voting stockholders. Furthermore, Spitzer, who owned some stock, had been stranded in Vienna since the start of the war, and Allen, one of the St. Louis stockholders, was touring Hawaii. Nothing could be done without their consent. Meanwhile, Baruch redoubled his efforts to obtain the Meyer and Allen stock, which totaled 9,380 shares, or 38 percent of the 25,000 shares in existence. An option was offered, which Allen spurned by telegraph:
NO MORE OPTIONS. IF MEYER WILLING WILL ACCEPT PROPOSITION. ALL CASH IMMEDIATE ACCEPTANCE.
Einstein answered:
ALL CASH IMPOSSIBLE. PARTIES WILLING OPTION CONTINGENT ON RAISING CAPITAL SUFFICIENT OPERATE PROPERTY.
In the next exchange Allen gave way, offering his and Meyer’s stock and bonds for $70,000, of which $30,000 was to be paid in cash. The rest of the securities would be Baruch’s to buy or not in the following fifteen months for a price of $40,000. (Poor Harrison had sold for a fraction of that.)
Baruch’s counteroffer was for $15,000 in cash and a two-year option. Allen declined, and Baruch raised the ante. He wired new negotiating instructions, which struck the recipient, Einstein, as peculiarly phrased:
IN VIEW OF YOUR PERSONAL POSITION AND TO AVOID ANY COMPLICATIONS FOR YOU IN ACCORDANCE WITH RECENT OFFER OF MEYER AND ALLEN WILL AGREE TO PAY $30000 CASH FOR THREE SEVENTHS OF THEIR SECURITIES WITH AN OPTION FOR TWO YEARS ON BALANCE FOR $40000 THEY AGREEING TO CONVERT ALL INTO COMMON STOCK AS OUTLINED.
Allen and Meyer said yes, but now it was Einstein’s turn to take umbrage. The “personal position” remark of Baruch’s offended him. He had thought that they were partners.
Baruch now owned, or held an option to buy, the majority of stock in Gulf Sulphur Company, and he faced a conundrum. He could risk his own capital to try to bring the property into production. Alternatively, at the cost of a loss of control, he could seek outside capital. Baruch made the second choice and looked up J. P. Morgan & Company. Inasmuch as the elder Morgan was three years dead and because the firm had approached him about sulphur in the first place, it seemed the unexceptional thing to Baruch to call on the Morgans now. He talked to Henry P. Davison, a Morgan partner, who referred him to Thomas W. Lamont, another partner, who in turn called in William Boyce Thompson, a successful mining entrepreneur. Thompson, on commission, looked into the prospects at Big Hill and reported favorably. On the basis of his report, the firm agreed to buy 60 percent of the stock, which Baruch allotted at the price of $10 a share. He sold some of his own to friends and acquaintances, including Dan Jackling, John Black, Eugene Meyer, and Daniel G. Reid, who was chief of the American Can Company. Presently Morgan sold to Thompson for a small profit. The sale infuriated Baruch because he thought that the stock should have been offered to him first. His outrage prompts the question of why he had sold the stock at all. The capital that had to be raised was about $500,000. In 1910, he had offered to gamble $250,000. In 1916, when the gambling element was substantially diminished, he thought nothing of throwing $3 million into the stock market in a single day on a speculative hunch. His net income that year topped $2 million (a feat duplicated by only sixty-six other Americans).
Probably the first reason for his reluctance in sulphur is that he continued to underestimate it. For another thing, he was an investor and speculator by temperament and long experience, not an operating man. Moreover, on a practical level, he had reason to believe that the Union Sulphur Company would file suit over some contested property and that the suit would stand up. (It was, in fact, lodged, and settled, in 1921, at a cost to Texas Gulf of $700,000.) There is one last, speculative hypothesis. The Morgan partners, as a class, were at the center of the establishment from which Baruch had been largely excluded. When he brought them a good thing, it was perhaps with the hope that they would come closer to accepting him as one of them. Their selling, in his eyes, was tantamount to a rejection of him.
Before he entered public service in 1917 Baruch sold such stocks as he could and patriotically invested the proceeds in Treasury bonds. (“Three and one half per cent tax free is good enough for me,” he told Clarence Barron in 1918, which in normal peacetime circumstances it patently was not.) Happily, there was no ready market for his stock in the Gulf Sulphur Company, and he kept it. By the time he returned from the Paris Peace Conference in 1919, the company had changed its name to Texas Gulf Sulphur Company and had enlarged its capital to $5 million from the original $250,000. In 1919 it mined its first sulphur. In 1921, it mined one million tons and sold stock to public investors. It was just about then—while its shares were listed on the New York Stock Exchange—that Baruch began to sell.[27]
As Texas Gulf had issued more stock, he had occasionally bought, so that by late 1921 his holdings had grown to 61,963 shares with a market value of more than $2 million. By late 1925, he had pruned his position to 19,000 shares. Einstein, the guiding spirit of Texas Gulf, had died unexpectedly of a heart attack, in November 1916, just after Baruch had sold to the Morgans. In November 1921, Einstein’s widow, Blanch Bloom, owned 2,094 shares while Mary Boyle, Baruch’s secretary, owned 10,000.
Baruch’s selling coincided with a spectacular rise in the company’s fortunes. In 1921 the dividend per share was $1. In 1925, it was $8.75. Between those years, the price of a share of Texas Gulf had vaulted from a low of 32⅝ to a high of 121 7/8 In a self-congratulatory mood, the stockholders, in September 1926, voted to split the stock four for one, that is, to multiply everybody’s holdings by four and to reduce the price per new share proportionately. Baruch read the vote as a sign that optimism had been carried too far; in the fall of 1926 he sold his last share. Although other Baruchs turned up on the stockholder rolls later in the 1920s—Herman, a director of the company since 1919, owned a good bit of it—Baruch himself stayed off.
While in he had done famously. His earnings from dividends alone were on the order of $1 million. A reasonable guess is that his profits on the sale of his stock amounted to $6 to $8 million. The campaign, his most lucrative, was until the end a characteristically cautious one. After he sold, the price of the stock continued to rise, reaching a 1929 high, on the old, pre-split basis, of $341 a share. At that ebullient instant, the company that he could have bought for $250,000 was valued in the market at $216,535,000.
24. Baruch’s reputation as a powerful figure around railroads, if not actually in them, became sufficiently well established that in 1935 a Nazi propagandist fell into the error of describing him as the “president of various railroad corporations.” Baruch could only have wished it were so.
25. A price of 46 meant that a $1,000 bond cost $460. Thus Baruch’s overall investment would have amounted to $1,438,880, which is 46 percent of the face, or par, amount of his purchase, namely, $3,128,000.
26. By June 1913, the Terminal Company bonds for which Baruch had paid about 46 were quoted at less than 15. He might have felt a poor millionaire.
27. Baruch left the impression that his affairs were dormant during his government stint, but in fact he didn’t entirely rest on his oars. In July 1918, for example, he exercised his right as a stockholder to subscribe $89,910 to a new issue of Texas Gulf common. In late 1918 and early 1919, he let it be known through his secretary, Mary Boyle, that he was unhappy with the amount of stock that was allotted him in another closely held venture, Cyprus Mines Corporation. His fellow stockholders obligingly contributed some more.
Eight
Poison-Pen Letter
Little by little, Baruch assimilated his money until it seemed not so much a possession as a trait, like his blue eyes. As far as he was concerned, he was an American, a southerner, and a Democrat, in that order, but others saw him first as a millionaire, and it was as a rich man that he entered public life, writing checks. He warmed up with a $12,500 contribution to the Wilson campaign in 1912. In 1914, when the Administration was trying to raise $135 million to lend to cotton farmers—a bump
er crop was unmarketable in Europe on account of the war—Baruch offered, if necessary, to subscribe $3.5 million. As a native South Carolinian he meant the offer sincerely but was relieved to find that it wasn’t necessary after all. One of his favorite public causes was the drive to foster military and industrial preparedness for war, and he pledged $10,000 to Major General Leonard Wood one day because the general mentioned that he needed that much to finish building roads at the reserve officers’ camp he was founding at Plattsburgh, New York. Out of sympathy rather than financial conviction, he subscribed to the Anglo-French war loan in the fall of 1915, held his bonds for a decent interval, and sold them at a loss. In 1916 he gave $35,000 to the second Wilson campaign and another $15,000 to help meet the party’s postelection deficit. After the United States entered the war, in 1917, he obliged another uprooted southerner, William G. McAdoo, the Secretary of the Treasury, by subscribing $5 million to help put the first Liberty Loan over the top.
Baruch dealt not only in money but also in the alternative political coin of favors. Once he prevailed on Charles F. Murphy, the boss of Tammany Hall, to secure a place for his friend Dick Lydon on the New York ballot as a candidate for a state judgeship. Murphy agreed, and he asked Baruch for a reciprocal good turn. A close friend of his, said Murphy, wanted a job in customs court, a federal bailiwick. He asked Baruch to find it for him, which, Baruch recalled, he did. Baruch was happy to oblige Colonel House, President Wilson’s adviser, in another help-wanted situation. In 1914, House’s brother-in-law, Sidney Edward Mezes, had his eye on the presidency of City College, which had become available the year before. Baruch, a trustee of the college, was on the board’s presidential search committee, and he did what he could for Mezes, then president of the University of Texas. In November it was duly announced (not by Baruch but by the chairman of the search committee, Frederick Bellamy) that Mezes had been hired.[28] In 1916, when Baruch wanted to resign from the board, House asked him to stay, “on Mezes’ account.” By that time, William McCombs, the trustee who had led Baruch into the Wilson camp in the first place, had had a falling-out with the Administration, and House feared reprisals on Mezes. A few years later the colonel hoped that Baruch would push the board to grant Mezes a leave of absence so that he might be free to head up what became known as the “Inquiry,” a secret postwar planning body. The leave, which was unpaid, was approved, although what part Baruch played in the deliberations is unrecorded.
Besides contributing money and favors, Baruch made a name for himself in politics by booming the idea of preparedness. He liked what he saw of the Wilson Administration in regulatory policy and praised the Federal Reserve System, which had just been founded, but his influence in economic matters was small. Starting in 1915 he devoted his public energy to preparing the United States for war and especially for industrial mobilization. That summer he issued a defense dictum from the point of view of the stock trader: “The only thing that prevents a bull market is our unpreparedness. The most important thing before us financially, commercially, and economically is the immediate organization of an adequate military and naval defense. . . .”
Unluckily for the letter of that statement, nothing at all, least of all unpreparedness, was standing in the way of a bull market. On July 9, which was the day after his remarks appeared in the Journal of Commerce, the Dow Jones Industrial Average made a low that was not to be seen again for almost two and a half years. But nobody knew it at the time, least of all the editors of the New York Call, a socialist newspaper, who took offense at what seemed the bald connection between blood and property. “Boiled down to a few words,” they wrote, concerning Baruch’s Journal of Commerce prediction, “Mr. Baruch plainly states that capitalism is the cause of war; that if one nation gets any ‘possessions,’ the rest regard it as immoral and illegitimate appropriation, and will fight to replevin it. . . .” (The year before, the Call had taken non-ideological note of Baruch in the course of reporting another accident involving his chauffeur. A sixty-seven-year-old carpenter was run down, the paper said, and Baruch himself had gone to the hospital to look in on the man and to insist that he get the best medical care available.) Undeterred, Baruch continued to call for more ships, guns, and troops and also for a plan to organize industry in case of war. Returning from vacation in 1915 he laid out his ideas to McAdoo, who relayed them to the President, who in turn asked to see Baruch. An appointment was set up, and Baruch dropped in at the White House on September 8. It was his first look inside the place. According to one newspaper account, he stayed for an hour and talked about a “Businessman’s Commission” that would synchronize plans for industrial mobilization. He elaborated on his ideas in a letter to House that fall, adding a proposal to raise a reserve army of college graduates.
After his meeting with Wilson, Baruch became, or appeared to become, an Administration insider, and when Hugo Spitzer, Gulf Sulphur’s occasionally unpaid superintendent, was waylaid in Austria and needed diplomatic help to return to America, it naturally fell to Baruch to see what could be done for him. Whether he got action is unknown, but his colleagues at least believed him capable of it. (Einstein wrote to Allen, one Gulf Sulphur stockholder to another, “Mr. Baruch happens to be in close touch with the present administration on several matters which he mentioned to me, which I do not care to repeat in correspondence.”)
Early the next spring, Baruch was campaigning again, and he wrote to House in April to press for the creation of a Mobilization Committee. His heart leaped at the reply, which was signed by President Wilson: “Mr. House has handed me your letter to him of April twenty-fourth about what I may briefly call industrial efficiency in case of need to mobilize all the resources of the nation. I remember the stimulation I received from our conversation about the matter and it has ever since been at the front of my thoughts. We are now trying to give shape to the matter and I heartily value your generous interest and cooperation.” Baruch was back at the White House in June. The President and he discussed mobilization and also politics and the loyalty of certain Cabinet officers, which Baruch made brave to question. He suggested, for one thing, that Wilson get rid of his outspoken Secretary of the Navy, Josephus Daniels, and replace him with John D. Ryan, the copper man, who happened to be a friend of Baruch’s. (Daniels, when asked a year later by the President what he thought of Baruch, answered that he found him “somewhat vain.” According to Daniels, Wilson fired back: “Did you ever see a Jew who was not?”) In August 1916 a pale copy of what Baruch and others had been urging was passed into law. A Council of National Defense, consisting of the Secretaries of War, Navy, Interior, Commerce, Labor, and Agriculture, was provided to direct the home front in time of war. An Advisory Commission was established to help out the Council. Baruch read the news impassively. His main concern was a case of rheumatism, which racked him. (He was suffering on Long Island that summer. He’d been in Europe when the war broke out, in August 1914, had sailed for home in September and hadn’t been back in Europe since.) On October 12, he opened a paper to read that he was a member of the Advisory Commission. The news took him aback.
His fellow commissioners comprised the van of the preparedness movement: Howard E. Coffin, an engineer who preached standardization and efficiency and who was vice president of the Hudson Motor Car Company; Dr. Hollis Godfrey, a like-minded engineer who was president of Drexel Institute; Daniel Willard, president of the Baltimore & Ohio Railroad; Julius Rosenwald, president of Sears, Roebuck & Company; Dr. Franklin H. Martin, director general of the American College of Surgeons; and Samuel Gompers, president of the American Federation of Labor. Baruch was identified as “the New York banker.” He was concerned about the euphemism and worried about what the public would think when his true speculative credentials came to light. In a self-effacing way he called on House to say that he was sorry he’d been named. In the privacy of his diary, House waspishly wondered about it too: “I doubt his sorrow as much as I doubt the wisdom of the President’s making the appointment. He might have
chosen a more representative business man.” The response from Wilson via House to Baruch was that it was time to put up or shut up. Baruch, as he himself wrote, put up. To ensure his timely arrival at the first meeting of the Advisory Commission on December 6, he chartered a special locomotive to speed his private railway car to Washington from Hobcaw.
No sooner had Baruch tasted some of the pleasures of public life than he suffered its worst torment. All in the space of a few weeks he was attacked by rumor and by poison-pen letter and was called on to defend himself before a congressional investigating committee. In the anxiety of waiting to testify, he lost twelve pounds.
What caused the crisis of Baruch’s reputation was the collapse of the bull market that had taken him by surprise in 1915. The economic consequences of the carnage in Europe smiled on America. In 1915, International Mercantile Marine Company, a shipping line, earned a profit ten times greater than the annual average of its profits in the prior decade; in 1914 it had been insolvent. In 1916 US Steel Corporation earned more than it ever had before, and crude oil was quoted at $2.75 a barrel, its highest price in twenty years. The Dow Jones Industrial Average, which on July 9, 1915, made a low of 67.88, by the autumn of 1916 cleared 100.
Because the market was so high and the public so bullish, a few professional operators were nervous. Jesse Livermore sold stocks short in November. Eugene Meyer recalled that, in December, he didn’t like the market and had told Baruch so. “All the women in town, at every house you went to, were talking stocks,” said Harry Content. On November 21, the Dow Industrials reached what proved their apex for the time being, 110.15 (an advance of no less than 62 percent from the low of July 1915).