Bernard Baruch

by James Grant

Inasmuch as war had been bullish, it seemed to follow that peace would be bearish, and when the German Chancellor, Theobald von Bethmann-Hollweg, made a conciliatory speech on December 12, 1916, the market slipped. On December 19, the British Prime Minister rebuffed him, but the market declined again. Late the next day, Wednesday, December 20, a rumor circulated that the United States had addressed diplomatic notes to the warring powers. This too sounded bearish, and in the last hour of trading the decline resumed. It came out the next day that the Administration had indeed been in touch with the belligerents in a peaceful vein, but in a separate statement the State Department warned that continued violations of American neutrality had brought the United States to the brink of war. The stock market, fearing both war and peace, was beside itself. More shares of stock changed hands more frenziedly than on any day since the Northern Pacific corner of 1901. The price of Mercantile Marine, measured from its 1916 high to the December 21 low, was cut in half. Bethlehem Steel, which that year had traded as high as 700, closed at 489. (“Prices,” sang a reporter on The Wall Street Journal, “melted away like the snows of the Pacific Northwest before the Chinook wind.”) Although the bottom fell out on the twenty-first, there had been well-informed selling late the day before. To be wiped out in the ordinary way in the stock market is shattering; to be robbed is intolerable. Thomas W. Lawson, the slightly balmy writer and stock trader, crystallized public resentment when he charged that the note had been leaked and that important men had profited from it. “The good old Capitol has been wallowing in Wall Street leak graft for 40 years,” he said, “wallowing hale and hearty.”

  The Lawson charges yielded indignation of an intense, but nonspecific, sort. He himself refused to furnish names, and although the House of Representatives passed a resolution to empower a committee to try to get to the bottom of the matter, no evidence was immediately forthcoming. Lacking facts, the members fell back on rumor, and on January 3, 1917, on the floor of the House, Representative William S. Bennet, Republican of New York, named the first suspect:

  I will state . . . what the rumor is. The rumor is that Mr. Barney M. Baruch, a member of the Council of National Defense [sic], was the man who was responsible for this information getting to Wall Street, and that thirty minutes before the President’s message was made public, he sold, on a rising market, in Steel, by the way, fifteen thousand shares of Steel common short. That is the rumor in New York if the gentleman wants names.

  There was a round of applause.

  Presently more names were bandied, including Joseph P. Tumulty, private secretary to President Wilson; Otto H. Kahn, the Kuhn, Loeb investment banker and friend of Baruch’s; and the President’s brother-in-law, R. Wilmer Bolling, a Washington stockbroker. Baruch was mentioned a second time in a letter to Representative William R. Wood, an Indiana Republican, which was signed “A. Curtis,” of New York.

  Curtis, whoever he was, wrote as follows:

  Bernard B. [sic] Baruch of this city unquestionably had the news of Secretary Lansing’s note as early as Saturday, Dec. 9. The note was dated Dec. 11 and was not dispatched until Dec. 12. [The dates were wrong.]

  How Baruch got it I am not prepared to say, but a gentleman of my acquaintance makes the positive statement that he saw Mr. Tumulty and Mr. Baruch breakfasting together at the Biltmore Hotel in this city on two or three occasions coincident with the penning of the note and its secret dispatch.

  That Baruch at this juncture smashed the market heavily and in all directions admits of no doubt and can be easily demonstrated in this way:

  At his offices, 111 Broadway, he has a system of private telephone lines to various brokerage houses. Before he has an opportunity to remove these wires you must obtain a list of them. If he is compelled to supply you with a list I would check it by obtaining an identical list from the New York Telephone Company and the Western Union Telegraph Company, these being the two companies that supply the wires.

  Having obtained this list, you can obtain from all the brokerage houses connected thereby a transcript of all orders executed for his account within the period in question. This investigation should cover not only his personal accounts, but any secret accounts, such as accounts carried by “numbers” or any fictitious names, all of which, as the broker’s books will show, are controlled by him or guaranteed by him.

  If the brokers refuse this information, Congress has the power to compel it. The Stock Exchange also has the power to enforce its members to produce their books and accounts, and as the rules of the Stock Exchange are sufficiently broad and elastic to cover every departure from ethics in the business methods on the part of its members, an appeal to the Governors of the institution will no doubt elicit the desired information. Many reputable members of the exchange are anxious to assist you in running to earth this most unsavory scandal.

  There is a great deal more in this than you imagine, and if you can once get your machinery in motion I am in a position to say that you will be supplied with all the necessary information.

  Very truly yours,

  A. Curtis

  After reading the letter into the record, Representative Wood blandly admitted that he hadn’t the faintest idea who Curtis might be. Various Curtises denied authorship (an Allen Curtis was tracked down by a sergeant at arms in Boston on a Sunday morning and was subpoenaed to testify in Washington; he also denied responsibility). A clue suggested that the correspondent might be David Lamar, the “Wolf of Wall Street,” then in an Atlanta prison, but the trail went cold. Rumor had it that Baruch’s profits in the leak ran to $60 million.

  Kahn and Tumulty were outraged by what had happened to them and issued denunciations of Wood. Baruch replied dispassionately, wiring The New York Times from Georgetown, South Carolina, on January 5:

  I RECEIVED NO ADVANCE INFORMATION OR INFORMATION FROM ANY SOURCE WHATSOEVER REGARDING THE PRESIDENT’S PEACE NOTE NOR DID I HAVE LUNCH [sic] OR CONFER WITH MR. TUMULTY AT THE BILTMORE OR AT ANY OTHER PLACE.

  Baruch was new to public obloquy, knew that he spoke badly, and was frightened by the prospect of a congressional interrogation. Talking it over with Meyer in New York, he mentioned that he was going to retain a lawyer, former US Senator John C. Spooner. Meyer asked him to think twice about it, because Spooner had political influence that an innocent man wouldn’t need. (Apparently he wasn’t retained.) Meyer made another suggestion. He said that when Baruch was asked the inevitable question about what he did for a living, he should tell the simple truth:

  Tell them you’re a speculator; that you buy them if you like them and sell them if you don’t like them. It doesn’t matter whether you [don’t] have them when you sell them, and buy them later, or whether you buy them first and sell them later.

  When the time came to testify, on January 9 in Washington, Baruch felt haggard from insomnia and loss of weight. His enemies were happy to believe the worst about him, and there was a depressing failure to rally around him by his friends. As Baruch took the stand, the chairman of the House Rules Committee, Representative Robert L. Henry, of Texas, asked him to state his name, address, and occupation. Meyer, who was in the gallery providing moral support, at Baruch’s request, held his breath. “Bernard M. Baruch; my business address 111 Broadway; occupation, investor and speculator. Anything further?” The word “speculator,” which to some implied an outright confession of guilt, caused a stir.[29]

  Baruch answered questions without rancor or sarcasm. He testified about his trading at the time of the alleged leak, filling in such details as he could from memory. He made a mild statement denying the gossip about him and said that he didn’t know who “A. Curtis” was. Presently the committee steered the conversation to his $50,000 campaign contribution, which prompted some banter with a Republican congressman:

  “Our party would be almost willing to adopt him if he promised to keep up his gait of subscription.”

  “You have got some pretty good givers in your party,” said Baruch. “But the more the merrier.”

 
; In response to questions Baruch provided some details about his office paraphernalia. He said that he kept two Dow Jones tickers, one for stock prices and the other for news, and had a number of direct telephone lines to brokerage houses. In that last detail, the “Curtis” letter was correct. (What didn’t come out was that the walls of his office were lined with pictures of himself aboard motorboats.) He said that he hadn’t executed an order on the Exchange in “a great many years.” He testified that he did no brokerage business and did not buy stocks on margin.

  He reported that he kept his money in five banks, of which his favorites were the Central Trust and the Guaranty Trust. He had five principal brokers—Fred Edey & Company, Lansburg Brothers, A. A. Housman & Company, Baruch Brothers, and H. Content & Company. “They are licensed brokers, are they?” a congressman asked. “So they say,” Baruch said dryly.

  Short selling was in bad odor at the time, not only in Washington but also among the more high-minded type of financier in New York. For his part, Baruch said that he saw nothing wrong with it, and he disagreed with a suggestion of Henry’s that it ought to be abolished.

  On the contrary, Mr. Chairman, I believe that if you had a market without short selling, that when the break comes—of course, trees do not grow to heaven overnight—and when securities go up as we see them, and when they start to fall down there might be a crash that would engulf the whole structure, and there is also this, if I may add, that the short seller is the greatest critic of the optimist, who continually calls the attention of the man who is long on securities or the individual who might become long, of the defects, you might say, of these securities, and you might in that way keep people from buying securities at extraordinary high prices.

  On another regulatory digression, Henry proposed that every buyer and seller of stock be required to divulge his name along with pertinent financial data in order to discourage the gambling interest. He amended the idea with a deferential “perhaps you may be right, and I may be wrong,” to which Baruch cordially replied, “You may be right, and I may be wrong.” Several courteous minutes later, Baruch was excused. He was recalled to testify at the end of the month.

  Lawson, meanwhile, who had started it all, provided a raft of names, including Paul Warburg, a governor of the Federal Reserve Board; Treasury Secretary McAdoo; and Malcolm McAdoo, the secretary’s brother, who said that he hoped the secretary would punch Lawson in the head. The proceedings took on the lunatic gaiety that was Lawson’s imprimatur, and when Baruch returned to testify on January 30, he had a lighter heart. On instructions, he brought an audited record of his trading in the days preceding publication of the President’s note.

  To begin with, on the second appearance, the committee was curious about where Baruch got his financial information.

  The committee’s counsel, Sherman L. Whipple, asked, “Did you have anything besides the ticker service?”

  “No, sir.”

  “Did you have any representative in Washington?”

  “No, sir.”

  “As to your personal habits of conducting your operations, did you carry them on from your office or by telegraph?”

  Baruch had trouble hearing. “Yes, sir.”

  “Did you avail yourself of means of information that might be in the brokers’ offices whom you used?”

  “No; I do not pay attention to information that comes [sic].”

  “I did not quite catch that.”

  “I say that I do not pay any attention to rumors.”

  So much for the master speculator’s estimate of brokerage-house research. Whipple, consulting the trading records, noted that Baruch had bought 5,000 shares of US Steel on December 11, which was the day before the German Chancellor had mentioned peace. He sold them on December 12 at a loss.

  “I know I bought them at 23 and a fraction [meaning 123 and a fraction], and I remember that when I gave the order [to sell] on the tape they were 20½, and I got 19 and a fraction. I have a very distinct recollection of that.” In other words Baruch expected to get a higher price than the one his broker got. In an aside he ruefully said his name: “Content.”

  “That was a loss for that day’s operations?”

  “Yes, sir. Sometimes it happens that way.”

  “I am very sorry to bring out that shameful fact, Mr. Baruch, because the world believes you never made a loss.”

  “That is the only annoying thing about this investigation,” said the witness, enjoying himself.

  The Chancellor’s speech led Baruch to sell his Steel and also Ray Copper, Chile Copper, and Cuba Cane Sugar preferred. He testified that he was negotiating to buy a block of railroad securities when he got wind of the speech, and that he broke off talks at once. (He owned no munitions stocks, or “war brides,” because he didn’t want to run the risk of compromising his position as a spokesman for preparedness.)

  At the time the only stock of which he was short—stock he had sold first with the expectation of buying later on, at a lower price—was Canadian Pacific.

  “I am speaking of December 12,” said Whipple.

  “Yes; I was short of that all the time.”[30]

  On the twelfth, Baruch sold what he already owned. On Wednesday, December 13, he sold what he didn’t own—23,400 shares of United States Steel Corporation, almost $3 million worth. To put that transaction in perspective, Baruch accounted for 6 percent of the day’s trading in Steel and 1 percent of the overall activity on the New York Stock Exchange. He would have sold that on Tuesday too, he explained, but he was out of the office most of the day. He elaborated for the committee:

  But then, when I read of the von Bethmann-Hollweg peace note, so called, to the Reichstag, which was given to the world, and which was, after the greatest war in civilization, a declaration of peace—at least, to my mind—and I think history will record it so, I realized what that meant to all of the great countries, particularly in connection with business and finance, and I realized, or thought, and I do realize still, that people’s minds which heretofore had been bent on nothing but war would think of peace, because this was a declaration of peace, and that people would think about what would come with peace, and I thought it would be reflected in our business, trade, and financial conditions, and my mind worked to a conclusion that made me believe that men of intelligence ought to act quickly and sell securities.

  Something else led him to sell, he said. The Japanese had taken steps to close their stock exchange on news of the German initiative, and there were no “cleverer” people in the world than the Japanese. They had seen peace coming. He added, sorrowfully, that they weren’t allowed to sell short in Japan. The dolorous note in his voice raised a laugh.

  On Thursday, December 14, he sold another 1,600 shares of Steel short, which brought his line up to 25,000 shares. He had sold at prices of around 119 a share. On Friday, the fifteenth, he began to “cover,” that is, to buy back what he had already sold in order to complete the transaction. He bought 14,000 shares at about 110, which netted him something on the order of $126,000. He had been wrong on history but right on the market.

  The opening of business on Monday, December 18, found him short of 11,000 shares of Steel. He sold several thousand shares more that day, but he did so as prices were rising, which took some nerve. Whipple asked him why he did it.

  “Because,” said Baruch, “I wanted to hear the next great thing, and that was the Lloyd George speech; and I felt that his reply would be just about what he did say.”

  Some of the speech crossed the ticker about noon on Tuesday. Baruch remembered standing in his office, watching the words print:

  The first part was just as anyone might have expected, that Lloyd George was not going to listen to peace, and England would not consider it under any conditions, and so on. As the market went up I sold some stock. I kept watching the ticker all the time, and as the message came out, I can see the break in the ticker now— “But he leaves the door open for peace.” I was standing at the ticker, and as
soon as I came out I sold stock just as tight and hard and fast as I could.

  By the end of the day he was short of another 28,400 shares, raising his short position to 43,400 shares, or some $4.7 million worth. Again Baruch was asked whether he had received any advance word on developments in Washington. None, he said, and submitted as proof his next market move, which was to buy 17,900 shares on Wednesday, December 20. This was the day before the Administration’s peace note smashed the market.

  “It was a very unfortunate judgment . . . ,” Baruch said. “A man who would have known [of the forthcoming note] would have sold all day long. He would not have stopped from 10 o’clock to 3.”

  On December 21, the day of the collapse, Baruch said that he had covered the rest of his short sales, and bought some other stocks to boot. The low price of Steel was 100 and change, but he said that he hadn’t gotten it. “I never get [in at] the bottom or out at the top.”

  Baruch by now had taken charge of the hearing, and he wondered whether the committee would like to know what he’d bought.

  “I do not think the committee would be interested unless—at least nothing occurs to me,” said Whipple. “There is no reason for stating them. . . . But you did buy other stock?”

  “Yes, sir. When the market is very weak I want to buy things which I believe in the most from their intrinsic standpoint, and when the market goes down I try to sell those things which I think will have the least intrinsic merit, or if their technical position is the least valuable as to trading possibilities of any other security.”

  Whipple, stumbling over a question he had on short selling, marveled at the complexity of that maneuver.

  “It is such a simple transaction,” said Baruch.

  More or less convinced of his innocence, the committee began to satisfy its curiosity.

  “Was this a large transaction for you?”

  “I have done larger ones.”

  “So you would speak of it as a major operation but not the largest that you have ever dealt in?”