by James Grant
“It is a pretty fair-sized one; but I have done—do I have to tell here what I have done before?”
“Oh, no.”
“If you ask me the question I will answer it.”
“The committee will not press it. They appreciate the intrusion into your private affairs.”
“I appreciate that, but I am willing to answer every question.”
“We are dealing with a public necessity in a private way.”
“I will say that I have often been short of this amount of Steel.”
“Often?”
“Yes, sir. I have been short a good many times a good many shares of stock, but you see there was only one kind that you could express your activity in and only one that you could get out of.” In other words, the market in US Steel provided him the greatest latitude for buying and selling.
There was one more question on everybody’s mind, and Whipple respectfully backed into it.
“I do not know whether the committee would think the amount of that profit is material, even if you felt disposed to give it, but it occurs to me that, in certain aspects, and perhaps in an examination of gentlemen alike who did profit by these transactions the question should be put.”
Baruch had no objection. He said: $476,168.47. (Jesse Livermore supposedly earned twice as much.)
Before the questioning closed, the committee doubled back to something that Baruch had mentioned earlier. He had testified that he did, indeed, call two Washington officials, Warburg and McAdoo, but that his calls had nothing to do with the stock market or a peace note. He said that he was passing on a recommendation for a man to fill a directorship at the Federal Reserve Bank of New York. Now the committee asked who had suggested that he telephone.
“Mr. E. M. House,” he said, smiling.
The witness exited in triumph and awoke, on the morning of February 1, to an editorial about his work in The New York Times. It was headed: “He needed no Tips or Leaks.”
The villain of the peace-note affair turned out also to be its victim. He was William W. Price, an affable, overweight golf-playing columnist for the Washington Evening Star. A pioneer White House correspondent who began hanging around the presidential quarters in the second Cleveland Administration, Price had taken a sideline job as a correspondent for a couple of Chicago brokerage houses at $25 a month. At 11 a.m. on the day the rumors flew in Wall Street, the Washington press corps had been briefed on the American note by the Secretary of State, Robert Lansing, but was held to secrecy until midnight. Price hadn’t been present at the briefing, but had heard of the communiqué and had flashed the news to Chicago. (J. Fred Essary, a reporter for the Baltimore Sun, had similarly notified E. F. Hutton in New York.) The congressional investigating committee received Price’s name in heartbreaking circumstances. A young daughter of his had discovered some unexpected entries in his bankbook and had snitched to a woman who had passed on the information to Lawson. On the witness stand Price said miserably, “. . . The Star, a great paper, may misunderstand what I regard as a mere private side matter.” It isn’t known what the Star made of it, but Price, the same year, took a job on the Washington Times.
As for Baruch, when he was publicly charged, he had resolved, first, to clear his name, and, second, to have nothing more to do with politics or politicians. So brilliantly did he succeed in the first resolution that he decided to ignore the second.
28. Besides being related by marriage to House, Mezes was also a friend of David F. Houston, who had preceded him as president of the University of Texas. Houston went on to become Wilson’s Secretary of Agriculture, and he praised Mezes lavishly. A historian of City College writes of Mezes’ appointment: “He had been strongly recommended for the City College post by a group of influential educators [including Charles W. Eliot, president emeritus of Harvard University]. And, most important, he had powerful friends with political influence.”
29. But the word was common enough. In 1916 more taxpayers designated themselves “capitalists: investors and speculators” than any other occupation listed on the income-tax form. In all, 437,036 returns were received by the Internal Revenue Service that year; about 20 percent, or 85,465, were filed by capitalists; fewer than 1 percent, or 2,992, were filed by civil servants. Capitalists accounted for 32 percent of the income-tax take; “dealers and merchants,” the next most forthcoming occupational group, provided only 12 percent.
30. What Baruch apparently meant was that he was short of Canadian Pacific during that period. But it was an ambiguous remark, and at least one publication construed it to mean that he was perennially short of the stock. James Warburg, son of the Federal Reserve member, seized on that interpretation, or on a similar one, as evidence of Baruch’s financial recklessness.
Nine
Captain of Industry
Just as Baruch reached his financial maturity in the McKinley bull market, so he hit his political stride in the First World War. In both cases his timing was impeccable. In the first instance, he owned stocks in a rising market. In the second, he was present at the creation of the twentieth-century American state.
Having made a fortune in Wall Street under a system of low taxes and limited government, Baruch entered public life to help install a regime of relatively high taxes and intrusive government. When he arrived in Washington the public debt was less than $3 billion, personal income tax rates were trifling, and national economic planning was alien to American experience. On his departure, in 1919, the public debt totaled $25 billion, tax rates in the top bracket had climbed by more than tenfold to 73 percent, and federal control of economic life was a firmly established precedent.
War is a dragooning proposition, and in America, as in other belligerent powers, the divergence between the professed liberal aims of the fight and its workaday conduct was ironically wide. In the name of liberty, the United States government conscripted troops, censored the mails, took over the railroads and telegraph, lines and fixed the price of wheat. A sign of the times was a questionnaire that arrived in the mail one day at the home of Baruch’s father from the Chronicle Magazine.
The magazine asked Dr. Baruch whether, as a German immigrant, he would be willing to pledge his allegiance to his adopted country. If not, the editors wanted him to know that his response, or lack of one, would be forwarded to the Justice Department for appropriate action. Dr. Baruch dutifully reaffirmed his loyalty, and his wife, in conversation, began to disown her parental bloodline altogether. “There’s not a drop of German blood in my body,” she would say, drawing herself up straight. (President Wilson, ignoring genealogy, had a basket of huge chrysanthemums sent to the Baruchs on their fiftieth wedding anniversary in November 1917.) The nation’s obsession with the loyalty of immigrants, aliens, and political eccentrics led to the formation of a Committee on Public Information, a federal body staffed with leading progressive journalists, which sought to elicit the name of “the man who spreads pessimistic stories . . . , cries for peace, or belittles our efforts to win the war.”
If it was odd that writers signed on in an agency to control free speech, it was no more or less curious that Baruch, an investor and speculator, should help to suppress free markets. He did so, full time, early in 1917, devoting himself to the transformation of capitalism into a kind of war socialism. This experience he called the greatest of his life.
After his brush with the peace-note leak investigation, Baruch sold his seat on the New York Stock Exchange and most of his common stock (with the exception of his Gulf Sulphur, Alaska Juneau, Cyprus Mines, and Atiola, a tungsten mine, the shares of which were unmarketable), and left instructions with Miss Boyle to contribute his residual dividend income to the Red Cross. By this time, his fortune had reached about $10 million, and he invested some three quarters of it in Liberty Bonds. He proceeded to Washington without Annie and the children and took rooms at the Shoreham Hotel. His first job was chairman of the raw materials and minerals committee of the Advisory Commission of the Council of National D
efense.
Washington in 1917 was still a small town, and Baruch, who was usually the tallest and best-looking and richest man in any company in which he happened to find himself, naturally made a self-assured raw materials chairman. Unbureaucratically, his first step was to try to organize the commodities side of the defense effort along the lines of supply and demand. The supply side comprised the miners and producers, many of whom Baruch knew personally, and whom he set up in advisory committees, from aluminum to zinc. On the demand side were the various government agencies, which proved harder to organize. As far as the thing could be done, Baruch thus lined up supply to meet the government’s vast emergency demand.
In peacetime, supply and demand met automatically, at a price, but in wartime it was Baruch’s idea that prices should be controlled in order to reduce civilian hardship and to deprive businessmen of an undeserved profit. The Administration reasoned that if soldiers and sailors were sacrificing their lives, businessmen ought at least to relinquish their dividends. That argument, however, failed to meet the objection that prices convey information, and that the distortion of economic information through price control sows mischief just as the twisting of political and military information does via censorship. Although no comprehensive price and profit controls were installed in World War I, the government inveighed and coerced under a system that Eugene Meyer Jr. aptly called the “involuntary voluntary” method.
A case study in that technique was described by Baruch in his autobiography. He was, he wrote, attending a White House reception when a military aide approached, saluted, and informed him that the President would like to have a word with him. Baruch, wondering what he had done wrong, followed the officer to the President. As the aide saluted again and withdrew, Wilson proceeded to describe a special assignment that he wanted Baruch to tackle. It seemed that a private syndicate had purchased some Austrian ships with the idea of selling them to the United States government in the event of war. The syndicate, perhaps not unreasonably, expected a profit for its trouble—after all, it was risking its capital to conserve scarce vessels until such time as they would be needed most, and if there weren’t a war, it stood to lose money—but the element of gain in the matter offended Wilson. Attempts to frustrate the syndicate had so far proved unsuccessful. Now, he told Baruch, “You use all the influence you think the President has, but get those ships.” If Baruch savored the irony of one speculator being sent to foil others, he failed to record it. His account continues:
It was 9:58 p.m. when I left the White House. Arriving at the Shoreham . . . , I began telephoning the people who owned those Austrian ships. One was in Washington, the others in New York. I roused several of them out of bed that night, and managed to impress upon them the determination of the government to have the ships without profit to the syndicate. I made them see how unwise it would be to oppose the President in this affair.
Next morning I called the President. I had my watch in my hand as the White House phone rang. It was 8:58, eleven hours to the minute since I had left there, when I got Mr. Wilson on the wire. I informed him I had the Austrian ships, without profit to anyone. He was surprised, and complimented me on accomplishing a difficult task with such dispatch.
Although he was out of practice at taking instructions, Baruch turned out to be an ideal subordinate. For one thing, he was irrepressibly cheerful, and the bureaucratic setbacks that would have gnawed at a brooding man—for instance, the loss of coal from his raw materials domain to a separate Coal Administration in 1917—failed to defeat him. (On such occasions, Baruch was prone to quote Bob Fitzsimmons to the effect that a champion has to be able to take it in order to dish it out.) For another, he had a drive for action. Mark Sullivan, the journalist, wrote about this side of Baruch to a friend in the spring of 1917:
He is always ready to compromise, or change the program, or do something different—only get something done. He is a nice fellow, a little naïve, a little overeager, but not at all offending. . . . He is quite on fire with what he is doing, and is so fertile in initiative and so energetic that he is likely to go a long way. It would be a useful thing for his friends to surround him with half a dozen very methodical private secretaries to follow him around and tie up the loose ends, for he is essentially a dashing mind and plunges at it; . . . This very boyish up-and-comingness of his, the obvious pleasure he has in his new game, serves to disarm opposition.
In time one young man, Edward Corcoran, was hired to do the work of the half dozen that Sullivan proposed. Sometimes a document turned up missing at the office—Baruch at first kept no files—and Corcoran would be dispatched to the Shoreham to search the pockets of his boss’s suits. Although Baruch suffered the usual drawbacks of being a Jew from Wall Street, his money was a compensating advantage. When, for example, the Advisory Commission was denied public funds with which to set up offices, Baruch himself rented a floor of the Munsey Building, instructing his secretary that if complications arose to buy the building whole.
One reason that the government was reluctant to furnish space for the Commission was that nobody was exactly sure what it was supposed to do. Its charge was to advise the Army and the Navy in purchasing decisions, to keep watch over business, and to help synchronize mobilization. But business was used to free markets, and the Army, which sorely needed advice, was loath to take it from civilians. (The Army supply service, declared General Hugh S. Johnson, who had been a part of it, “was just a cluster of jealous and ancient bureaus.”) The Advisory Commission did produce some organizational results—it successfully threw its influence behind the formation of the Shipping Board, Emergency Fleet Corporation, and Food Administration, for instance—but industrially speaking it counted for little.
To Baruch this was an unsatisfactory state of affairs, and as early as May 1917 he tried to convince the President of the need to appoint one man to head up an efficient supply bureau. It turned out that the man was Baruch and the bureau was the War Industries Board, but it was in the financial side of things that the future of the home front turned, in which department Baruch, his Wall Street credentials notwithstanding, had little to say.
It developed that the Administration’s plan was to raise politically expedient sums in taxes, to inflate the money supply as necessary, and to mask the effects of inflation through selective price controls. Broadly speaking, the work of suppressing inflation was given to the War Industries Board. It fell to the new Federal Reserve Board, to the Treasury Department, and personally to William G. McAdoo, the Secretary of the Treasury and chairman of the Board, to inflate. The irony of that arrangement was that it was also McAdoo who was instrumental in getting Baruch his job in the anti-inflationary side of the government. Thus the two allies worked cordially at cross-purposes.
Of the two officials, McAdoo had the easier time of it, because inflation had become a tidal force. In 1916, when gold poured into New York in payment for Allied arms and matériel, wholesale prices jumped by no less than 37 percent. After the start of hostilities, the Treasury ran enormous deficits which it borrowed to cover. In fiscal years 1918 and 1919 it spent some $43 million a day, more than any other warring power and enough (as the War Department subsequently observed) to have financed the Revolutionary War for a thousand years at eighteenth-century prices. Part of this money was raised by noninflationary means—via taxation and borrowing from people’s savings—but another part the Federal Reserve printed. Thus from 1917 to 1920, the level of credit created by the Federal Reserve grew by $3 billion, to a level unseen again until the 1930s. Whether a given increase in the money supply is inflationary depends on the rigor of business, just as whether a given number of calories is fattening depends on the metabolism of the diner. In the case of America in World War I, the extra money was, on the face of it, inflationary, because civilian production fell. Inasmuch as people had more money to spend on fewer things, the cost of living went up. Thus retail prices, which had risen by 17 percent in 1916, rose by 17 percent again in 1917 and
by 15 percent in 1918. Probably the moderation in the rate of rise owed something to the WIB’s informal price controls, as did the reduction in the rate of gain in wholesale prices to 12 percent in 1917 and 6 percent in 1918 (from the astronomical 37 percent of 1916). But after controls were relaxed, prices climbed all over again.[31]
For reasons more closely related to Baruch’s arrival in Washington than to his departure from Wall Street, financial markets suffered a sinking spell in early 1917. Interest rates on long-term, high-grade bonds, for instance, rose from about 4 percent in January to 5 percent in October. It followed that the prices of existing bonds, including the ones that Baruch had just bought, fell. (When Charles G. Dawes, chairman of the Liberty Loan Drive, was informed that some people thought the 4 percent interest rate on Liberty Bonds skimpy, he suggested: “Anybody who declines to subscribe for that reason, knock him down.”) That much was only to be expected, since inflation from time immemorial has caused higher interest rates. What was puzzling was the action in stocks. By late 1917, the market was just about where it had been on July 30, 1914, when the New York Stock Exchange was closed against waves of European selling. “Easy money, and industrial activity wholly unparalleled in the country’s history,” wrote Alexander Dana Noyes, The New York Times’s learned financial editor, “were accompanied by financial markets such as in other days would have indicated financial panic.”
One cause of the bear market in stocks was the new bull market in government. Although the regulation of business was nothing new, the reach of government was extended in the war, and investors were struck not so much by the volume of trade (so great was the volume and so uncoordinated were the federal agencies that eastern rail traffic by late 1917 was almost at a standstill) as by the way it was being taxed and constricted.
The natural retort to critics was that there was a war on, but after the Armistice the debate was joined, and after the next war, an economist offered a novel alternative to the then customary regime of wartime controls. Ludwig von Mises, a professor of the Austrian school, prescribed a first step of financing as much of the cost of a war as possible out of taxes, thereby reducing civilian consumption and expanding the purchasing power of the Army and the Navy. Since incomes would suffer and the demand for civilian goods would decline, businessmen would spontaneously converge on the growth market of armaments. Baruch had always said that voluntary conversion would be too slow. Von Mises countered that if prices were allowed to run their course, sizable profits would accrue to the firms that converted fastest. For that reason, he maintained, conversion would be lightning fast, and production would soar. Because business would be governed by market forces, no government planning apparatus would have to be built (except to ensure that the government itself knew what it wanted), and if the war were financed by savings and taxes, there would be little or no inflation. The Wilson Administration, however, objecting to the principle of profit in wartime, was led to intervene heavily in the market, deciding (when it could decide) how much ought to be produced, by whom, and at what price.