by James Grant
This was in August. In October a mild recession began, and in November Baruch made his first short sale, 3,000 shares through his brother’s firm, Sailing W. Baruch & Company, at a price of 150. He sold short another 12,000 shares in January 1927 at prices as high as 155.
As a bear, Baruch hoped for bad news and a drop in the stock, but February brought a rise. Conceding partial defeat, he bought 8,000 shares, paying up to 160¼. He stuck to his guns to the extent of a short position of 7,000 shares.
In March there was more optimism and a new record high for the stock. In midmonth, Baruch resumed buying—covering his shorts, cutting losses—but changed his mind toward the end and began selling again. He got off 26,000 shares at up to 176 per share, but the market went against him again. He bought at higher prices.
This cycle of selling short, hoping for the worst, but buying at rising prices, continued through July until he bought his final share at 213½. The previous November he had sold short his first share 63½ points lower. His losses in the campaign ran to $405,432.50. “I told you some time ago that I was out of step with the market,” he confessed to General Pershing in March, “and I have not gotten back in step since; so I can’t give you any advice that is worth anything.”
In May 1928, as the averages pointed straight up and preparations were being made for the autumn’s presidential elections, Baruch moved his office from midtown to downtown. At about the same time he moved his household from West 52nd Street, just off Fifth Avenue, to Fifth Avenue at 86th Street—from midtown, uptown. (He and Annie had been thinking about a move to that block for some time; they bought the first two lots north of 86th Street in 1909, but sold them again in 1915.) His new Wall Street address, which was the thirty-first floor of the Equitable Building, 120 Broadway, gave what he feared was a clear signal of a shift in career from public service to speculation. A public-relations dilemma was presented: Was a man who dealt chiefly in cash, not on margin, who eschewed such razzle-dazzle as large-scale pools, but who traded both on the long and short side and kept accounts at twenty-six separate brokerage houses, as he did—was such a man “in the market”? (Possibly this dispersal of business was intended to protect his confidentiality; at H. Hentz & Company, a firm that Herman Baruch headed and through which his brother channeled considerable business, clerks were discouraged from uttering the name of Bernard Baruch lest they start a market rumor. Back-office functionaries referred to him by account number, which was 19.) Baruch thought not, and he fostered the half-truth that he had moved downtown to cultivate his money but not to speculate. The Times ingenuously reported that “he does not intend to do trading in the market.”
It was true that Baruch was no longer a visible trader. He had long ago resigned from the New York Stock Exchange, he had made a mark in public life, and, since November 1927, he had been a member of the board of directors of the Baltimore & Ohio Railroad (Willard had, after all, encouraged him). Having taken that directorship, he felt duty-bound to join the board of the American Smelting & Refining Company when Simon Guggenheim asked him to in the spring of 1930.
As Baruch, at the age of fifty-seven, was finally entering corporate life, Herbert Bayard Swope, at forty-six, was leaving it. One day in the fall of 1928, the editor turned to his wife and said, “I don’t want to be a hired boy any longer.” With that he resigned from the World, a very wealthy former newspaperman. The bull market had made him rich, and Swope was not such an ingrate as to cast aspersions on it. When, early in 1929, Thomas Chadbourne expressed some doubts about how high prices had gone, Swope reassuringly told him, “Don’t kid yourself. We are going to take a pleasant ride, so climb up in the driver’s seat.” Trading gregariously, Swope kept a joint brokerage account with John Hertz, the Yellow Cab and car rental magnate; with Albert D. Lasker, the advertising man; and with Baruch. Swope’s principal stock-trading asset was the people he knew, starting with his brother, Gerard, president of General Electric, and including such eminent corporate figures as John J. Raskob, Charles M. Schwab, and Walter P. Chrysler. The last-named trio, in fact, good-naturedly cut him into the earnings of a pool in Radio Corporation of America in the spring of 1929 even though Swope hadn’t put a cent of his own at risk. In a form of reciprocity, Swope fell into the gay habit of placing large bets in the names of his friends without bothering to tell them until they had won or lost. He bought a thirteen-acre estate in Sands Point, Long Island, complete with a seven-car garage, all-weather tennis court, a quarter mile of beach front (shored up by steel sheet that he had ordered direct from the president of Bethlehem Steel, Eugene Grace), and a salt-water pool. There was a telephone by the pool.
Swope was jobless in 1929, but in the stock market he had an engrossing and, while it lasted, lucrative avocation. While passing the winter in Palm Beach, he left instructions with his secretary, Helen Millar, to check in with Baruch and Morton Schwartz at noon every day for the latest market news and to pass along anything interesting to him in Florida. In February Baruch wired him that he was, for the moment, uncertain:
UNDERSTAND CORNER PEOPLE [i.e., J. P. Morgan & Company] THINK MARKET IS OVER. PERSONALLY SITTING TIGHT BECAUSE I THINK FEDERAL RESERVE DOES NOT UNDERSTAND CONDITIONS AND STILL HAVE BELIEF IN MY INDUSTRIAL RENAISSANCE.
Sometimes it was Swope who passed along information to Baruch, as in an enthusiastic wire of March 21, 1929:
ACTUAL INSIDERS SAY GOLDMAN SACHS DUE FOR ANOTHER FIFTY-POINT RISE. THIS COMES SO STRAIGHT I WANTED YOU TO KNOW IT. REGARDS, HERBERT.
Although Goldman Sachs Trading Corporation indeed went higher that day, by 1⅜ to 119, it went lower starting the next day. Seven months later it would strike 32. On March 22, Swope was back again:
FOR YOUR INFORMATION . . . GENERAL ELECTRIC FIRST QUARTER WILL SHOW MORE THAN A FORTY PERCENT INCREASE. UTTERLY ASTOUNDING. IT SIMPLY FORCED ME TO BUY SOME. LOVE, HERBERT.
Despite the presumptive authority of this tip, Gerard Swope a month later revealed that his brother had been wide of the mark. Profits were up by only 23 percent.
On the day Baruch learned that Swope liked GE, he also read in the papers that the Federal Reserve Bank of New York was worried about excessive credit creation and the possibility of bust following boom. The bank’s warning left him cold. For one thing, he believed that the decision to lower the discount rate to 3½ percent from 4 percent in the summer of 1927 (just as he was winding up his campaign in General Motors) was responsible for a good part of the speculative rise, and that it ill behooved the Federal Reserve to deplore what it had so signally helped to foment. A few days later, when Charles E. Mitchell, president of National City Bank, reiterated that the policy of his bank was to lend to stockbrokers, investors, and speculators at a price, come what may, Baruch was sympathetic. Writing to Mitchell, he called the 1927 discount-rate reduction “false and unwise” and criticized what he took to be the Anglophile motive of the Federal Reserve:[44] “I go a little further, perhaps, than you would,” he told Mitchell, “in saying that I think the Federal Reserve System has no right to enter into agreements with foreign governments for the sale of gold for that is the business of private banks and bankers.”
Despite such misgivings and the occasional ill-timed short-selling campaign, however, Baruch was fundamentally bullish on business. Starting in the mid-1920s, he thought he could see the shape of a future “industrial renaissance.” There would be huge prosperity, he said, if the reparations dilemma were solved and free trade defended. In the event, reparations were never untangled and protectionism impeded the international flow of goods, but Baruch clung to his idea. Early in 1929, on a visit to Hobcaw, Frank Kent got a full briefing on the renaissance theory, which he distilled into a series of newspaper columns. The immediate basis of Baruch’s optimism, as it emerged in Kent’s articles, was a forthcoming United States mission to Germany. Headed by Owen D. Young and J. P. Morgan, the delegation would seek a final reckoning of what Germany owed and the mobilization of international capital to aid in its payment. A bond issu
e would be floated and the proceeds applied to financing German debts to the former Allies. The Allies, in turn, would be able to pay what they owed the United States.
Kent reported that, in the estimation of financial bigwigs, the success of such a scheme would ignite “an industrial boom incomparably greater than any that have preceded it.” Indeed, the stock market, he wrote, was merely anticipating it, and he went on to paraphrase Baruch’s ideas:
It is the belief of the big boys that Young and Morgan will do this job and that these results will follow. They think the thing is “all set” now. They believe that unconsciously the market is already discounting the coming “industrial renaissance,” as one “man of large affairs” calls it. What he and others like him see ahead is a prosperity greater than that of the last five years.[45]
Late in March stock prices (that is, the thirty components of the Dow Jones Industrial Average) stopped going up. There was a break from about 320 to 300 and sideways movement through April and May. It was in June, just as the market began to climb again, that Baruch issued what would prove his least prophetic forecast of the era. Talking with the publicist Bruce Barton, he emphasized the bullish implications of the reparations settlement that he saw clearly in the offing and praised the conduct of monetary policy worldwide:
For the first time in history [said Baruch], we have sound reason for hope for a long period of peace. For the first time, the businessmen of all nations are supplied with statistical information, together with some understanding of the laws of economics. For the first time, we have sound centralized banking systems in all the countries and close cooperation between those systems internationally. Because all these factors are favorable, and because of the universal stirring of desire and ambition to which I have already referred, I believe in the “industrial renaissance.” We are already seeing something of it in the United States.
When Baruch embarked on his annual European vacation late in June 1929 he was kept current on the market by Swope, who stayed home to speculate for the rise and accumulate a racing stable. In Paris a cable reported on the new yeast and baking-soda company called Standard Brands that Morgan was putting together, and to Carlsbad came a message about Armour & Company. In early August (locale uncertain, perhaps Fetteresso), Baruch received assurances that the prior day’s boost in the discount rate (to 6 percent from 5½ percent) by the Federal Reserve Bank of New York would do no real harm:
THINK GOOD SECURITIES ALRIGHT. FEDERAL RESERVE TOTALLY INCAPABLE OF UNDERSTANDING PUBLIC PSYCHOLOGY. ACTION WILL RESTRICT VOLUME BUT UNAFFECT REAL VALUES.
Sailing home aboard the Berengaria in September, it was Baruch who tipped Swope:
LEHAM NEW STOCK A GOOD THING,LOVE MAGGIE BERNIE.
Leham meant Lehman Corporation, a mutual fund that the banking firm of the same name was in the process of bringing to market; Maggie was Margaret, Swope’s wife.
According to his autobiography, Baruch saw the Crash coming and sold stocks in time to avoid getting caught in it. A biographer, who took no position on how, or when, he managed to sell, noted that his presumed investment sagacity in 1929 did perhaps more than anything else to advance his subsequent reputation for wisdom in economic matters.
Certainly he seemed none the worse for wear after the market broke. Early in November 1929, after the first convulsion, he suggested to Senator Joe Robinson that the government should prepare a public-works program in case of serious joblessness, and he was able to precede that advice with a campaign contribution of $1,000. (He mailed the check on October 29, as the Dow slumped by 30 points and many on Wall Street were answering, or refusing to answer, margin calls.) In December he gave $10,000 to the Federation of Jewish Societies of New York City, a large gift except in the relative terms of his own income, which would total $1,986,995.63 in 1929, including stock-trading profits of $615,786.31.
Nor in the sinking years that followed the Crash was he noticeably impaired. He still summered abroad, supported favorite causes, and made large political contributions. In the first week of August 1930 he was visiting Winston Churchill in England,[46] and in the second week of September he was home again (the Dow at 243 and falling; unemployment at 9 percent or so and rising), writing checks for $35.26 to the Riverside Ice Company and $594 to the Metropolitan Opera Company.
He contributed some $40,000 to the Democratic Senatorial Campaign Committee, and he was a principal backer of the Jefferson Islands Club, a Democratic haven in Chesapeake Bay. In 1931 he had an extra $13,000 for the South Carolina Food Research Commission to finance an investigation into the iodine content of his home state’s soil and truck crops. He lent handsomely to his friends and relatives, sometimes pressing money on people who hadn’t asked for it. He sent his cousin, Virginia Epstein, $100 a month after she came in to ask him for a loan for a friend of hers (she protested that she didn’t really need the money for herself, but it kept coming until Mary Boyle put a stop to it), and he contributed £100 to a fund that the friends of Winston Churchill had raised in order to buy the future Prime Minister “the best Rolls-Royce obtainable.” With Tom Yawkey, owner of the Boston Red Sox and a South Carolina neighbor, he distributed food to hungry people around Hobcaw. In the presidential election year of 1932 he spent $86,716.07 to maintain his office, which served as an unpaid Democratic research bureau. On July 18, 1932, less than two weeks after the stock market scraped bottom, Annie Baruch made financial preparation for a summer of collecting and touring in Europe by applying for a $25,000 letter of credit from the foreign department of Bankers Trust Company.
All this circumstantial evidence merely points to the conclusion that Baruch was as farsighted as he himself suggested. As he told the story and others repeated it, he was vacationing in Scotland when it dawned on him that not all was well in the market. Sailing early, he returned to America, sold stocks, and waited for the inevitable.
It would be interesting to know which stocks he owned late in the summer of 1929 and which he held, month by month, through the long liquidation; what he was worth at the top and bottom of the market and the disposition of his assets throughout the cycle. Not all the answers are at hand. Copies of his income-tax returns are available for 1925, 1926, and 1929, for instance, but not for 1927, 1928, or 1930 and beyond. While extensive and previously untapped, his brokerage-house records for 1929 may or may not be complete. For 1930–1932 they are obviously incomplete.
Even without all the facts, however, one is led to take issue with the man who was there. The weight of the evidence supports the conclusion that he didn’t sell out in time. A thoroughgoing industrial-renaissance optimist, he underestimated the gravity of the situation for months following the Crash and sold stocks only belatedly (so belatedly that his 1929 tax return showed a stock-trading profit: he hadn’t taken his losses yet). On the other hand, he also managed to stay out of “the Cleaners.” He was not overextended on margin, and he resisted the temptation to buy stocks heavily before the liquidation had run its course. Before the devaluation of the dollar he had the presence of mind to buy gold and gold-mining shares. He was not the Bernard Baruch of legend, but that was the only standard by which he can be said to have fallen short.
To regain the thread of the story: Late in August 1929 Baruch was in Scotland dressed in sturdy boots, sweater, and tweeds, carrying a shotgun and stumping about the moor looking for birds. The shooting was indifferent—where he thought there would be 1,600 brace of grouse, he and his guests killed only 306—and his mind was distracted by financial news. His mood was bullish, however, and he traded, via cable, from the long side. On the sixteenth of August he bought 700 shares of Silica Gel Corporation of Maryland at a shade under 30. He had bought the same stock in March and April at prices as high as 45; for in fact, as he had no doubt noticed, the strength of the averages had masked a weakness in the shares of smaller, less widely traded companies. (Indeed, from the point of view of breadth, or the ratio of advancing to declining issues, the market had been sinking since May 1928.) Fee
ling out of touch and in need of views of men on the scene, he cabled the chairman of National City Bank, Charles E. Mitchell, for advice.
Baruch had played bridge with Mitchell, had once invited him to Fetteresso for some shooting, and thought the world of him as a banker. His esteem was nothing casual. It had withstood a $1 million loss in 1927 when a Cuban sugar property that Mitchell had brought to his attention as a venture-capital investment failed. Mitchell, who himself had a big department-store head and a Lord of Creation manner, had made his career on the securities selling side of the bank, expanding its personnel from 4 to 1,400, setting up branches in fifty cities and successfully instilling the precept that prospective investors should be sought out by salesmen rather than the other way around. People called him Charlie before the Crash, and afterward, derisively, Sunshine Charlie. In his secular faith he was very much like Baruch. Both men believed in the future of America and in the potential for its great prosperity, except that Mitchell was an enthusiast, and he invested accordingly (and honorably if not wisely, for he lost everything in the Crash, refused to declare personal bankruptcy, and at length paid off his debts and built another fortune as the head of Blyth & Company, investment bankers). Thus it could have come as no surprise to Baruch when Mitchell cabled him optimistically in August 21:
GENERAL SITUATION LOOKS EXCEPTIONALLY SOUND WITH VERY FEW BAD SPOTS SUCH AS RUBBER. BELIEVE CREDIT SITUATION PRACTICALLY UNAFFECTED BY DISCOUNT RATE ACTION. MONEY SEASONABLY WEAK. SHOULD STRENGTHEN AS MONTH CLOSES. STRENGTH IN STOCK MARKET CENTERS LARGELY IN SPECIALTIES, WHICH IN MANY CASES SEEM UNDULY HIGH, WHILE THERE ARE MANY STOCKS, SUCH AS COPPER AND MOTORS AND CERTAIN RAILS THAT LOOK UNJUSTIFIABLY LOW. I DOUBT IF ANYTHING THAT WILL NOT AFFECT BUSINESS CAN AFFECT THE MARKET, WHICH IS LIKE A WEATHER-VANE POINTING INTO A GALE OF PROSPERITY. BELIEVE THERE IS LESS PESSIMISM AROUND THAN WHEN YOU LEFT.