by James Grant
Baruch cabled his thanks and apparently asked for particulars, because next day Mitchell reported that the motors were being looked on favorably and that a rise in Anaconda (of which he was a director and in which his bank held a sizable investment interest) was “imminent.”
While mulling this information Baruch went for a walk on the moor with General Pershing, who had visited him for some gunning and was about to leave for France. (Next month in New York Alexander Woollcott would broadcast the report that the general had been superficially wounded by an errant shot from the gun of Richard P. Lydon, another guest of Baruch’s at Fetteresso; Baruch would say that if such a thing had happened he certainly would have heard about it, but, as he didn’t, it hadn’t.) As Pershing and he walked, Baruch related later, an uncomfortable feeling came over him. He wrote that he made preparation to leave and set off ahead of schedule for New York. If he turned suddenly bearish at the castle or aboard the Berengaria en route, however, there is no record of it. On September 5—two days after the Dow Jones Industrial Average made what would prove its 1929 high and two days before he sailed from Southampton—he bought 5,400 shares of American Radiator, 1,000 of Bethlehem Steel, and 1,300 of United Corporation, in round numbers $500,000 worth of common stock.
It is unclear, furthermore, that he left Scotland suddenly or with any sense of alarm. There was a regular board meeting of the B&O on Wednesday, September 18, which he attended; the Berengaria docked in New York on Friday the thirteenth. A few days after Baruch landed, Mitchell boarded ship for Europe, and Baruch lightheartedly cabled him bon voyage:
FROM MY WINDOW I CAN HEAR THE REFRAIN OF THE SONG THAT THE LITTLE BANK BOYS ARE SINGING. OH AIN’T WE GLAD CHARLIE IS GONE AND HOPE HE GETS LOST IN A FOG BANK.
Baruch was home for less than two weeks when he bought 5,000 shares of Lehman Corporation and also made a notable short sale. In joint account with Swope, he sold 20,000 shares of Radio Corporation of America, which were worth almost $2 million. Radio was one of the bull market’s pillars, but Swope and he thought that the speculative house could stand without it. (Until just then Swope had been tipping the stock to Irving Berlin, but he was considerate enough to drop a broad hint on the eve of his short-selling campaign that the songwriter ought to get out.) The prices of most stocks, however, not just Radio, were falling. On September 27 the Dow declined by 11 points, to 345. This was still, relatively speaking, rarefied, but it was some 9 percent below the September 3 high. Baruch decided to sell some National Acme; he got 33 for 1,300 shares, about 3 points less than he had paid in August.
For the time being that was the full extent of his cautionary selling. On the first day of the fatal month of October, he bought 1,400 shares of a copper-mining outfit on the London exchange called Rhodesian Congo Border and sold short another 3,000 shares of Radio. On October third the Dow suffered a sharp, premonitory setback of more than 14 points, to just below 330. The decline continued on the fourth, but Baruch, trading for the rise, bought 2,600 shares of Anaconda, one of Mitchell’s stocks, and 700 shares of American Smelting. By the same logic he also bought 2,700 shares of Radio to begin to cover his and Swope’s short position.
On October 8, he nimbly sold his Anaconda for an $8,000 trading profit and took a small loss in American Smelting. He continued to sell Radio short. On the fifteenth, Mitchell, from London, declared that “. . . American markets generally now are in a healthy condition,” and on the sixteenth, Irving Fisher, the Yale economist, ventured that soon-to-be-immortal prediction that “stock prices have reached what looks like a permanently high plateau.” If Baruch didn’t agree with those sentiments, neither did he take violent exception to them. On October 21, the Monday before Black Thursday, Swope and he bought 17,700 shares of Radio, thereby winding up their short-selling operation and netting $100,584.22 each. They had done most of their selling at 93 or so and had bought all the way down to 83. Although Baruch had warned Swope that they would no doubt buy, or “cover,” too soon, he could have had no idea how premature they would be. On November 13, Radio would change hands at 28¾. In 1932 it hit bottom at 3⅝.
On Tuesday, October 22, Pershing cabled anxiously from Paris:
CONFIDENTIAL. WHAT DO YOU THINK OF THE GENERAL SITUATION. WOULD YOU HOLD SELL OR BUY ANACONDA. IF SELL WHAT WOULD YOU BUY. PLEASE REPLY.
An answer was forthcoming immediately:
I WOULD STAND PAT. BARUCH.
Baruch himself bought 1,800 shares of American Smelting and 1,400 of Warner Brothers.
In his previous Wall Street experience, panic had been foreshadowed by monetary trouble or conspicuous bankruptcies. So far there were no such portents. Indeed, as Richard Whitney, then vice president of the Stock Exchange and later president, would observe, an oddity of the Crash was the virtual absence of distress in the money market; and as for nonagricultural bankruptcies, the National City Bank letter, as late as December 1929, could say with all apparent confidence, “There are no great failures, nor are there likely to be.”
Baruch had himself changed no less than economic conditions had. Before the war, as a speculator and venture capitalist, he had been more or less his own agent. By 1929, however, he was a full-fledged establishmentarian: corporate director, former high government official, political and public figure; the kind of man to whom Nicholas Murray Butler, president of Columbia University, would naturally turn to fill out a Committee of Five to plot a course for the university’s future. In a revealing message to Winston Churchill in December 1929 concerning some Rhodesian copper properties in which they were both interested, Baruch would say, “. . . it is time somebody led the way in the development of great enterprises upon which the comforts, benefits, and prosperity of great numbers can be based rather than upon any selfish motive.” The implication was that mere moneymaking was unworthy of the enlightened entrepreneur, and that Baruch, as a responsible businessman, was predisposed to a view of constructive optimism. At all events, he had no inkling that Wednesday, October 23, would be much different from Tuesday; certainly none that the character of trading on Thursday would deteriorate in such a way as to constitute a market boundary between what had gone before and what was to follow.
On that Wednesday the market was shockingly weak. Radio fell 11¾ to 68½, and Telephone gave up 15 to 272. One hundred shares of Adams Express, an investment trust whose prospects, as far as the public was aware, hadn’t appreciably changed in the prior twenty-four hours, traded at 440, down 96. The Dow was down by 21, or the equivalent of a 300-point break from the 5,000 mark. This was, in fact, a sharper break, opening bell to closing, than occurred next day, the infamous Black Thursday, but on Thursday all pretense of orderliness gave way to panic. It was to check this hysteria that a procession of bankers filed into J. P. Morgan’s office at 23 Wall Street shortly after noon to plan a show of support. A few minutes later the bankers filed out and the press was ushered in. Thomas Lamont, the former Peace Conference official and the personification of Morgan mastery, remarked casually to the newsmen, “There has been a little distress selling on the Stock Exchange, and we have held a meeting of the heads of several financial institutions to discuss the situation.” Lamont declined to go into details, but at about 1:30 p.m., Richard Whitney, acting in the capacity of Morgan’s chief floor broker (in which he was a successor to Arthur Housman), strode onto the floor to make large purchases for the account of the bankers. This he did with such panache that the rout was stemmed. Baruch, operating coolly for himself, bought 2,000 shares of Anaconda, 400 of Warner Brothers, and 1,000 of American Smelting. (This was his last recorded purchase of Anaconda until December 16, 1931, when its price was 9½; on that Black Thursday he paid 104½.) At the close the Dow was below 300 but not much below it, and it was down by fewer than 6 points from Wednesday, which seemed a very long time away.
At the top of the front page of Friday morning’s Wall Street Journal (adjacent to a report on a surge in earnings at Bethlehem Steel Corporation and directly above a hortatory essay addressed
to cotton growers, “Raise Better Cotton”) was an editorial on the stock market under the portentous headline, “A Turn in the Tide.” The piece explained that weakness in the industrial average on Wednesday had confirmed a drop in the rails on Monday and that, according to the theory of the late Charles H. Dow, a bear market was under way. In the penultimate paragraph, William P. Hamilton, the anonymous editorialist, remarked that “there are people trading in Wall Street and many all over the country who have never seen a real bear market,” and who, presumably, would be in for further disagreeable surprises. Baruch, who was hardly one of those tyro optimists, nonetheless chose to buy, and to buy in a company that he knew, American Smelting. On Friday he picked up 5,500 shares, thereby boosting his purchases of that stock in the past week to 8,500 shares, or roughly $835,000 worth.
Prices were up a bit on Friday and off only slightly on Saturday. On Sunday, Broad Street was lined with the double-parked cars of clerks who had gone to the office to send out margin calls. (Thus the New Era was, for the moment, intact; the messengers of bad news could still afford to drive to work.) Faith in the bankers’ pool still ran high, and the talk was of a rally on Monday.
Instead there was a catastrophic decline, the Dow plunging by more than 38 points, or 13 percent, to close at a hair above 260. Baruch did some selling—3,000 shares of Standard Brands, 2,500 of American Smelting, and $23,000 worth of French government bonds—but also, in counterpoint, some buying of Rhodesian Congo Border in London. At his Fifth Avenue home that evening he gave a dinner party for Winston Churchill, who was visiting America as his guest and losing his own money in the market. Also among the diners were both Swopes, Herbert and Gerard; Mitchell of National City Bank and Albert H. Wiggin, chairman of Chase National Bank; Charles Schwab of Bethlehem Steel and John D. Ryan, president of Anaconda Copper; Eugene Meyer; and Thomas Lamont. Evidently absent was another banker friend of Baruch’s, George F. Baker, chairman of First National Bank, who, as a result of the day’s declines in only three stocks—his bank, Telephone and Steel—was poorer by what the Times surmised to be $14,737,000.
Late in the evening, after Mitchell offered a facetious toast to “my fellow former millionaires,” talk turned to serious schemes for rescuing the market. The sense of the group was conveyed in a night letter from Herbert Swope to his fellow speculator John Hertz:
THINK I AM ABLE TO SEE CHANGE IN SITUATION FOR BETTER SO AM MAKING DETERMINED EFFORT TO HOLD ON STOCKS BELIEVE YOU SHOULD TOO. CONSENSUS OF OPINION OF MEETINGS AT BARUCH’S . . . WAS THAT THOSE WHO STAND PRESSURE WOULD NOT ALONE BE DISCHARGING PUBLIC DUTY BUT WOULD BE CONFERRING BIG FAVOR UPON THEMSELVES WITH CERTAINTY OF RECOVERY OF STOCKS WHOSE VALUES UNDOUBTEDLY FAR GREATER THAN TODAY’S MARKET REGARDLESS OF HIGH OR LOW QUOTATIONS IN PAST. ARRANGEMENTS MADE FOR BIG POOL TO [O]PERATE. HERE IS SOMETHING IMPORTANT: TOMORROW MAY SEE BEGINNING OF REAL OPERATION IN WESTERN UNION. PLANS BEING MADE TONIGHT OR TOMORROW TO ORGANIZE BUYING POWER. BECAUSE OF ALL THIS AND TAKING ADVANTAGE OF YOUR WILLINGNESS TO DO SO AM LEAVING MY WESTERN UNION INTACT AT HARRIS WINTHROP. I DISCOVERED DISTINCT CHANGE FOR BETTER TONIGHT IN THAT MEN WERE TALKING AGAIN ABOUT MAKING MONEY INSTEAD OF MERELY LOSING MONEY.
Baruch’s guests were premature, except, perhaps, for Wiggin, who happened to be heavily short of the shares of his own bank and who therefore had a vested interest in calamity. On unprecedented trading volume next day, Tuesday, October 29, the Dow shed another 30 points. Anaconda lost 8½ points, to 85; American Smelting dropped 6, to 84. On the Curb Exchange, Goldman Sachs Trading Corporation, which Swope, the previous March, had tipped at 119, plunged by 25 points to close at 35. Sensing that what he saw (or didn’t see; the tape was two and a half hours late) must be a selling climax, Baruch bought 1,000 shares of Smelters and 5,000 of US Steel. (No doubt Schwab at Baruch’s home had repeated the gist of his remarks to the American Iron & Steel Institute the prior Friday, namely, “In my long association with the steel industry I have never known it to enjoy a greater stability or more promising outlook than it does today.”) On Friday, Swope reported to Hertz:
REAL BELIEF WORST IS OVER.
Two days later the former editor’s net worth had shrunk to minus $2,345,000.
Baruch too thought that things were on the mend. About that time he told a director of Lehman Corporation that the market was cheap, and that he, Robert Lehman, had a fiduciary obligation to get out of cash and into common stocks. (Happily for all concerned, Lehman resisted this counsel.) He advised his friend George Armsby, a California businessman, on October 30: “But we have gotten our minds and also prices of stocks down to a level where we can do business with real confidence. Business will probably be bad enough for the next sixty days, but it won’t last long in this country. Just long enough for us to get a good investment market and a strong situation.”
All the while Pershing was standing pat uncomfortably in Paris. He cabled on November 6 (the Dow had fallen by 29 percent from October 22 when Baruch urged patience), asking that his margin account be guaranteed; Baruch cabled back assurances. Next day, when prices rallied smartly from early losses, Baruch was moved to wire John Morron with a forecast:
LOOKS LIKE ALL TECHNICAL AND FORCED LIQUIDATION ABOUT COMPLETED. ONLY THING UNPLEASANT IN SIGHT IS PRESENT AND PROSPECTIVE DECLINE IN BUSINESS WHICH WILL BE BAD BUT WILL BE MUCH EXAGGERATED AS THE BULLISHNESS WAS EXAGGERATED SIX MONTHS AGO. HOW HYSTERICAL BUSINESS MEN WILL NOW BECOME REGARDING BUSINESS YOU CAN JUDGE AS WELL AS ANYONE BUT BUSINESS CANNOT REMAIN VERY BAD IN THIS COUNTRY LONG.
To Churchill, who had sailed home with heavy losses, Baruch cabled, on November 15:
FINANCIAL STORM DEFINITELY PASSED.
Baruch and his wife and three children and two of his friends, Richard Lydon and Senator Key Pittman, were at Hobcaw in Christmas week when fire broke out in the main house. The party escaped safely with some valuables, but the old planter’s house was destroyed. In 1930 Baruch ordered a new place built of brick and steel, but construction was delayed in November by a second fire. This run of bad luck provides an allegory, although an inexact one, of the financial history of the Depression. Whereas a new house did rise up more or less promptly at Hobcaw (with ten bedrooms, each with its own fireplace and bath, or more plumbing, as the joke went, than in the rest of the state of South Carolina combined), the stock-market fires seemed perpetual. The ashes smoldered, were raked clean, and pronounced cold, but still flames broke out. To switch metaphors, in the Crash, prices had fallen like hailstones. In the long ensuing liquidation they floated to earth like leaves. Watching them, people were ruined.
For the short pull, Baruch had been right in his cable to Churchill. Temporarily, in mid-November, the worst was over. But after rising to almost 300 in April 1930, the Dow fell to 212 late that June. About a year later, after the failure of the Kreditanstalt in Austria, with the average at 128, John Morron inquired of Baruch:
WILL YOU USE YOUR INFLUENCE TO SECURE ME AN APPLE STAND IN FRONT OF YOUR BUILDING.
As was by then customary, a period of fleeting strength and optimism followed, only to lead to still lower prices. In mid-December 1931 the Dow alighted at 74. At 41.22, on July 8, 1932, it stopped going down. This was 89 percent below the pre-Crash high and the lowest reading since June 5, 1897, when Baruch, not quite twenty-seven, was cleaning up in American Sugar Refining.
Now in his early sixties—richer, wiser, better connected—he had wound up on the wrong side of perhaps the greatest move in American market history. The problem was strategic, not tactical, for he could still bring off the neat trade (he and Meyer, for example, had taken 4 points in 2,200 shares of Southern California Edison in a rally in early 1930). Having the means to hang on, and expecting a better day, he waited; but the days grew worse. In several past crises he had profited by buying what panicky people had thrown overboard. It turned out this time that the alarmists were right.
It must be emphasized that the available trading records for 1930 and beyond are meager. At least they show a sharp curtailment in tradi
ng and, contrary to the rumors that were credited at the Hoover White House, little or no short selling.[47] When, in March 1930, George Armsby wrote to ask for a stock tip, explaining that he needed some money to pay his late mother’s doctor bills, Baruch obliged with the confidential information that American Smelting’s earnings were running at 60 percent of the 1929 rate, but that if the price of the stock got below 70, he planned to buy some. (That year, it got as low as 37½.) Early in June 1930, he purchased blocks of Radio Keith Orpheum, Public Service Company of New Jersey, and Coca-Cola for the account of Cary Grayson. In September Baruch himself sold 1,000 shares of Westinghouse and 2,000 of General Electric. On the other hand, later in 1930 he bought approximately $100,000 (at par value) worth of the bonds of the unsteady Interborough Rapid Transit Company and 3,700 shares of Warren Pipe & Foundry. On October 24, he wrote Churchill that business had reached its nadir. At a B&O directors’ meeting on January 21, 1931, he seconded a motion to raise the president’s salary.
Baruch bore his losses stoically, confessing only to a few friends that he had suffered at all. “I can tell you,” he wrote Senator Joe Robinson, in November 1930, “that the drop in my securities has been very severe, but I can still live in comfort and peace as I have done before. But I may not be able to help out in many of the directions I have heretofore until the ship floats anew on the incoming tide, which, of course, it will do some time.”[48] The tardiness of that tidal movement evidently prompted some introspection. A memo to himself on the basics of investment and speculation, dated only 1930, was found among his papers. It went as follows:
PERSONAL EQUIPMENT
SELF-RELIANCE: Do your own thinking. Don’t let your emotions enter into it. Keep out of any environment that may affect your acting on your reason.
JUDGMENT: Consider all the facts—meditate on them. Don’t let what you want to happen influence your judgment.