by James Grant
Baruch’s professional acquaintance with the Guggenheim family began when Daniel, failing to reckon with the applicant’s mother, invited him to go to Mexico to buy ore in 1889. (Once Baruch asked Thomas F. Ryan for his opinion of Daniel. “He’s a big man,” said Ryan approvingly; “he bores with a big auger.”) Meyer Guggenheim, the patriarch, was a patient of Dr. Baruch’s and an occasional patron of the gaming tables in Long Branch, New Jersey. Some time after Meyer and his seven sons gained control of the American Smelting & Refining Company in 1901, Solomon, the No. 4 son, favored Baruch with some pertinent facts and figures on the company. Baruch bought the stock and recommended it to his friends.
The first sizable joint undertaking of Baruch and the Guggenheims was a mission in which Baruch negotiated for the purchase of a pair of West Coast smelting companies on behalf of American Smelting & Refining Company. He left for Everett, Washington, site of the Tacoma Smelting Company offices, early in January 1905 with the trusted Henry Davis and a lawyer from the office of William H. Page, the same Page with whom Baruch had had truck in the Liggett & Myers acquisition in 1898. A measure of Baruch’s growth in the intervening years was his rise from the station of agreeable young man on the St. Louis trip to chief negotiator and tactician for the Guggenheim brothers.
The first stockholder to be courted by Baruch was Darius Mills, a multimillionaire who kept an office in his own building on Broad Street in New York. Mills wore mutton chop whiskers, visited English country homes, and told charming stories of having slept under a wagon during the California gold rush. Such was his business perspicacity that a chain of low-price hotels that he founded as a philanthropic enterprise managed to return a small profit to the philanthropist. Mills owned most of the stock of the Tacoma smelter as well as a smaller interest in the Selby Smelting & Lead Company, in San Francisco, which was the Guggenheims’ second objective. When Baruch asked him for an option on his stock, the old man declined, but he left the door open and promised not to talk to the Rockefeller interests, who were also knocking.
Out in Washington, Baruch began talks with the president of the Tacoma smelter, William R. Rust, who happened to be a friend of Davis’. Baruch ventured a bid of $800 a share for his stock, Rust shook hands, and the rest of the stockholders, Mills included, fell in behind him. Negotiations for the Selby Company proceeded more slowly, word having leaked out that Baruch represent the Guggenheims. But thanks to Rust’s help and to the influence of Darius Mills, the Selby holders too appeared well disposed to a sale. Confident of a deal, Baruch climbed aboard the Overland for New York in early March. Shortly after his return, the Selby matter was closed, but the Tacoma deal was unexpectedly reopened. Three more weeks of talks ensued, Baruch participating from New York via telegraph. By late March, Rust and Davis had gotten the deal done, and Baruch opened negotiations of his own with the Guggenheims.
Baruch’s understanding with the brothers was that the Selby and Tacoma companies would be merged and recapitalized and that a block of the new stock, worth perhaps $1 million, would be his commission. Instead, Dan decided to absorb both organizations into the American Smelting & Refining Company. He invited Baruch to discuss his fee with the gifted and high-handed family lawyer, Samuel Untermyer. Baruch’s recollection of their meeting was as follows:
I told Mr. Untermeyer [sic] that was what I was asking for [$1 million, which he felt he had been promised] and declined to debate the matter. Mr. Untermeyer inquired if I intended to “hold up” the American Smelting & Refining Company.
Leaning across the table that stood between us, I replied, “No, Mr. Untermeyer, I had not thought of that until now.”
Then I said good day and left the room.
The question was referred to Daniel Guggenheim, who settled it characteristically. “If Bernie says he ought to get $1,000,000, that is what he will get.”
The check was made out in the sum of exactly $1,106,456.00. Baruch in turn wrote checks to Rust and Davis, each for $300,000 in thanks for their help. They were flabbergasted.
An obvious question is whether the Guggenheims offered Baruch his commission in the shares of the American Smelting & Refining Company. It is reasonable to suppose that they did and equally probable that he declined. At the start of the year, Smelters was quoted at 82. By mid-April, in part as the result of a bull pool that Baruch directed for the Guggenheims on the floor of the Stock Exchange, the price had cleared 120. Then, suddenly, the pool disbanded, or “realized,” and the price of the stock slipped. An explanation for the withdrawal of support was provided later. It was that Baruch had decided the price was high enough, and that no pool had the right to bid up a stock only to sell it to an unsuspecting public. He served notice on the Guggenheims that he planned to sell his investment holdings and to suggest to his friends that they sell too.
The brothers took umbrage at this information, perhaps because, as Baruch maintained, they were stock-market amateurs, or perhaps because they felt it rank ingratitude for the recipient of a seven-figure check to be anything but bullish on the parties who had signed it. At all events, the price of the stock resumed its climb, hitting 174 by January 1906. But just then the market gave way and Smelters sold off with the rest of the list. In the spring it touched 138½.
On Wall Street a rumor was hatched that the fall in the stock was caused by Baruch selling short. The story was untrue—Baruch, who saw nothing wrong with short selling in general, perhaps inconsistently drew the line at hammering the securities of his friends—and when it was credulously repeated by Solomon Guggenheim, Baruch called on him to set the record straight. When Solomon heard from his source that the rumor was unfounded, he apologized to Baruch.
It was Baruch’s settled opinion that nobody could know all investments thoroughly and that it was best to stick to what one knew best. For himself, he said that he had never understood commodities. “My self-confidence,” he confessed, “suffers a very real shock when I contemplate the sum total of my operations in coffee, sugar, cotton, and other commodities. . . . It always seemed to me, in fact it never failed where I was concerned, that what I bought suddenly became something else again when I paid for it, especially when I wanted to deliver it.” His most searing early experience in commodities was in coffee. He bought heavily in early 1905, just about the time he was headed west on the Guggenheim smelter mission.
He entered the market on the advice of Herman Sielcken, his wise counselor in the Amalgamated Copper affair. Sielcken was the largest importer of Brazilian coffee in the United States, and the authority with which he spoke on that commodity was absolute. He predicted short Brazilian crops in 1906 and 1907, in the first year on account of nature and in the second owing to a government scheme to curtail production. But there was a curse of abundance instead, and prices fell, from 7.65 cents a pound at the start of 1905 to 6.65 cents in December. Baruch, who had bought on margin, was bound to put up more earnest money with each drop of a fraction of a cent. To raise cash, he sacrificed a profitable position in the Canadian Pacific Railroad. Sielcken continued to express confidence.
Definitely, the market needed help, and the Brazilian authorities, in consultation with Sielcken, dreamed up a “valorization” scheme to finance the storage of surplus coffee. Loans were floated and warehouses filled but still the price fell. By early December it was less than 6 cents. When at last Baruch came to sell, his loss had mounted to $700,000 or $800,000. More galling, he was forced to admit that he had been misled by a man who had once shown him the immutability of the laws of supply and demand, that he had let his losses run, failed to face facts, and sent good money after bad. The experience literally turned his stomach.
Around Christmastime 1906 Baruch was distracted from the vicissitudes of the coffee market by the unexpected arrival of two visitors in his office. One of the men, well known to him, was William Crocker, the San Francisco banker. Crocker introduced his companion, Senator George Nixon of Nevada, president of Goldfield Consolidated Mines in Goldfield, Nevada. Nix
on was an incumbent United States senator but he was burdened with private business. “Nixon,” said Crocker, by way of introduction, “needs a million dollars and he’s good for it.”
The Goldfield property had been organized in November and promptly hailed a bonanza. It was the result of the merger of four mines, but Nixon decided that he needed a fifth, the Combination, right away. The price was $1 million down, in cash, and $1.6 million payable in a few months, in cash or Goldfield stock, as the sellers chose. Knowledge of the fact that Nixon needed money had depressed the price of Goldfield shares, which in turn exacerbated the senator’s financial predicament.
Baruch liked Crocker and he decided that he liked Nixon too. He talked to some friends, organized a syndicate, and raised $1 million. (Baruch’s warmth was fully requited by Nixon. “I haven’t a closer friend on earth than Baruch, and he is a good man to have on the property,” declared the senator in June.) A cashier’s check in that amount was drawn up for Nixon, who agreed to repay it by February 1908. As a further emolument, Baruch and his friends received an option to buy 1,000,000 Goldfield Consolidated shares.
Baruch next dealt with the psychological factor. He told Nixon to put the check in his pocket and take a table at the Men’s Cafe at the Waldorf. If somebody asked him about his money troubles he was to produce the check and drop the Baruch name. The senator complied. As expected the question was solicitously raised, and Nixon flashed the six zeros. Heads turned.
The senator’s next stop was Chicago to meet with the sellers of the Combination Mines. It was naturally in Nixon’s interest that they choose stock in payment for the final installments. It was in their interest too, if they could be led to believe that the price was going up. For reasons not entirely explained, they obliged, choosing stock then and there.[14]
The Nixon stratagem was endorsed by the Goldfield board and was duly ratified by the stockholders. Nixon was well pleased. Baruch, anticipating a bull market in the stock and a profit on his option, was also pleased. The main dissatisfied element was the miners. The Industrial Workers of the World, or Wobblies, which spoke for some of the Goldfield men, deplored the wage system and, indeed, capitalism. In particular, they opposed a rule that was instituted by management to halt the theft of high-grade ore. The rule held that miners must strip naked at the end of their shift and hop over a bar in order to dislodge any rock that might be adhering to their persons.
All together, 1907 was an unrepaying year. Earnings were a disappointment. The annual report was derided by the authoritative Mining & Scientific Journal as a “confused and inconsistent jumble of figures.” Ninety-one days of work were lost to strikes, and “labor relations” had deteriorated into pitched battles between armed men. Late in the year, the governor of Nevada appealed to President Roosevelt to send troops to Goldfield to quell, among other things, “the unlawful dynamiting of property.” Nine companies were bivouacked by Christmas.
In early August, before the US Army encamped, Baruch traveled to Goldfield to consult with the board of directors. He took some friends along, including his brother Harty and Count Roger de Perigny, a Parisian nobleman who had joined the Baruch syndicate and was curious about life in the American West. George Wingfield, vice president of the mine, was on hand when the contingent arrived at the station. Baruch, a fastidious dresser, noticed that Wingfield wore no jacket.
It being a warm evening, a man did not need a coat [he remembered]. Also, this made it easier for Wingfield to get at the five revolvers he carried, two in front, two behind, and one on his left breast. George explained that the four serious-looking men who accompanied him were Pinkerton detectives, and said something about labor troubles. One of the Pinkertons rode with us to the company’s building. There Wingfield explained that everything would be all right if we kept the lights off in our rooms.
One of the items on the business agenda in Goldfield was Baruch’s stock option, which had caused some indignation in the press and second thoughts among stockholders. In the Nevada Mining News, Nixon was portrayed as a kind of financial nitwit and Baruch as an evil genius. It was said that Baruch, in league with powerful interests, was insinuating himself into control of the mine. (“There is a rumor that the Rothschilds, Belmont, Ryan, and I don’t know but what the King of England and others have sent experts here and are about to secure control of the Consolidated Mines,” said Nixon in May. “There is no truth to the rumor whatsoever.”) As for the stockholders, the longer that some of them thought about Baruch’s option, the madder it made them. On account of the strikes, all-around mismanagement and unlawful dynamiting, however, the price of the stock failed decisively to clear the $7.75 mark, at which Baruch could have cashed in. By late September a compromise was struck. Baruch agreed to forgo the option for the consideration of 100,000 shares. It was further agreed that the $1 million loan would be repaid mainly by stock. By 1908 Baruch reportedly owned more shares than Nixon, Wingfield, or Henry C. Frick, the last named an important Goldfield investor who was better known for his exploits in steel. Gradually labor peace was won, production increased, and the mine came into its own. Stock that had paid a dividend of 20 cents a share in 1907 yielded 90 cents in 1909.
The notion that Baruch was panic-proof—that he unfailingly profited from market breaks—is disproved by his own records of the one episode in which his records survive, 1929. For the rest, what remains is recollection. In his autobiography he wrote that he had sold stocks in advance of the so-called Rich Man’s Panic of 1903. And also in 1907: “Like many other people I had made preparations, not for a panic but for a financial stringency. I had increased my cash balances at the Manhattan Company. Moreover, I had told Stephen Baker [president of the bank] that I might want my money in cash at any time.” [15]
The 1907 Panic affected Baruch intimately because it struck both the stock and copper markets. The price of the red metal, which began the year at 25 cents a pound, by early autumn had sunk to 15 cents. Mines were closed in Butte, Montana, by the Amalgamated Copper Company and in Mexico by the Guggenheims. Even the banking news was copper-bottomed. Preceding the Knickerbocker Trust Company into trouble that October was the Mercantile National Bank, the officers of which were prominent in a failed attempt to corner the shares of United Copper Company. Utah Copper, which had raised $9 million in the capital market (some of it from Baruch) but had only started production, was making heavy weather of it. Late in October, Baruch received a telegram from Charles MacNeill, the president. The message was, send cash.
MacNeill, according to Baruch, wanted $500,000, which by everyday working-capital standards was the earth and sky. On June 30, the company had kept a bank balance of only $35,803. Its customers owed it $90,580. It owed its suppliers $18,887. (One of the larger balance-sheet items was an inventory entry called “copper in transit”: $425,597.97.) Furthermore, half a million dollars was a vast sum for that particular time. On October 24, money was lent on the Stock Exchange at the distress rate of 100 percent. J. P. Morgan was hard pressed to round up a bankers’ pool of $25 million.
Even so, Baruch was able to oblige MacNeill. He wrote that he had the money boxed and shipped express to Salt Lake City, and that he charged the nominal rate of 6 percent, which MacNeill insisted on bumping up to 20 percent. With some leftover cash, Baruch bought Utah Copper cheap in the market.[16]
In that tumultuous autumn—when Morgan, aged seventy, assisted by the United States Treasury, virtually saved the banking system—Baruch was moved by a sense of duty. As a rising financial personage, he felt it incumbent on himself to fall in with Morgan to check the tide of liquidation. One night he lay awake rehearsing what he would tell the great man. He would appear at his door and announce that he wished to lend some money to the pool he was raising. Morgan, flashing his beacon eyes, would ask how much. Baruch—Baruch the Stock Exchange governor and investor, not the young man in the Waldorf crowd who had done all the short selling—would say, a million and a half, cash. It would be a very large loan: some banks had p
ut up less. But in the light of morning Baruch’s native caution asserted itself and he made his contribution anonymously, through the Manhattan Bank. (Arthur Housman, the chronic bull who had helped do Morgan’s dealing on the floor of the Stock Exchange, was spared the ordeal. He died, after a brief illness at his country home in Babylon, Long Island, on August 21, at the age of about fifty-two. Baruch and Sailing were among his pallbearers.)
A stock that Baruch had accumulated in the preceding panic year of 1903 was the Rubber Goods Manufacturing Company. It was also in 1903 that Middleton S. Burrill, Baruch’s mentor from his Housman days, joined the Rubber Goods board. It is possible that (a) Burrill joined the board because Baruch owned the stock or (b) Baruch invested because Burrill was on the board. Baruch liked to keep posted on companies in which he’d put his money, and Burrill was in a position to brief him authoritatively on Rubber Goods. In any case, rubber appealed to Baruch’s imagination. One day he proposed to Daniel Guggenheim that they pool resources, buy control of Rubber Goods, and turn it into something along the lines of the Standard Oil Company. Guggenheim said he’d think about it, but he thought too long, and Baruch, who saw a trading profit in his stock, took it.