by James Grant
Meanwhile, an inventor named William A. Lawrence had discovered a technique to extract rubber from a bush called guayule. Late in 1905 he invited Thomas Fortune Ryan and Senator Nelson Aldrich, a moneyed Republican from Rhode Island, to back him. They brought the proposition to Daniel Guggenheim, and Guggenheim, recalling that Baruch had had an interest in rubber, took it up with him. The result, in December 1905, was the incorporation of the Continental Rubber Company under the impressive aegis of Aldrich, Baruch, the Guggenheims, Ryan, and (among other subsidiary stockholders) John D. Rockefeller Jr. The company was capitalized at $30 million.
Now that he was back in the rubber business, Baruch set out for Mexico via railcar with Annie, Sailing, and the broker Eddie Norton, of Northern Pacific corner fame, to investigate the prospects for guayule. He found them so promising that, on behalf of the company, he negotiated for the purchase of several million acres of rangeland on which to raise it. Guayule grew wild in northern Mexico. Continental proposed to bring the bush under cultivation and to build a factory at Torreon to extract the rubber under the Lawrence process. The Rubber Goods Manufacturing Company contracted to buy the raw rubber when production would begin three years hence. When production did begin, however, Rubber Goods pronounced the merchandise substandard and abrogated its contract with Continental. Rather, US Rubber abrogated its contract with Intercontinental Rubber, both companies by that time having changed their names.
Usually not the litigious kind, Baruch wanted to sue the US Rubber people because, as he insisted, the Torreon rubber was in fact up to par. But, he related, J. P. Morgan and George F. Baker, president of the First National Bank, “pulled us off the suit.” Next Baruch urged that his company, Intercontinental, buy up US Rubber stock in the open market, turn out management, and reinstitute the contract themselves. This plan was rejected. He made an attempt to secure a contract with another rubber company, Baruch wrote, but the deal was ruined by the greed of his associates.
Now impartially disgusted with friend and foe, Baruch again retired from rubber. By a happy turn, he sold his stock before the start of the Mexican Revolution of 1910, which trampled the corporate guayule bushes and closed the Torreon plant (which did, ultimately, find a taker for its rubber). Moreover, as he was selling, one of the firms that had stood in the way of his lawsuit was buying. A news account of the time reported: “The wisdom of Bernard M. Baruch in getting out of Intercontinental Rubber just as the Morgan people went into it at around $30 a share is demonstrated by the recent shutdown of the plant because it is the center of the revolutionary troubles in Mexico. The stock is now under $15.”
As a freelance venture capitalist and occasional investment banker, Baruch traded chiefly on his judgment, tenacity, and salesmanship. A big-picture man, he left as many of the details as possible to somebody else. One such detail-minded associate was Eugene Meyer Jr., the head of his own investment-banking firm, a specialist in copper securities, and a pioneer in what has come to be called investment research.
In his old age Meyer remembered a bond underwriting that Baruch and he had jointly tackled for the Guggenheims in 1909. The issuing company was Braden Copper Mines Company, which drew its ore from the western slope of the Andes Mountains in Chile some eight thousand feet above sea level. Production had been under way for a year or two when Baruch and Meyer agreed to buy $1.5 million worth of Braden convertible bonds in order to resell them to investors:
[Baruch] didn’t do the work on it—I did the work—but he was friendly with the Guggenheims [said Meyer]. He was a good man to have as a partner because he’d go out and do the selling job. He had a following and people he’d recommend. He didn’t know anything about them. He never did any work on the legal papers. We had to do all that legal work and all that engineering. He just signed his name to anything I sent—he wouldn’t even read it.
Baruch was less disposed than usual to read the fine print on the Braden deal because he was in Paris with Annie when the bonds were offered. Meyer, who had sent him a prospectus and invited him to do some selling if he had the time, reported late in July 1909 that the issue had flopped and that the reason was entirely the failure of the Guggenheim name to inspire investor confidence. Meyer wanted the details to be kept confidential—sales of bonds to the public had amounted to only $150,000—“as a knowledge of the facts would reflect great discredit on the Guggenheims and also interfere with our own marketing in the securities.”[17] From London about a week later Baruch cabled that the bonds and the Guggenheims were a hard sell on that side of the Atlantic too: “AFRAID IMPOSSIBLE HERE PEOPLE UNPOPULAR BARUCH.”
If Baruch was discouraged with the Guggenheims, he still believed in Meyer. While the Braden bonds were going unsold, Meyer wired him in Paris with a bullish prognosis on the United States Steel Corporation. The cable had more than ordinary effect, because Meyer, in the opinion of no less an observer than J. P. Morgan, had written the seminal Wall Street research report on the company. Meyer’s communiqué followed news of an increase in the Steel Corporation’s dividend. The wire reported that earnings in June had been unusually strong, that orders were heavy, and that another rise in the dividend was likely in October or January, probably October. From Paris, on July 30, came the answering cable: “BARUCH LENDS YOU 920000 MONDAY OPINION STEEL.” By October 26, the date on which the second dividend boost was duly declared, the price of the stock had climbed by 18 percent.
An interesting feature of the Braden underwriting is that Baruch and Meyer expected to make most of their money in an option in Braden stock. After Baruch got back to New York, in August, the two decided not to proceed without some change in contractual arrangements. Wrote Baruch: “Under no conditions do I think it advisable for us to take over the Braden stock at present nor attempt to make a market until we have a modified option.” On the face of it, Baruch and Meyer had agreed with the Guggenheims to manipulate, support, or otherwise to take charge of the market in Braden, an arrangement then unexceptional but subsequently illegal under the Securities Exchange Act of 1934.
Braden was a short-term nuisance for Baruch (the mine quickly redeemed itself), but another Chilean venture repaid him handsomely almost at once. This was the Chuquicamata mine of the Chile Copper Company, which was bigger, more desolate, and even richer than the Utah Copper works in Bingham. Chuquicamata had been mined by the Incas before 1536 and was incorporated under the laws of Delaware in 1913. In 1915, when the price of copper was 20 cents a pound, the mine began to produce at a cost of about 6 cents a pound. Eugene Meyer, who had foreseen this bonanza, negotiated with the Guggenheims for the privilege of underwriting a $15 million convertible bond issue (the Guggenheim name by then having been restored to its former luster). Baruch again joined him for what proved one of the most lucrative operations of his career.
Baruch often sold out of his venture-capital projects before they reached the dividend-paying stage, but some never got that far. One of his more obscure investments was something called the New York Orient Mines Company, founded by Daniel Jackling, William Boyce Thompson, and himself in the early 1900s. It was Thompson’s idea to send a mining man to China to delve into old records for clues about forgotten but exploitable mineral deposits. Evidently nothing came of this archival enterprise. In 1910, the Intercontinental Fertilizer Company was incorporated on a shoestring to engage in fertilizer manufacturing in Charleston, South Carolina, and points south. Baruch was identified as vice president of the company (a rare instance of his accepting any corporate title, honorific or not); Allan A. Ryan, son of Thomas Fortune, was treasurer; and W. B. Chisolm, a former officer of the Virginia Carolina Chemical Company, was president. In 1915 Baruch wrote the senior Ryan that, contrary to the stockholders’ high hopes, there were no profits to distribute. He blamed Chisolm.
Perhaps the longest-running disappointment of Baruch’s venture-capital experience was the Alaska Juneau Gold Mining Company. The company’s claim, which had been staked out in 1899, was situated along the Gastineau C
hannel outside the city limits of Juneau. Fred W. Bradley, the distinguished engineer, believed in it. Its ore was thin, but it lay adjacent to the claim of the Alaska Gold Mine Company, in which Dan Jackling himself was interested. On the subject of meager ore, what Jackling said, went. In 1915 Alaska Juneau drew up plans to offer 400,000 shares of stock, and it invited Baruch to underwrite the deal. Baruch accepted, and he engaged Eugene Meyer Jr. to help.
Before an announcement of the deal could be made, Wall Street got wind of it, and Baruch was importuned for stock. “Dear Mr. Baruch,” wrote a broker with a Baltimore firm, “Can you take care of your poor friends from the provinces to the extent of a few hundred shares of the Alaska matter?” Baruch could not. All the stock was gone. Before the issue was priced—indeed, Baruch protested, before it could be priced—trading was under way on the Curb Exchange. The Wall Street Journal termed the anticipatory demand “unique.” In the end, five times as much stock was demanded as was engraved and put into circulation.
Baruch and Meyer each took 100,000 shares to sell at a price of $10. Their commission was $1.75 a share. Also, Baruch was granted an option on 75,000 shares at $8 each through June. That is, Baruch could buy at $8 regardless of the market price. On April 15, just three weeks after the offering, Alaska Juneau was quoted at $15. By the end of July it was down to $9.50.
Thus began the slide that was to take the stock closer to zero than anyone had dreamed possible. An early disappointment was Jackling’s decision to suspend operations at neighboring Alaska Gold Mine. At Alaska Juneau, there was what mining historian T. A. Rickard called a “serious blunder” in the design of the mill, which caused a significant reduction in its capacity. By the close of 1916, the stock was quoted at $7.75. It slipped to $2 in 1917. By 1920, Fred Bradley, the president, was inviting the stockholders to subscribe to a bond issue to rebuild the mine’s depleted working capital. Eugene Meyer Jr. answered him drily: “My relation to Juneau up to the present time has been that I have a very large interest in the shares in which I have a very large loss. My ownership of the stock does not, at first glance, make me feel that I would care to take $425,000 worth of the bonds at 6 percent interest, of which a liberal part of all the interest would go to the United States Government.”
Eliciting only two orders for $500 each, Bradley committed substantial funds of his own. His example inspired other important stockholders, including Baruch, to ante up, and in time $1.9 million was raised. Bradley had refused to quit because his name had been used to sell the stock to the public, and Baruch, for the same reason, had refused to quit before Bradley. Not until 1931 did the mine yield its first dividend. In 1934, when the dollar was devalued against gold, the mine and its stockholders enjoyed a windfall. Baruch reaped an especially large profit, for he had been buying stock and gold bullion in expectation of some such monetary depreciation. It was as well earned as any in his long investment career.
11. In his autobiography Baruch indicates an immediate move from the Housman offices at 20 Broad Street to new quarters in the Trinity Building, 111 Broadway, but the city directory reports no change of address until 1906. The directory appears the better source. In 1906, a new Trinity Building, rising twenty-one stories on the site of the old one, was opened. Baruch’s office was on the seventh floor; the original Trinity Building had only six. In court documents Baruch gave the date of his leaving Housman as August 10, 1903, but he apparently made his first new office in the same old building.
12. Marcia Kendrick McCue, granddaughter of Baruch’s caller, Sarah Kendrick-Strahan, writes:
How she got an appointment, I do not know but she did and went to his office. He must have been very impressed by this very dainty British lady and started to give her a few tips when she interrupted him and said, “I do not know anything about what you are saying—I want you to do it.” Then she pulled these drafts out and turned them over to him. He must have been surprised but said, “I’ll get you a receipt.” She said, “Sir, a hand shake will be my receipt,” and left. After two–three months dividends etc. started arriving . . . [at] 72 [I] am still receiving dividends.
13. No declaration by Baruch of his interest in the company appears in the Unlisted Securities Committee minutes. It is possible that none was made, that something was said in private, or that his holdings were common knowledge. Perhaps he thought that they were nobody’s business.
14. The reason advanced by Baruch is unsubstantiated. It is that the Combination men, wanting to test the strength of the Goldfield market, entered a large sell order on the Curb Exchange. Expecting it, Baruch forehandedly entered a large buy order. Purchase met sale and the price held firm. Impressed by the market action, the Combination men elected stock. However, for the period in question, there is no record of any Curb transaction in Goldfield.
15. In 1911, the Boston News Bureau published a literary interpretation of Baruch’s market operations about this time:
At the height of the Harriman bull market in 1906, Baruch was carrying a big line of Union Pacific expecting to see it sell for $250 a share. One day he received from a friend a copy of a book printed in London in 1851 and written . . . by Charles Mackay. . . . Its title was Extraordinary Popular Delusions and the Madness of Crowds. It told in detail the story of the South Sea Bubble, John Law’s Mississippi Bubble, the Darien Expedition, the famous alchemists of the Middle Ages, the Crusades, and other historical “madnesses.” Baruch was so impressed by the similarity between the speculative orgies of history, as related by Mackay, and the Wall Street enthusiasm for railroad securities selling at sky-high prices that he unloaded his whole line of stocks and sat back to wait for the crash.
16. It is difficult either to prove or disprove Baruch’s account on the basis of independent sources. For example, no news of Utah Copper’s alleged distress appeared in The Salt Lake City Tribune, Deseret News, The Mining Review (Salt Lake City) or, for that matter, in the company’s annual report for 1907.
17. Baruch, in fact, was more than a supernumerary. When the bonds met with public rejection, he arranged for a $l million loan to finance them in inventory until such time as they could be sold.
Six
The Baron of Hobcaw
Baruch was a peripatetic millionaire, and he came and went conspicuously. He had his own private railroad car in the days when everybody traveled by rail, and he was an early enthusiast of motoring. His first automobile, an eight- or ten-cylinder Panhard, frightened horses and set up a racket along the Jersey Shore and irritated at least one of his summertime neighbors, Eugene Meyer, father of the investment banker. His second car, a yellow Mercedes, had forty horsepower and cost $22,000. Once he raced it at an exhibition in Long Branch, New Jersey, clocking more than sixty miles an hour against an American car driven by a Standard Oil heir named A. C. Bostwick. Baruch’s taste for speed was keen enough to overcome his dread of seasickness, and together with his brother Harty he bought and raced a 190-horse-power boat, the Skeedaddle. In 1906 they won—by a nose—the National trophy at the Motor Boat Club of America races on the Hudson River.
Behind the wheel Baruch was at least as accomplished as his paid help, perhaps more so. In 1908 a chauffeured automobile of his jumped the curb on West 55th Street and allegedly struck a pedestrian. A similar episode was set in motion in 1901 by a telephone call from Baruch to his driver. “You be off today,” the driver, in sworn testimony, later quoted him as saying. “I go to New Haven.” The chauffeur was forbidden to use the car without permission, but he took a chance and drove to Brooklyn to watch an auto race. On the way home he bumped a pedestrian who was crossing Eighth Avenue at 42nd Street. In a subsequent lawsuit Baruch lost a $1,000 verdict at trial but successfully appealed. Probably the chauffeur was Heinrich Hilgenbach, who had come with the car and who turned out to be, in Baruch’s laconic words, a “good man when sober.” Whoever he was, the court records show, he kept his job. (In 1913 Baruch’s mother disapproved of such indulgent employment practices. She declared that, “If your
chauffeur knows that he will be dismissed if he goes too fast and if pedestrians will exercise more care there will be fewer accidents.” She said that her personal speed limit was twelve miles an hour.) On summertime excursions to Europe, Baruch sometimes took an automobile along with him for the pleasure of driving it himself.
It wasn’t always easy to reach Baruch or to do business with him because he was so often on the move. He tried to tour the United States once a year to get the lay of the land for business and stock market purposes. He was in Europe in the summertime and at his barony in South Carolina for a part of every winter. Hobcaw, as the barony was called after an Indian word meaning “between the waters,” was his second home (Belle, his daughter, always thought of it as her first home) and the tangible link to his mother’s and father’s South. The first baron of Hobcaw, John, Lord Carteret, was presented with 12,000 acres of what was called Hobcaw Point by King Charles II. The Point was a neck of land between the Waccamaw River and the Atlantic Ocean, and it turned out to hold 13,970 acres, not 12,000. Carteret and Baruch had at least two important things in common. Each was alive to the possibilities of precious-metals mining, and each was a charming companion (Carteret was described as an “ardent convivialist,” which was also Baruch to a T). Carteret, however, never laid eyes on the place, and he sold it in 1730 to one John Roberts, of Dean’s Court, Middlesex, England, for £500. The transfer included timber rights, “Sightwood Pitchings, Lakes, Ponds, Fishings, Waters, Water Courses, Pastures, Feedings, Marshes, Swamps, Ways, Easments, Profits, Commodities, Advantages, Emoluments, Hereditaments, and Appurtenances,” and also “Hunting, Hawking, Fishing, and Fowling,” but not the gold and silver rights, which Carteret wanted to keep mainly for himself. Alas, there turned out to be no precious metals.