Bernard Baruch: The Adventures of a Wall Street Legend

by James Grant

  As Baruch grew older, caution naturally tended to assert itself against audacity, and once, in a reflective mood, he imagined himself as a turtle. He wrote to Frank Kent how, in this transfiguration, he would climb out on a rock to sun himself and roll off into deep water at the first sign of trouble. He could stick his head out with impunity, he explained, because “no one was able to cut a turtle’s head off when he stuck his neck out.” Herbert Bayard Swope, after close observation, preferred the image of the elephant, and one day he elaborated on his theory to Baruch in the company of President Wilson. Baruch, he said, resembled

  the Asiatic elephant, which has five toes, as against his African brother, which has only three, it being agreed that Baruch would have all the toes that nature permitted. The Baruch elephant, representing the embodiment of all animal wisdom, would be walking along a narrow path and come to a deep river, across which was thrown a flimsy bamboo bridge. First the elephant would try it with his trunk, then with his right foreleg, then with his left foreleg, and, backing up to it, repeat the process with both hind legs. Having completed the inspection, the elephant, turning to his followers, would announce: “This bridge is perfectly safe and will carry my weight—but I guess I’ll let some other sucker cross first!”

  In the Wabash episode, Baruch had bravely bought bonds, but cautiously, or loyally, declined to break ranks with the bondholders’ committee. In sulphur, he was undividedly pachydermatous. He stood for years at the bridge, testing it. Had he ventured out first, he might have become as rich as the public always imagined him to be.

  In 1909 Baruch received an unexpected invitation. It came from J. P. Morgan & Company, the nonpareil Wall Street bank, and it concerned what appeared a promising sulphur deposit outside of Galveston, Texas. A proposition was put to him (Baruch by that time having made a name for himself in mine finance): He would mobilize some engineering talent; reconnoiter Bryanmound, as the site was called; make a report; and, if all went well, take 40 percent of the profits. Morgan would furnish the capital and take 60 percent of the profits. Baruch said yes, and he put in a call to Seeley W. Mudd, the mining engineer who in 1905 had staked his professional reputation on the future success of the Bingham Canyon copper mine, to ask him to go along. Mudd said yes to Baruch.

  At length, the Baruch party rendezvoused in the hamlet of Brazoria, which lay within striking distance of Bryanmound. The suspected sulphur had long been confirmed to the satisfaction of a handful of local prospectors, who predicted big things from it. By day, Mudd and his assistant, Spencer Browne, conducted their own tests, and by night painstakingly analyzed the results with the implements at hand. Mudd dried cores of earth in a homely double boiler while Baruch occupied himself with a study of the world sulphur trade. Everybody slapped mosquitoes.

  Despite the lack of amenities, it was an ideal time to be prospecting in Brazoria. For one thing, the demand for sulphur, a mainstay of industrial chemicals, notably of sulphuric acid, was on the rise. For another, the basic patents on the Frasch process for mining sulphur deep underground had expired in 1908. The Frasch idea was to ram a ring of concentric pipes into the ground. When sulphur was struck, superheated water was pumped down the first pipe to melt the sulphur. Compressed air was forced down a second pipe. The air pushed the molten sulphur up a third pipe. Above ground, the liquid was dried in giant yellow slabs, blocked, and shipped.

  The conclusion drawn by Mudd was that the chances of reaching sulphur in recoverable quantities were no better than 50-50. Back in New York, Baruch relayed this to J. P. Morgan in person. He added that the property could be bought for $500,000, of which he, Baruch, would “gamble” half.

  Perhaps it was merely the word, or perhaps the way it lay on Baruch’s lips. Harriman, for example, bet. Morgan did not. “I never gamble,” the banker said, gesturing that their business was done. With as much dignity as the circumstances allowed, Baruch rose from his chair and left the room.

  By coincidence, just about the time Baruch offered to put up $250,000 for a sulphur venture, another Texas company was capitalized in that amount. The Gulf Sulphur Company was chartered in Matagorda, near Beaumont, on December 23, 1909, under the auspices of four St. Louis men and five Texans. The application for charter stated that the company owned land situated

  at or near Big Hill in Matagorda County, Texas, and comprising part of the William Simpson and Ira Ingram Leagues of land in said County; said tracts of land being, according to our best information and belief based upon repeated and successful tests; underlaid with a strata of Sulphur from 40 to 60 feet in depth, and which it is proposed to develop and produce, and the cash value of which is $250,000.00, that being the price at which it was received from J. M. Allen, one of the incorporators hereof, . . .

  In the summer of 1909, before the incorporation of the Gulf Sulphur Company, word of the goings-on at Big Hill had attracted the attention of Spencer Browne, of the Baruch party, who called to investigate. The Big Hill men, who had heard of the New York money over at Bryanmound, were happy to see him, and he was impressed by what he saw there. Reporting to Mudd and Baruch, Browne said that Big Hill was at least as promising as Bryanmound, probably more so.

  Following his rebuke by Morgan, Baruch for a while did nothing in sulphur. Early in 1911, his interest was stirred by a follow-up report on Big Hill by Mudd, who was hopeful but cool. He called the property unproved, but “worthy of further work.” A man who thought he knew it to be proved was Alfred C. Einstein, a St. Louis electrical engineer, quondam prospector, and an original stockholder of the Gulf Sulphur Company. Einstein and his associates needed money, which they thought Baruch could provide. In the spring of 1911, just as Baruch was pouring more than $1 million into Terminal Company bonds, it was proposed that he purchase an option on two-thirds of the stock of an expanded Gulf Sulphur Company. He would advance $25,000 at once to buy more land, another $25,000 for drilling and prospecting, and $100,000 for a boiler plant. For the next three years, he could buy a controlling interest at $12 a share, making the entire outlay something in the neighborhood of $600,000. The proposal fell through. Next, in June, Einstein wondered whether Baruch would care to buy control of the existing Gulf Sulphur Company. There were 25,000 shares outstanding. Einstein’s friends were willing to sell 17,000 shares for $10 each for a total of $170,000. Capital necessary to begin operations, which Einstein judged to be $150,000 or so, would be furnished by Baruch and him, equally. Baruch called the proposal “entirely out of the question.”

  Baruch didn’t buy but he kept listening. In January 1912 Einstein offered him the same 17,000 shares on an installment plan. Again he demurred, which exasperated Einstein. The son of a mining engineer, Einstein was four years older than Baruch and a successful builder and manager of utility enterprises. He was bald and wore a mustache and chain-smoked cigars. He erected electrical signs extolling the advantages of St. Louis for the benefit of incoming travelers and held office in numerous local clubs and civic organizations. “Personally and frankly speaking,” he wrote Baruch, “I cannot reason out what you seem to be afraid of in this Gulf Sulphur deal. The proposition made you by my associates appeals to me as certainly most liberal, and is only brought about by certain conditions in the affairs of some of these men, which I would not feel at liberty to elaborate on in detail.”

  Baruch might have decided that it was foolish to negotiate with the stockholders when they were content to negotiate against themselves. In June 1912 he signed an option under which he might buy control at a fixed price for the next eighteen months. He also agreed to put up $25,000 for the purchase of land. Without exercising the option in full, he began to accumulate some stock. By 1913, he had 4,500 shares, which made him the third-largest stockholder.

  As preparation for the start of production moved forward at Bryanmound (it began in November 1913 under the aegis of the Freeport Sulphur Company), Big Hill lay fallow. For his part, Einstein wanted to mine sulphur. J. W. Harrison, J. M. Allen, and Theodore F. Meyer, his fellow s
tockholders from St. Louis, were ready to sell. Baruch too was inclined to settle for a fast profit. Einstein was the visionary, but Baruch held the option, and prospective buyers were directed to him. Baruch found the lot of them unimpressive, as he wrote to Einstein:

  The man supposed to be from the Berlin Mills never showed up after the first call. The other man, Lattarulo, who was sent here by some lawyers, brought a lot of men around here to see me who looked like fakirs and who certainly acted like it, with whom I felt that I could have no dealings, and, in fact, they did not want to do anything except apparently use my good name to make some money for themselves. So far the inquirers who have been desirous of purchasing Matagorda have turned out to be merely fakirs.

  Or commission hunters:

  All these men who have been supposed to want a sulphur proposition want to get options and have the property financed for them and they want a large interest in it for standing around and looking pretty.

  By the spring of 1913, the company needed money. Its technical man, Hugo Spitzer, had gone unpaid, at $150 a month, since January. There was also a watchman at Matagorda to be paid. Einstein, on his own hook, had lent about $2,500 for working capital. In the past Baruch had offered to lend such amounts as might be needed for corporate subsistence. Now Einstein asked for $3,500, which Baruch grudgingly agreed to put up:

  I am willing to lend the Company $3,500 if you will send me the note properly endorsed, the understanding being that it shall be a prior claim against everything. I am doing this in order to assist you gentlemen and do not want you to take it in any way as a willingness on my part to lend further money or in any way committing me to do so.

  On June 7, another period of Baruch’s stock option expired, unexercised. Einstein, who was losing patience with him and with Mudd, his adviser, wrote to try to stir up some action:

  I am becoming more satisfied every day we are losing a splendid opportunity to bring about some most satisfactory results at Matagorda. The amount involved to a man like yourself is within the most reasonable limits for the possibilities it offers for most reasonable returns.[26]

  The cost to bring the Big Hill into production was put between $109,000 and $240,000, the low estimate being the company’s and the high one Mudd’s. Hugo Spitzer said that $109,000 would pay for a steam plant and for the miscellaneous expenses of starting up a well. By his reckoning, the first pumping plant would be able to turn out 20,000 tons of sulphur a year (or 4 percent of the average annual production in the United States in 1911–1913). Even by Mudd’s figures, the cost per ton delivered in New York ran to no more than $14 or $4 less than the market price.

  Spitzer estimated, on the basis of exploration already carried out, that there were 750,000 tons of sulphur underground, but he correctly suspected more. By the time Big Hill was exhausted, in 1936, production had totaled 12,350,000 tons. Bryanmound had yielded only 5,000,000.

  Lacking either clairvoyance or Einstein’s faith, Baruch listened to Mudd, who was skeptical. (So was the International Paper Company, which nibbled at Big Hill in 1913 but refused to bite.) Presently Baruch and the St. Louis men changed places, Baruch giving them an option on his stock. No change of ownership resulted. In St. Louis, Allen grumbled to Einstein about a clerical oversight of Baruch’s and added, acidly: “I don’t believe that Mr. Baruch has any thought of playing anything but a ‘sure thing.’ ”

  A year passed. At the start of 1915, ownership of the company was still distributed mainly among Baruch, Einstein, Allen, Meyer, and Harrison. Einstein, hoping to move matters off dead center, wired Baruch on March 1, 1915:

  WOULD YOU BE INTERESTED TO BUY OUT J. W. HARRISON GULF SULPHUR COMPANY AT PRACTICALLY HIS COST. THE OLD GENTLEMAN TALKS AS THOUGH HE NEEDS FUNDS BADLY. THINK THIS OPPORTUNITY FOR PROMPT ACTION.

  Baruch answered directly:

  WHAT IS PRICE.

  Einstein wired:

  HARRISON ASKS THIRTY-FIVE THOUSAND DOLLARS IMMEDIATE ACCEPTANCE FOR FORTY-FIVE HUNDRED SHARES AND APPROXIMATELY SIX THOUSAND BONDS. HE IS NOT SURE EXACT AMOUNT LATTER HAS A FEW LESS THAN OTHER PARTNERS. I BELIEVE TWENTY-FIVE THOUSAND CASH IN MY HANDS WILL BUY.

  Baruch parried:

  DO NOT CARE FOR IT MUCH OBLIGED.

  Persisting, Einstein wrote to explain a few things about Harrison. He was, he said, old, sick, and illiquid. He needed money and there was family trouble over his holdings in Gulf Sulphur:

  I am telling you these things confidentially to give you all the side lights on my agency in the matter, which is in the interest and behalf of both Mr. Harrison and yourself and without any moti[v]e on my part for profit.

  On the fourth of March, Einstein forwarded to Baruch a letter from Harrison in which the old man asked Einstein to ask Baruch to make his best offer. Einstein asked Baruch to keep the letter under his hat.

  Called to St. Louis on some Wabash business, Baruch saw Einstein a few days later. (He’d alerted him of his impending arrival by a commanding telegram: “PLEASE ENGAGE FOR ME PARLOR BEDROOM AND BATH AT BEST HOTEL FOR MONDAY NIGHT. . . . ”) The two talked over the sulphur matter, as Einstein subsequently reported to Harrison. Baruch, wrote Einstein, could take the stock or leave it:

  Mr. Baruch said to me frankly he was not in the market buying anything at the present time, but if, however, you practically wanted to give your holdings away I should make you an offer of $10,000 for your holdings.

  They had cost Harrison between $25,000 and $30,000. Baruch himself would sell below cost if he were going to sell at all, which he wasn’t eager to do, Einstein went on:

  I do not think Mr. Baruch is very anxious either way, he seemed to be very sincere in his discussion with me on the subject of the purchase of your stock, and frankly told me he did not really care [for] it, but if you desired to sell it cheap and make a sacrifice he would gamble on it, and that’s what he thought he would be doing in buying at this time.

  Even if he were as mortified as Morgan at the use of the word “gamble,” Harrison was in no position to foreclose commercial relations on account of it. On March 11, he sold 4,695 shares of stock and $4,000 worth of bonds for a net price, after deducting odds and ends, of $11,800. If the price of the stock alone is taken to be $10,000, the price per share amounted to $2.13. In 1929, a share fetched as much as $341. Baruch kept half of the Harrison interest. He sold the other half to Einstein to show his gratitude for services rendered. Not in funds at the moment, Einstein financed the purchase on Baruch’s credit.

  Now that Harrison was out of the way, Einstein urged Baruch to buy out Allen and Meyer. He reasoned that the way to bring Big Hill into production was to consolidate its ownership in strong hands, namely, Baruch’s and his own. Baruch agreed, but only to the extent of seeking an option to buy, not an outright purchase. His nonchalance in the matter began to grate on Einstein again, and the bid that Einstein made on Baruch’s behalf to Allen and Meyer roused suspicions in them. Reports of the mistrust reached Baruch, who answered that he would rather drop the entire affair if they felt that way.

  In what had become a characteristic state of exasperation, Einstein again called for action, reassuring Baruch that his friends really didn’t think he wanted to “squeeze them out,” and observing that, if Baruch and he didn’t buy their stock, someone else would. Why let a few thousand dollars more or less stand in the way of a good thing? He went into details on June 14, 1915:

  I recognize [he wrote Baruch] your investment in the Gulf Sulphur Company is merely an incident and that you are willing to bide your time, in the meanwhile fellows like myself who have to work for results get impatient, and frankly speaking I have about reached the point that I feel it incumbent upon myself to make an individual effort to see what I can do regardless of Mr. Mudd or your associates if you are willing to go the route with me to the extent of your holdings in which I may be able to get started. I have never really made an effort in that direction, to the contrary I have rather been the stumbling block to my associates deferring the outcome of our previ
ous plans from time to time. I know that you have taken a “longer shot” on many other things than is involved in financing the Matagorda proposition and with possibly less hope and promise of success, and also possibly not offering an outcome as promising as that which I believe the Gulf Sulphur Company holds in store for its owners.

  Still hurt by the suggestion that Meyer and Allen didn’t trust him, Baruch answered that he was perfectly willing to proceed, on the right terms, and that the first step was to see that the company’s bonds were converted into stock. (One cause of the Wabash’s troubles was that there had been too many bonds.) In the fall of 1915 came an optimistic geological report and a recommendation that $50,000 more be spent for exploration. Baruch agreed to furnish the money and dispatched an engineer of his own to the scene. Early in 1916 he wrote Einstein in a proprietary way: