by James Grant
When at last the stock market stopped falling, in July 1932, it rebounded with such spring that by September 7 the Dow had come within an ace of doubling from its low. Baruch’s timing was better at the bottom than it had been at the top; later in September Churchill cabled his thanks for advice that had gotten him out of the rally at the high. On the sixth of September Baruch did a little selling himself, including 700 shares of Irving Air Chute at 5½. For the same company in the spring of 1929 he had paid 37⅞ a share.
Later that fall Baruch wrote a brief foreword for a new edition of Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay’s nineteenth-century study of such ill-fated enthusiasms as the South Sea Bubble and the tulip-bulb craze. Baruch praised the book for the light it shed on the psychological element that figures in all great economic movements. “I have always thought that if, in the lamentable era of ‘New Economics,’ culminating in 1929, even in the very presence of dizzily spiraling prices, we had all continuously repeated ‘two and two still make four,’ much of the evil might have been averted,” he wrote. “Similarly, even in the general moment of gloom in which this foreword is written, when many begin to wonder if declines will never halt, the appropriate abracadabra may be: ‘They always did.’ ” Baruch chose not to mention his industrial renaissance or to indicate, even obliquely, how it might have differed from the “New Economics.” He was, however, right on the timing of the decline. From the point of view of stock prices, it was over.
44. Great Britain, which had returned to a variant of the gold standard in 1925 at what proved an overvalued rate of exchange, had been losing gold and export sales and in 1926 had suffered a general strike. It was faced with the disagreeable choice of deflating—that is, of engineering lower prices at home in order to make its goods more salable abroad—or of refusing to convert pounds sterling to gold on demand. The Federal Reserve action provided an out. With the fall in the discount rate, American interest rates declined. For a time, London became a more attractive place in which to invest than New York. Gold, which had previously been moving westbound, began to be shipped east again.
In effect, the Federal Reserve had embarked on a policy of competitive inflation. In June 1927, a month before the action was taken, it held $398 million worth of Treasury securities. In December it owned $606 million. That is, in six months it had expanded its portfolio by 52 percent. The proceeds of these purchases provided new funds for the banking system and new loans to brokers. All together, the growth of credit in the second half of the year was in excess of the usual seasonal needs of commerce. Adolph C. Miller, a governor of the Federal Reserve Board at the time, subsequently condemned the policy as “. . . one of the most costly errors committed by it [the Federal Reserve] or any other banking system in the last 75 years! . . .”
Monetary historians disagree on the point, but Milton Friedman and Anna Schwartz are sympathetic with the Baruch position to the extent of observing that “. . . virtually the full increase in bank assets from June 1926 to June 1928 as a result of easy money in 1927 was confined to investments and loans on securities. . . .”
45. Besides counseling Kent, Baruch also managed some of his investments. Just after the column appeared, Baruch apprised him of a $900 trading profit. “This isn’t exactly what the ‘big boys’ do,” Baruch wrote, “but . . . what is called a ‘little soft money on the inside.’ ” Kent agreed it was the softest $900 he had ever made.
46. Baruch, who had gotten to know Churchill in World War I and at the Versailles Peace Conference, and who liked to keep his friendships on the plane of large events, thanked him for his hospitality in a cable that was couched in geopolitical terms:
THE MEMORY OF MY WEEK VISIT WITH YOU IS A DELIGHTFUL SOUVENIR WHICH I WILL ALWAYS TREASURE STOP I BETTER UNDERSTAND ENGLAND HER PEOPLE AND HER TRADITIONS AND HOPE THAT NEW PROSPERITY AND HAPPINESS WILL COME TO HER IN ORDER THAT SHE MAY CONTINUE FOR THE WORLD WHAT SHE HAS DONE FOR SO LONG STOP I TRUST THAT OUR COUNTRY MAY JOIN WITH YOURS IN THE GREAT RESPONSIBILITY THAT LIES BEFORE US STOP I AGREE WITH GENERAL DAWES THAT IN THE BETTER UNDERSTANDING OF THE ENGLISH SPEAKING NATIONS LIES THE ARK OF THE COVENANT OF CIVILIZATION AND HUMAN FREEDOM STOP MANY MANY THANKS AND AFFECTIONATE REGARDS TO ALL.
47. In an early draft of his autobiography, Baruch asserted that he had sold short—“In my operations, I just about made up on the short side what I lost in the shrinkage of securities which I owned and which I sold”—but that he hadn’t begun his selling until the spring of 1930. No records support that claim, however, and Baruch himself contradicted it in other reminiscences. In October 1933, Fortune magazine reported that he had been a heavy short seller and that he had channeled his transactions through Mary Boyle’s account, but neither do the available records bear out that story.
48. Not all Baruch’s predictions were so definite. In September 1931, for instance, he wrote delphically to a friend, “The fertilizer business appears to be like all other businesses. People have to be fed, clothed, and housed and if they find a way to do that, it will make business better.”
49. On November 25, Baruch took out a pistol license, but the timing was apparently dictated by a new gun-registration law rather than by the stock market. If he was worried about his safety in 1931, he had also given the matter some thought in the late bull market. It was reported in 1927 that he was one of only 182 Americans to have insured their lives for $1 million or more.
50. Derived by inference. In 1929 he reported dividend income of $585,811.81. If he earned the average dividend yield for the year of 3.47 percent, his portfolio would have been worth almost $17 million. By the same token, he reported $307,002.26 in interest income. If he earned an average of 5 percent on his bonds and bank balances, the implied principal value of those holdings would be $4.8 million; if 4½ percent, then $5.3 million. Hence a grand total of roughly $22 million. In 1934 Time magazine used $25 million. In 1926 Arthur Krock in The New Yorker put his net worth at “somewhere between thirty and fifty millions,” which seems high.
51. A director’s lot was an unsatisfactory one, Baruch reminisced a few years after he resigned. “It took about half my time and then I did not learn much about the railroad. At the board of directors meeting, matters of policy would come up. Large transactions would be reported. Everybody was in a hurry and the man who asked many questions was a nuisance. I cannot see anything in it for a thoughtful or wise man to be a director of a railroad or in fact any large institution of which he does not know all the details. . . . A director becomes more or less a figurehead except in the smaller institutions.”
Thirteen
Suffering Roosevelt
Hardly a reunion of the War Industries Board passed without Swope retelling the story of the Baruch elephant. This was the animal who would draw suspiciously up to a bamboo bridge, test it with both sets of legs, pronounce it safe, but call to “some other sucker” to cross first. As the cautious venture capitalist in Texas Gulf Sulphur, as the delegate to the Versailles Peace Conference who fought the good fight “though not to the death,” as the kingmaker who resolved in 1924 to have no candidate but the party’s, as the investor who reminded himself not to try to buy at the bottom but to “wait and see, and buy too late”—as this eminently careful man, Baruch heard the story with the delight of self-recognition.
In the bottom of a depression it was reasonable to suppose that the party out of power would elect the next President, and in early 1932 there was spirited jockeying for position in advance of the Democratic convention in Chicago. One Wall Street man, Joseph P. Kennedy, correctly sensing a change in the trend of the political market, committed his money early to the governor of New York, Franklin D. Roosevelt. Baruch, however, was typically guarded. Though partial to Newton D. Baker, Albert C. Ritchie, or Al Smith, and opposed to Roosevelt, he maintained a stance of public neutrality pending the decision of the convention. The delegates having spoken, he reported to the Roosevelt camp for marching orders.
Along with
other conservative Democrats, a rare political type which then was common, Baruch saw the electoral issues distinctly: economy in government versus waste, good money versus bad, liberty versus meddling. He was very clear on one point. Roosevelt was the candidate of fiscal and monetary orthodoxy; Hoover, of bizarre and unsound experimentation (as witness, for example, a 1932 budget deficit that would reach $2.7 billion and the unprecedented activism of the Reconstruction Finance Corporation). In 1930 Baruch had recited his political credo:
I am a Democrat for the following reasons: I believe that the Government should mind its own business. I believe that the people who are least governed are best governed. You cannot make people temperate by passing the Prohibition law and you cannot make manufacturers prosperous by putting up a tariff wall which because of reciprocal action will drive our manufacturers into other countries, as General Motors and Ford have been driven employing their labor instead of our own. I do not believe that any makeshift economic measures which attempt to lift out any part of the population by their boot-straps is a part of governmental action. It will fail as the Prohibition law has failed. The people should be free to work out their own problems. The only thing that good government can do is to see that everyone has equally easy access to the door of opportunity. Never in the history of our country have we drifted so far from the principles of good Democracy and good Republicanism as we have under the present administration, where the government is seeking to do everything and accomplishes nothing except disrespect for the law.[52]
As economic circumstances changed for the worse, free-market views went out of style and collectivist ones came in. Baruch himself in 1931 talked about a “High Court of Commerce” to license cartels when and where desirable in order to check “overproduction and losses due to uneconomic competition.” He had, in fact, proposed the idea after the war, but he was willing to go further with it now, as he told the WIB reunion in 1931:
Usually I am frightened by artificial makeshifts but I think we might try the experiment of coordinating and stabilizing industry. After all, it is only by the trial and error of commission and omission that we can advance along the road to progress.
Baruch was the despair of political taxonomists because he could change his mind as easily on public issues as he could about common stocks. He sincerely espoused some libertarian principles, but if a stray left-wing scheme happened to catch his fancy he saw nothing wrong with advocating that either. (He drew the line at Marx. Later on in the 1930s, when everybody seemed to be reading him, Baruch dutifully made the effort in the incongruous setting of the Paris Ritz. “I don’t understand him—I think people who say they do are phonies,” he scrawled on a postcard to Swope. “He takes the position in what I have read so far that if you don’t understand him and follow his reasoning, it is because you are a vulgar bourgeoisie. Well, maybe I am.”) To intellectuals, political ideas lived and breathed. To Baruch, they were not nearly so lifelike as power, party, and friendship, and he was usually ready to sacrifice philosophical consistency to any one of those considerations.
Mostly in those days he favored the tried and true. In pre-inaugural policy sessions he urged a balanced budget, reduced federal spending, and the repair of the public credit. He believed that there was plenty of money to finance recovery if government could only coax it out of hiding. In general he stood by the 1932 Democratic platform of which the first plank called for an “immediate and drastic reduction of governmental expenditures and by abolishing useless commissions and offices . . . ” and the second for “the maintenance of the national credit by a federal budget annually balanced. . . .”
There was some resentment against him within the Roosevelt inner circle because he had come to the winning side so late. Furthermore, he was rich and independently connected to the press and Congress, which aroused envy. Raymond Moley, the original Brains Trust man, once told him, “Bernie, you’re just too luminous a man” (as if he didn’t know that already). Baruch cordially reciprocated the New Dealers’ suspicions. In December 1932, while in the throes of the gout, he wrote peevishly about the college professors at the President-elect’s side: “The horn-rimmed boys are encircling Franklin. . . . You can see that there is no leadership and no idea of any program.” As it turned out there was no shortage of leadership and no lack of a program, although it would be a very different program from the one Baruch had imagined.
For a while after the election it seemed that he was back on the inside. Condé Nast cabled from Paris with the instructions that he was to be sure to agree to become Secretary of the Treasury. Kennedy told Walter Lippmann he thought that Baruch was conspiring to become Secretary of State. However, no post was forthcoming. In January 1933, Baruch believed that, while he was out of things politically, he was in the thick of them economically. In February he testified before the Senate Finance Committee on the necessity both of relieving human want and of maintaining the fiscal and monetary integrity of the government. He conferred with Roosevelt and traveled to Baltimore with Annie to receive an honorary degree from Johns Hopkins University (of which Daniel Willard was a trustee and chairman of the board’s executive committee). In the encomium that preceded the presentation of the degree and a Commemoration Day address by Baruch, Professor Jacob H. Hollander paid tribute to the honoree’s moral, mental, and material fiber. (Reference to the material side was delicately vague, no mention being made of stock trading, or of speculating for the fall.) The professor spoke of the highlights of Baruch’s public career, noting—significantly, on the eve of a new Administration—that he had been “requisitioned by successive Presidents.” Inasmuch as Roosevelt would keep Baruch out of the Cabinet and requisition him only sparingly, this was a small touch of unconscious irony. Baruch answered in kind with a speech on the evils of statism and the inviolability of “natural laws.” He titled his remarks “Leaning on Government”:
Thus [said the new Doctor of Laws], bit by bit, we barter away our birthright in such an extension of federal power that the earth, air, and water are all, in some sense, regulated by bureaus. Local self-government is a vanishing function. Privacy in business is practically gone. Personal conduct is largely under federal supervision. There is scarcely one of the guarantees of the Bill of Rights that has not been impaired. The cost of all this folly is reflected in a four billion dollar government no better in many respects than the pre-war establishment which spent one-sixth as much. It is the chief threat to federal credit and one of the greatest barriers to economic recovery. We simply cannot afford this sterile luxury.
Interspersed with this talk about freedom was a wistful harking back to the war. Baruch spoke of it fondly—“Government welded the common effort—not by magic, but by breaking down barriers to unified action.” There had been sacrifice then, he recalled, also with satisfaction. In closing he urged his audience to support the President-elect in the great burdens he was about to take up. Referring to “our people,” he said: “Not for his sake [i.e., Roosevelt’s] but for their own sake and that of the whole world, they will demand for him the unwavering loyalty of every man, regardless of prejudice, party, or selfish interest. They will know that anyone who does not accord it in full measure is either dull in his perception of danger or derelict in the most sacred duties of citizenship in an hour of national peril. Public opinion will scourge such a man as it pilloried slackers in the war.”
Here was a masterpiece of irony: within weeks Baruch himself—“counselor of statesmen,” said Professor Hollander—would fall to deploring a legislative program in which he had hardly been consulted. President Roosevelt was inaugurated on March 4. On the sixth of March, he declared the bank holiday. On the twentieth he signed the Economy Act, by which federal salaries were reduced and other governmental savings effected. It was one of the earliest, and in retrospect the least characteristic but (to Baruch) the most heartening, of New Deal measures. Late that month Charles E. Mitchell was indicted on charges of tax evasion, and Bernard K. Marcus and Saul Singer, re
spectively president and vice president of the failed Bank of United States, were packed off to Sing Sing. On April 5, an executive order forbade the “hoarding” of gold and directed that bars, coins, and gold certificates be surrendered to the nearest Federal Reserve Bank. On April 19 and 20 the President declared a policy of permitting the dollar to deteriorate in terms of foreign currencies as a way of raising American prices. The so-called Thomas Amendment to the Agricultural Adjustment Act was introduced in Congress, granting the President the right to devalue the gold content of the dollar by as much as 50 percent. Next came the Emergency Farm Mortgage Act, the Tennessee Valley Authority Act, the Securities Act, the Home Owners Loan Act, and the National Recovery Act, the last named intended to raise domestic prices through a kind of peacetime War Industries Board. On June 5 a resolution was passed to abrogate all contractual clauses, public and private, that specified payment in gold or in money equivalent to the current gold price. Meantime Ferdinand Pecora, Senate committee counsel and a childhood immigrant from Sicily, was interrogating partners of J. P. Morgan and lesser financial personages concerning Wall Street practices in the late boom.
This reforming binge took Baruch’s breath away. “There is so much legislation going on and so much of it that I do not agree with,” he confided to Senator Key Pittman on April 5, “that I do not want to be put in the position of saying anything to commit sabotage.” On the tenth he drafted a congratulatory letter to President Roosevelt (containing, for example, the remark that “people are awakening to the fact that they are witnessing the miracle of an elected candidate keeping his word. . . .”) but couldn’t bring himself to mail it. For better or worse, as James P. Warburg later observed, the President was well on his way to fulfilling the Socialist platform of 1932, not the Democratic one.