BERNARD BARUCH MADE a habit of arriving at the stock exchange an hour or two before the opening, hoping to glean some intelligence that might allow him to repeat his 1899 triumph in Liggett & Myers. On Monday morning, May 6, the ambitious thirty-year-old broker was hanging out at the arbitrage desk, keeping an eye on incoming cables from London. Next to him stood Talbot Taylor, the son-in-law of James Keene, Pierpont Morgan’s ace trader. Baruch companionably pointed out that Northern Pacific was trading in London several points below its closing price in New York.
Taylor fixed him with a level stare. “Bernie, are you doing anything in Northern Pacific?”
“Yes,” Baruch replied. “And I’ll tell you how to make some money out of it: Take an arbitrage profit.” In other words, buy in London at the lower price and sell in New York simultaneously at the higher.
To any experienced broker, this was an obvious strategy. Taylor seemed to have doubts. He pondered the idea, thoughtfully tapping his lips with the blunt end of his pencil. Then he said: “If I were you, Bernie, I wouldn’t arbitrage Nipper.”
Baruch did not need to hear another word to know that something was up with Northern Pacific, and J. P. Morgan must be at the center of it. He told Taylor that he already had acquired some NP and would let him have the shares if he needed them. At that, Taylor took him by the arm and led him to a quiet spot.
“Bernie,” he whispered, “there is a terrific contest for control and Mr. Keene is acting for J.P. Morgan. Be careful, and don’t be short of this stock.” He explained that the contest would be won by whoever had the most shares actually in hand. There was no point in buying shares in London, for the week or more needed to ship the stock certificates across the Atlantic meant they would be useless in a situation that was likely to come to a climax within days. “What I buy must be delivered now,” Taylor said. “Stock bought in London will not do.”
Baruch was determined to keep Taylor’s words to himself, but their import could not be ignored. With Morgan and Harriman both in the market for Northern Pacific, every available share was likely to be snapped up in a strongly rising market. This posed a mortal threat to unsuspecting shorts—traders who had sold borrowed shares in the expectation that Nipper’s elevated price would collapse, at which point they could buy back the shares cheaply and return them to the lenders at a profit. Short sellers merely reversed the order of the Wall Street mantra to “buy low, sell high”—they sold high first, and bought low later. The practice required ready capital and intestinal fortitude, for a short who reckoned wrong was exposed to a theoretically infinite loss if the shares he had sold kept rising in price; he would have sold high and been forced to cover his positions by buying even higher.
Baruch knew that the shorts had been betting big on Nipper’s fall. If trading proceeded as Taylor hinted, they would have to raise millions to cover their Nipper shorts—almost certainly by dumping all their other stocks at fire-sale prices. “A corner in Northern Securities,” he reflected, “would produce a general collapse in the market.”
Accordingly, Baruch made two decisions on that fateful Monday morning. The first was to avoid any trading in Northern Pacific, for when behemoths were trampling each other, the only safe place to be was the sidelines. The second was to go short in several leading stocks in the market, anticipating the crash. Over the next four days, these resolutions enabled him to witness events “as if I were a spectator, and not one of its hapless victims.”
And spectacle it was—one of the great panics of Baruch’s career.
OVER THE WEEKEND of May 4–5, both sides in the battle over Northern Pacific had assessed their positions and found the results unnerving.
At their meeting that week, Jacob Schiff had assured James J. Hill that Harriman’s buying had not been aimed at driving Hill out of the Northern Pacific, but rather at bringing about “the harmony and community of interest which other means and appeals to him [that is, the proposal to share the Burlington] had failed to produce.” Hill was not comforted. After assessing his portfolio he warned the Morgan partner Robert Bacon that he and his associates held only $20 million of Nipper. Combining that with Morgan’s $8 million, they were still well short of a majority of the $80 million outstanding in Northern Pacific common and therefore had their flanks exposed to Harriman’s raid.
Bacon wired these figures to Morgan at Aix-les-Bains and asked him for permission to buy another 150,000 shares, or $15 million at par value, to put them over the top. His message did not reach Aix until after the stock market closed for the weekend at noon on Saturday, New York time. And when he received it, the wire rattled Morgan—not least because he considered his role in the reorganization of the railroad to be on a more elevated plane than the merely financial. “We had reorganized the Northern Pacific,” he recounted later. “I feel bound in all honor when I reorganize a property and am morally responsible for its management to protect it.” His reply telegram, bearing authorization to acquire 150,000 shares, was in Bacon’s hands by midday Sunday.
Harriman, meanwhile, had lain abed Friday night tormented by the thought that a loophole might have left his own position less than airtight. Thanks to assiduous buying by Kuhn, Loeb, the Union Pacific now controlled more than $78 million in Northern Pacific stock—a majority of all the $155 million in outstanding shares. But $42 million of the total was in preferred shares. The remainder was in common, but short of a majority in the common by about forty thousand shares.
The common and preferred shareholders had equal voting rights, but as Harriman knew, the corporate bylaws allowed Northern Pacific’s board to retire the preferred at par, or $100 per share, effective the following January 1. The rules gave the common shareholders the right to buy up the preferred shares and convert them to common, but no reciprocal right was afforded the preferred—its holders could not convert to common, but could receive only cash. This “bothered me somewhat,” Harriman reflected later, “and I felt that we ought not to leave open to them any chance of retiring our preferred stock and leaving us with a minority interest in the common stock.”
This was not a new concern. Aware of the bylaw provisions, Harriman and the partners at Kuhn, Loeb had polled five experts in corporate law about whether a majority of both classes together was tantamount to majority control of the company. The experts “agreed unanimously” that it was, Otto Kahn recalled. “On the strength of these legal opinions . . . Mr. Harriman was convinced at the time and ever afterward that he held, beyond any question of doubt, the winning hand.”
Yet the situation was not so clear-cut. It was true that Harriman’s majority holding of all shares would allow him to elect his own board at the annual shareholders meeting, which was to take place in October. Morgan and Hill, however, planned to hold an early board vote in May to retire the preferred as of January. They also proposed to postpone the annual meeting until after January 1. These two actions together would allow the majority of common stockholders—that is, the Morgan and Hill camp—to extinguish Harriman’s preferred holdings before he could elect his own board to block the move. Whether the sitting Northern Pacific board had the power to retire the preferred that far in advance and to postpone the annual meeting was unclear. Harriman’s lawyers answered in the negative, but as long as control remained in question, litigation—prolonged, expensive, and uncertain—threatened. Surely, Harriman reasoned, it would be better to make the issue moot by acquiring an undisputed majority of the common shares.
Rising on that Saturday morning from his sickbed—most likely from the recurrence of a bronchial condition plaguing him regularly—Harriman reached out to Schiff’s partner Louis Heinsheimer at the Kuhn, Loeb office and asked the firm to close up the forty-thousand-share shortfall in common shares. Heinsheimer agreed. Harriman returned to bed confident, as he would recall, “that, come what might, I had control of Northern Pacific, common stock and all.”
He was wrong. Spending the more than $4 million required for a forty-thousand-share purchase vastly exceeded Heinsheimer’s authority. He needed Schiff’s approval, but on Saturday mornings Schiff could be found only at his synagogue. Steeling himself to interrupt his senior partner at worship, Heinsheimer traveled uptown to Fifth Avenue and Forty-Third Street, the location of Temple Emanu-El, an elegant landmark built in Moorish style in 1868 to mark the rising prominence of the city’s German Jewish elite. Summoned from his pew, Schiff heard Heinsheimer out and brusquely countermanded Harriman’s order. Secure in his belief that owning a majority of all the capital shares, preferred and common, cemented control of the Northern Pacific, Schiff reckoned that acquiring another forty thousand common shares would be a waste of money—especially since the shares had closed the previous day at a stratospheric $115. That was far more than Schiff thought reasonable to pay, notwithstanding his client’s fretfulness. (The stock would close on Saturday at $110.) Schiff sent Heinsheimer home with the assurance that he would take the responsibility for the rejected order, and returned to the sanctuary.
To paraphrase an ancient adage, Schiff’s unwise decision was the nail by which the battle for the Northern Pacific was lost. It may have been difficult to fully execute Harriman’s order on that Saturday morning in the scant hours before the exchange closed at noon, even if Harriman were well enough to deliver the order to Schiff in person. But precious time was squandered; Harriman did not learn that his instructions had been ignored until trading was already underway on Monday, when he called Heinsheimer to ask why he had not received a trade confirmation.
By then, Northern Pacific was enveloped in a bull frenzy. For while Schiff had resisted making the last investment necessary to control the railroad, Morgan’s floor brokers had been instructed to acquire the necessary shares for victory at any price. The moment the opening gavel sounded on Monday morning, they swung into action. Trading started with a powerful bound upward and scarcely paused for the entire five-hour session. Northern Pacific opened at $114, a nearly unheard-of advance of four points from its Saturday close, and promptly rose another two and a half points.
As was their habit, the Morgan bankers had placed the task of managing their purchases in the hands of their master stock trader. Keene was known for his immaculate dress and impeccably trimmed beard, which earned him the nickname “the silver fox.” He was never seen on the floor of the New York Stock Exchange, for he was not a member, but preferred to work from his office and the Waldorf-Astoria. He called the hotel his “home . . . from Monday to Friday night,” in the words of the New York Sun, which further reported that brokers gathered there every evening “with the hope of getting an inkling of what Mr. Keene is to do next.” More to the point, his generalship was flawless: “Keene took more care in preparing a financial campaign, and was quicker and surer in its execution, than any man I know,” Baruch attested.
Keene delegated the floor trading of Northern Pacific chiefly to Eddie Norton of the Street & Norton brokerage firm. Street & Norton would end Monday’s session with total purchases of 200,000 shares of NP, a new record for purchases of a single stock by a single firm in a single day; its buying and selling accounted for more than half of Nipper’s total trading volume of 370,000 shares that day. Anyone with knowledge of Norton’s role could have discerned Morgan’s hand in the trading, for Street & Norton was widely known as Morgan’s favorite brokerage. But gaining that knowledge was not easy, for Norton carefully camouflaged his trading by interspersing large block sales of the shares within his even larger purchases. Yet at the end of the day Norton was still shy of the 150,000 shares needed by Hill.
What was uncertain even to those who detected a hint of Morgan’s involvement was its purpose. Rumors swept across the floor. The New York Tribune asserted that Morgan had been infuriated by the discovery that Hill and his cronies had sold Northern Pacific short during the previous week. Morgan, according to this version, had enlisted William K. Vanderbilt in a buying splurge “to catch Mr. Hill and his friends napping” and thereby “[add] the control of Northern Pacific to that of Union Pacific, which Mr. Vanderbilt secured last week.” The Tribune thus managed to allow two erroneous reports to lead it to a single utterly misguided conclusion. Cornered by reporters during the afternoon, Hill said he had “no explanation at all for the rise of Northern Pacific,” a statement that was disingenuous at best and deceitful at worst.
Some observers continued to view the action in Nipper as an artifact of the broader frenzy for stocks. “The wonderful advances in prices have been altogether too alluring to the outside public longer to resist,” reported the New York Times, citing “many signs . . . that this public was coming more and more into the market.” Among them was that sure signal to an almost exclusively male profession of a market becoming irrational: “Brokers reported that the craze had spread mightily to women, and that many orders had been received from women, rich and in only moderate circumstances alike—women, some of them, who would be the last in the world to be suspected of such a thing. . . . The speculative fever is on; where and when it will end nobody can know.”
The remarkable rise in Northern Pacific remained the center of attention all day. With the stock being bought in blocks of hundreds, even thousands, of shares, its price rose to $117, then $120, topped out at $133 and closed at $127.50. It looked like the crest of an elemental torrent of buying. But it was only the beginning.
When the market opened on the morning of Tuesday, May 7, Eddie Norton resumed buying. He had been instructed to buy up to a price of $125, but the market was running ahead of him—by the time the price reached $120 he had yet to fill half his order. There he paused, perhaps hoping that the apparent slowdown in trading would provoke the bulls to take profits by selling down. But that had not happened. The reason was that the shorts were beginning to panic.
“There was virtually no Northern Pacific stock that anyone wanted to sell,” Baruch recalled. Under exchange rules, all stock bought or sold in New York had to be delivered the following day; if a short seller could not buy shares or borrow them to make good on his trades, any investor to whom he had sold phantom stock had the right to buy on the market at any price, and demand compensation from him. Given the scarcity of Northern Pacific shares, the shorts faced catastrophe.
The result was a melee. Any trader suspected to have access to Northern Pacific shares risked being virtually assaulted on the floor. Baruch witnessed one unwitting broker being pressed flat against a railing by a baying crowd. “Let me go, will you?” he cried. “I haven’t a share of the damned stock—do you think I carry it in my clothes?”
A young broker for Kuhn, Loeb named Al Stern strode through the crowd, blithely offering to lend out a block of Harriman’s stock. As Baruch recollected:
The first response was a deafening shout. There was an infinitesimal pause and then the desperate brokers rushed at Stern. . . . Strong brokers thrust aside the weak ones. Hands were waving and trembling in the air. Almost doubled over on a chair, his face close to a pad, Stern began to note his transactions. He would mumble to one man, “All right, you get in,” and then complain to another, “For heaven’s sake, don’t stick your finger in my eye.” . . . Soon Stern had loaned the last of his stock. His face white, and his clothes disheveled, he managed to break away.
No one could yet be sure what was driving the maelstrom. “The Control of N.P.: Wall Street Still Guessing Who Has It,” blared the Tribune’s headline on Wednesday morning. The Sun, more confident in its guesswork, if not especially accurate, declared Hill the loser in his “stock duel” with Harriman. Closer to the truth, the Sun also reported that “the tremendous buying demand of the rival Harriman and Hill interests [had] absorbed the entire floating supply” of Northern Pacific. In the aftermarket, where loans of needed stock were negotiated broker-to-broker, the “money rate” hit 7 percent, meaning that for every 100-share lot a broker borrowed, he had to pay interest of $700—per day. The ferocious bidding for borrowable shares suggested that “every Stock Exchange house must be short of Northern Pacific,” the Sun reported. Estimates of stupendous losses circulated—the eminent trader Louis Wormser was said to be short sixty thousand shares, for a potential loss of $6 million. A member of his firm was seen entering the office of Kuhn, Loeb late that afternoon, possibly to plead for mercy.
NP rose by as much as twenty points on Tuesday, reaching $149.75 before closing at $143.50, up sixteen points on the day and more than thirty-three points higher than it had closed on that distant Saturday, four days earlier. May 8 promised only more madness.
On that Wednesday morning, indications emerged that the public was becoming perturbed by the goings-on of the plutocrats on the stock exchange. Observing that the machinations of Street & Norton would have required some $25 million in capital, the Sun editorialized, “At first the public were unable to account for transactions so enormous on any other theory than that vast and serious schemes of consolidation were the cause of them.” But no: In its view the truth was more frivolous. “Wall Street believes now that these astounding changes instead of signifying a revolutionary remaking of the railroad map, are simply speculation. They do not mean investment . . . but stock ‘manipulation.’” The speculators “are venturing into schemes of market twisting as staggering in their boldness as the United States Steel Corporation was among industrial enterprises . . . , with a blind and prosperous public plunging after. . . . It is a good thing for ordinary men to let alone.”
Sure enough, as Wednesday wore on, the market began to crack. With Northern Pacific still rising—it would peak at $180 that day, an incredible seventy-point gain in three trading sessions—the shorts’ desperation reached a fever pitch. Neither the Harriman nor Morgan camps were buying that day, for both had become confident that they held the necessary majority. Wednesday’s action was all from the speculators. In fact, the holdings claimed by the Harriman and Morgan camps taken together exceeded the Northern Pacific shares actually in existence by one hundred thousand, possibly two hundred thousand, shares. Whatever the true figure, there were no Nipper shares to be found in the market.
Northern Pacific had been “cornered,” in market parlance. But it was a corner unlike any other the market had seen. Corners deliberately staged to squeeze shorts for the benefit of speculators were a common occurrence; in this case, however, Morgan and Harriman were not trying to squeeze shorts in Northern Pacific—they were genuinely bidding for control of the railroad. It was the frenzied buying and selling by onlookers that created this corner. The Northern Pacific corner would be the largest ever known up to that point, but it was entirely accidental.
That was not to say that its effects were illusory. “Panic Reigns,” the New York Times declared, judging the lunacy to be even greater than what had followed the death of Roswell P. Flower two years before, previously the preeminent example of the stock market in full stampede. “Brokers acted like insane men,” the Times reported from the Produce Exchange. “Big men lightly threw little men aside, and the little men, fairly crying with indignation, jumped anew into the fray, using hands, arms, elbows, feet—anything to gain their point . . . It was something incomprehensible, almost demoniac—this struggle, this Babel of voices, these wild-eyed, excited brokers, selling and buying, buying and selling.” In the brokerage offices blocks away, the tickers “ticked out fortunes, easily made, being more easily lost.”
Unnerved by the storm, Schiff and his partners tried to quell the speculation in Northern Pacific. Asked by reporters that afternoon if it was true that the “Harriman syndicate” now had control of the railroad, Schiff replied levelly, “We think that we have.” An unnamed spokesman for Morgan was somewhat more reserved, but also signaled that his side’s buying was at an end. “Mr. Schiff, himself, told me to-day that they controlled the Northern Pacific,” he said. “Mr. Schiff is a truthful man and I suppose I must believe him.”
AFTER THE MARKET’S 3 p.m. close on Wednesday, May 8, the insanity moved uptown to the Waldorf. The vast hotel’s bars and hallways were dense with tobacco smoke and redolent of stale whiskey. Brokers huddled in clumps to negotiate borrowings of Northern Pacific stock at prices that threatened ruin—money rates reached 85 percent, meaning that a borrower would have to pay $8,500 for the loan of one hundred shares for only a few hours. To onlookers, it seemed that a well-deserved comeuppance was at hand. “For several months,” crowed the Sun, “the brokers and the professional room traders and even their clerks have turned up at the Waldorf-Astoria for dinner . . . All were in evening clothes and all lolled and waggled their heads, and proclaimed, ‘The world is mine.’ Last night very few of the brokers and none of the professional room traders and no clerks appeared in evening clothes.”
The rumor mill continued to grind at top speed, with spectacular losses by major players still the prime grist. Bet-a-Million Gates was said to be in a $6 million hole on his short position in Northern Pacific. Mobbed by newspaper reporters at the Waldorf, he denied the calumny.
“Do I look like it?” he barked. “No, I have not lost a cent. But even if I had it would not interest the public; it would only concern my heirs.”
“But the public believes that you sold 60,000 shares of Northern Pacific short.”
“If anyone can prove that I have sold 6,000 shares short I will give him 60,000 shares as a present.”
(“Nevertheless,” commented the Sun, “Mr. Gates was not as frisky and not in as genial a mood as usual.”)
Exasperation with the turbulent market was plainly spreading. James Hill watched bemusedly what he later referred to as “a good-sized panic in New York.” Unlike Schiff, Harriman, and Morgan, he was not a habitué of Wall Street and found the goings-on unseemly and thoroughly inexplicable. He reached back to his experience on the western frontier for his judgment. “All I can do is liken it to a ghost dance,” he told reporters.
The Indians begin their dance and don’t know why they are doing it. They whirl about until they are almost crazy. It is so when these Wall Street people get the speculative fever. Perhaps they imagine they have a motive in that they see two sets of powerful interests which may be said to be clashing. Then these outsiders, without rhyme or reason, rush in on one side or the other. They could not tell you why they make their choice, but in they go, and the result is such as has been seen here for the past few days.
The other rumors consuming the Waldorf crowd concerned the possibility of a settlement allowing the short sellers to escape with their shirts, which would require an agreement between the Harriman and Morgan camps. Both sides were inclined to find a solution—desperate, in fact—for it served no one’s interest to have a major panic roiling Wall Street and ruining brokers and shareholders.
Stories circulated that representatives of both sides had been seen entering the Morgan offices at six thirty that evening; others heard that Keene had been seen at the Waldorf in conference with his principals at 10 P.M., with a deal bruited about to allow the shorts to cover their positions at anywhere from $150 to $250 per share.
But by the end of the night no settlement had been announced. As dawn broke on Thursday, May 9, Wall Street steeled itself for a final paroxysm.