Liquidate, Liquidate, Liquidate

Money, Burn, Dollar, Waste, Finance, Fire, Investments

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The above was the supposed advice of Treasury Secretary Andrew Mellon to President Herbert Hoover after the Wall Street Crash of 1929. It was good advice, which Hoover did not follow, thus landing the country in a decade of the Great Depression. However, if Mellon’s advice was good after the crash, how much more intelligent would it be to follow it before the bubble has burst, as today?

Mellon’s advice was good on an individual level and on an economic level, when he is supposed to have said it, around the end of 1929. On an economic level, there had been a great deal of unjustified over-investment in the 1920s boom, caused by an excessively loose Fed monetary policy (where have I heard that before?) so liquidating it was necessary to get down to a base of sound investment that could be built upon. This had been done in 1920-21, and it produced a sharp but mercifully short recession, followed by a decade of remarkably robust growth. Had this policy been followed in 1929-30, the result would doubtless have been similar – as it was in Britain after 1931, where Neville Chamberlain followed essentially Mellon’s prescription.

On a personal level, when Mellon made that statement, the stock market had roughly halved from its peak and was to enjoy a modest recovery in the first half of 1930. Anybody who followed Mellon’s prescription and went into cash at that point would have found that cash worth some 30% more in terms of purchasing power by the bottom of the recession in late 1932 – and worth 500% more in terms of the stocks it could buy. Anyone who followed Mellon’s advice in 1929-30 and went back into the market anywhere near the bottom would have enjoyed a prosperous 1930s. John Paul Getty, in the 1950s the world’s richest man, was asked how to become a billionaire (real money in those days). He responded: “Start as a millionaire and buy in 1932.” It was an opportunity never to be repeated.

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(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of "sell" recommendations put ...

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