“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” That’s what Treasury secretary Andrew Mellon is said to have told President Hoover in 1929. His essential words are misunderstood to this day.
In his often errant new book titled The Lords of Easy Money (review here), journalist Christopher Leonard disappointingly referred to Mellon as “heartless and delusional” for instructing Hoover to let the economy correct itself. In truth, Leonard was revealing himself as heartless.
Seemingly missed by the journalist is the simple truth that economies gain strength from periods of weakness whereby what no longer makes commercial sense is liquidated. While “Blockbuster Nights” in many ways defined the 1990s as increasingly inexpensive VCRs (remember those?) made “renting movies” a rather decadent luxury, by the 2000s the rise of DVDs in concert with disdain for late fees set the stage for Blockbuster’s replacement. Little known Netflix, which had meekly offered itself for sale to Blockbuster twice, ultimately eclipsed what the FTC viewed as too powerful as recently as 2005. How things change. Thank goodness they do.
The failure of a business or businesses, contrary to what Leonard thinks, signals progress. It’s a sign that precious resources presently being underutilized or misused altogether will soon reach more capable hands. Leonard views it has “heartless” for politicians to allow businesses to fail, but what’s really heartless is to prop up what markets no longer deem worthy of precious capital. There are quite simply no entrepreneurs or expanding businesses without capital, so when government “compassionately” keeps resources in the hands of poor stewards, the losers are the good stewards. Along with customers. Does anyone yearn for Blockbuster over Netflix? When Netflix is eventually replaced by an entrepreneur who sees a way to meet our needs in ways Netflix doesn’t, should politicians prop up the latter? These questions answer themselves. Or they should.
Leonard yet again misses what an actual businessman like Mellon intuitively grasped, and that investor extraordinaire Howard Marks expertly grasps today. Marks has long made the point that the seeds of economic boom are planted during the bad times, and that the seeds of economic difficulty are planted during the good times. Put another way, during good times we develop bad habits, reach on hires, reach on loans, investments, etc. On the other hand, it’s during the bad times that we’re forced to come to terms with errors, when we’re made to – yes – liquidate all the mistaken actions taken when the commercial outlook was relatively flush. Without liquidation that is the logical result of allowing markets to work such that bad stewards of resources are forced to give up control, crucial resources would never change hands. Reduced to the slow growth absurd, Blockbuster would live forever.
All of this rates discussion ahead of a recent Wall Street Journal headline that was buried deep in the B section. Titled “Surgery Centers Fill Retail Vacancies,” what was buried in a relative sense was actually wildly bullish. According to Konrad Putzier, author of the article, a “closed Sears department store and an adjacent wing” of the Marketplace Mall in Rochester, NY are “being reborn as a roughly 350,000-square foot orthopedic healthcare campus.” Please think about what you just read.
A surgery center is replacing Sears. Notable here is that Sears opened its proverbial doors in 1893, and did so at a time when surgery was largely unheard of. Medicine in the late 19th century was beyond primitive relative to today’s standards. As for Sears, it soon enough became the Amazon of its time. Sears was the innovator extraordinaire, and its rise led to all manner of dislocation in retail. Thank goodness for the dislocation. Sears thrived precisely because it met customer needs in ways that merchants before it hadn’t. But as is always the case in a dynamic economy, eventually giants stumble. A Sears that was a giant well past the mid-point of the 20th century was limping by century’s end, and filed for bankruptcy in 2018. How things change!
The main thing is that the relentless process whereby bad in a free market economy is replaced with good is the essential driver of economic progress. “Heartless” is once again not allowing markets to deliver their verdict on businesses. Mellon correctly thought markets exponentially smarter than politicians, and that’s what any reasonable person would divine from his comments to Hoover. Hoover sadly ignored him, thus the Great Depression. Slow growth is always and everywhere a consequence of blunting the message of the markets, and by extension propping up the present at the expense of the future.
All of which speaks again to how bullish Putzier’s article was. As he went on to write, while shopping malls “have long been home to urgent-care facilities or doctor’s offices,” in recent years it’s been the case that landlords have been “increasingly desperate to fill big blocks of space.” Surgery centers are filling space retailers used to occupy, plus with the exciting rise of big data, Mark Mills notes in The Cloud Revolution that empty shopping malls are similarly giving way to data centers that will power a future of commerce that will make the internet economy seem like the telephone economy by comparison. The future is bright thanks to liquidation.
Without the relentless movement of resources to higher and higher uses, progress would stall. Economies gain strength from periods of weakness precisely because the weakness born of capital misuse is what enables the transfer. In short, what Leonard deems heartless is actually the definition of compassionate.
Better yet, it calls for a rethink by wise minds of what Mellon is said to have said to Hoover. Leonard errantly claims that in “urging Hoover to liquidate so much value, Mellon liquidated years of future economic growth.” In truth, Hoover’s failure to heed Mellon’s sage advice is what held the economy back. If you doubt this, ask yourself what the U.S. economy would look like today if allegedly kind politicians had saved Blockbuster, Sears, and shopping centers that customers long before deserted.
