Our Economic Past Andrew Mellon: The Entrepreneur as Politician

BY BURTON FOLSOM, JR.

arely do spectacular entrepreneurs leave their The U.S. tax system, which generated the revenue to realm of business for the political arena. One pay the debt, was in disarray.Under President Woodrow R exception is Andrew Mellon, the third- Wilson, Harding’s predecessor, the income tax had wealthiest American of his era, who left a dazzling become part of American life.Wilson started with a top career in American industry to become secretary of marginal rate of 7 percent, but he argued that the war treasury under Presidents Warren Harding, Calvin required a drastic rise in taxes. Congress agreed, and by Coolidge, and Herbert Hoover. 1920, Wilson’s last full year in office, the top rate Mellon established his career in Pittsburgh as a suc- reached 73 percent.Tax avoidance was rampant, and the cessful banker—always on the lookout for profitable annual revenue did not offset expenses. innovations to back. His investments in Gulf Oil chal- Finally, the debts that the European allies owed the lenged the legendary John D. Rockefeller, and Mellon’s United States for food and materials during the war establishment of Alcoa introduced lightweight alu- were over $10 billion. Britain and France, which owed minum as a significant industrial metal. the most, were balking at repayment. Should Mellon have given up run- Few secretaries of the treasury have ning these and other profitable ventures ever encountered such formidable in 1921 to work under President Hard- problems, and Harding (who died in ing, a career politician who had little 1923) and Coolidge relied on Mellon understanding of economics? Mellon for financial advice. Mellon’s attack on hesitated. But when Harding persisted, the debt was twofold. First, he renego- Mellon joined the president’s cabinet.At tiated almost one-third of the debt at age 65, Mellon had experienced a full lower interest rates; second, he helped career in business; his country, which chop federal spending from $6.5 bil- was in economic chaos after World War lion in 1921 to $3.5 billion in 1926. I, had 11.7 percent unemployment and Coolidge, in particular, obliged by needed his financial guidance. vetoing special-interest legislation—a bill to give a bonus to veterans and Confronting Crises Andrew Mellon another to subsidize wheat and cotton s treasury secretary Mellon con- farmers. Afronted three major crises: a spiraling national debt, Mellon was not always consistent in his free-market near confiscatory tax rates, and the repayment of large arguments. He supported high tariffs for many prod- loans owed the United States by most European nations. ucts, but he recognized that a “subsidy can be paid only The soaring national debt required immediate by taking money out of the pockets of all the people in attention. During the 140 years from the American order that it shall find its way back into the pockets of Revolution to 1916, the United States had accumulated some of the people.” a national debt just over $1.2 billion. But during World War I the debt had skyrocketed to more than $24 bil- Burton Folsom, Jr. ([email protected]) is a professor of history at lion. The annual interest payments alone exceeded the Hillsdale College, FEE’s senior historian, and author of New Deal or entire national debt before the war. Raw Deal? (Simon & Schuster, 2008).

25 DECEMBER 2008 Burton Folsom, Jr.

Mellon, meanwhile, did his part to promote thrift. over $1 billion by 1929. Finally, the United States had He cut staff at the Treasury Department, and he budget surpluses every year of Coolidge’s presidency, reduced the size of America’s paper money; the smaller which cut about one-fourth of the national debt. bills were more durable and saved ink and paper. On the issue of the Allied loans, Mellon was less suc- The slashing of the tax rates, however, was where cessful.When the Europeans refused to begin payments Mellon did his most good. He carefully studied the on their debts, Mellon substantially lowered the interest effects of confiscatory rates and concluded that most rates on the loans and gave the Europeans 62 years to wealthy Americans were avoiding payment of taxes by repay. At first, they agreed, and even began making exploiting tax loopholes—foreign investments, the small payments, but only Finland paid off its entire debt. buying and selling of art and coins, and the purchase of The other countries eventually asked for a moratorium tax-exempt bonds. on payments, and then abandoned their debts entirely. Why not, Mellon argued, cut the top rate from 73 to Oddly, the Allies had one good argument for reneg- 25 percent? In fact, why not chop all rates by the same ing on their debts. In 1930, when the United States proportion? That idea—which would be called the Mel- passed the Smoot-Hawley Tariff, the highest in Ameri- lon Plan—would not only encourage the rich to invest can history, Europeans asked how they could repay in the American economy, it might actually generate their loans when the United States was refusing to more revenue. “It seems difficult for accept their imports? Hoover ulti- some to understand,” he wrote, “that mately appointed Mellon as ambas- high rates of taxation do not necessarily Cutting both federal sador to England—in part to nudge mean large revenue to the Government, spending and tax the British into honoring their debt and that more revenue may often be commitment—but with the Great obtained by lower rates.” rates across the board Depression under way, even Mellon’s Coolidge fully backed the Mellon worked wonders powers of persuasion failed to move Plan, and Congress passed it in stages the British. during the 1920s. Cutting both federal for the American By 1933, with the arrival of spending and tax rates across the board Franklin Roosevelt and the New worked wonders for the American economy. Dealers, the times had changed for economy. American businessmen Mellon. Hoover had raised the top plowed capital into radios, cars, refrigerators, vacuum marginal income tax rate to 63 percent, and Roosevelt cleaners, telephones, and a variety of new inventions hiked it to 79 percent in 1935. Moreover, Roosevelt from the air conditioner to the zipper. Entrepreneurs played politics and pressured the IRS to assess Mellon a knew they would be able to keep most of what they $3 million fine for tax evasion. Mellon gladly went to invested, and the American economy grew rapidly dur- court and was vindicated of all charges of wrongdoing. ing the 1920s. David Blair, the former commissioner of internal rev- enue, called the tax investigation “unwarranted abuse Measuring Misery by high officials of the government.” ne measure of prosperity is the misery index, Mellon, despite the trumped-up charges, always Owhich combines unemployment and inflation. focused optimistically on the art of the possible. Before During Coolidge’s six years as president, his misery his death in 1937 he donated his superb art collection index was 4.3 percent—the lowest of any president dur- to the United States. In doing so, he wanted to avoid ing the twentieth century. Unemployment, which had all federal expense, so he built the National Gallery of stood at 11.7 percent in 1921, was slashed to 3.3 percent Art in Washington, D. C., to house the paintings and from 1923 to 1929.What’s more, Mellon was correct on then donated all of it to his country. When Mellon the effects of the tax-rate cuts—revenue from income went to Washington, he changed it more than it taxes steadily increased from $719 million in 1921 to changed him.

THE FREEMAN: Ideas on Liberty 26