When President-elect George W. Bush chose Paul H. O’Neill, chairman of the world’s largest aluminum manufacturer, to be his secretary of the treasury, Bush said, “it’s important for me to find somebody who has vast experience, who has a steady hand, and when he speaks, speaks with authority and conviction and knowledge.” If O’Neill turns out to be half as good as the other Alcoa executive who once occupied the same cabinet post, he’ll do the country great service.
From 1921 to 1932, Andrew William Mellon served Presidents Harding, Coolidge, and Hoover as treasury secretary. His business prowess was legendary. With an uncanny ability to pick cutting-edge technologies and the right entrepreneurs to bet on, Mellon built a financial and industrial empire in steel, oil, shipbuilding, coal, coke, banking, and aluminum. One of the giant firms he helped found was, of course, the Aluminum Company of America, or Alcoa. Mellon was already one of the three wealthiest men in America when Harding tapped him for the $12,000-a-year federal job at the age of 65.
Arguably, Mellon’s greatest contribution to America was not the vast wealth he created or the vast wealth he gave away (a single $15 million Mellon gift built the National Gallery of Art), but rather the vast wealth his fiscal policies allowed millions of Americans to produce. Mellon’s riches did not insulate him from the real world; rather, they reinforced in his mind just how the real world works.
When Mellon came to Washington, the federal income tax hadn’t yet celebrated its tenth birthday, but the false prophets who had scoffed that it could ever get as high as 10 percent had already been shamed by events. The top marginal income tax bracket was 73 percent by 1921. Mellon noticed that confiscatory rates were putting scarce capital to flight as investors sought refuge abroad or in tax havens at home. In later years he would often point to John D. Rockefeller’s brother William, who had $44 million in tax-exempt bonds and only $7 million in Standard Oil when he died in 1923.
Mellon’s view of the deleterious effect of high tax rates was formed early in life. His grandfather left Ulster to escape a crushing tax burden, and Andrew’s father made sure his son understood that. In America the Mellon family practiced thrift and entrepreneurship and credited the strong incentives of a free economy for giving them those opportunities.
Mellon was always a thoughtful, never an impulsive fellow. If he didn’t have the facts, he didn’t jump to conclusions. He took his time, did his homework, and paid attention to detail. But once he made up his mind, he knew what he had to do and didn’t vacillate. What he lacked in oratorical skills, he more than made up for in intellect, in long hours of study, and in a quiet thoughtfulness that contemporaries recognized as admirable.
Arguing that taxes had to be slashed “to attract the large fortunes back into productive enterprise,” Mellon as treasury secretary noted that “more revenue may often be obtained by lower rates.” Henry Ford, he pointed out, made more money by reducing the price of his cars from $3,000 to $380 and increasing his sales than he would have earned by keeping the price and profit per car high. He relentlessly pressed Congress to do the right thing, and by 1929 when it passed his sixth tax cut of the decade, the top rate had been lowered two-thirds, from 73 to 24 percent. Those in the lowest income bracket (earning under $4,000 annually) saw their rates fall by an even greater percentage—from 4 percent to 0.5 percent.
Mellon also worked to repeal the federal estate tax, but secured just half the loaf; Congress cut it from 40 to 20 percent. At his urging, the gift tax was abolished. So many exemptions were introduced or raised that between 1921 and 1929, the number of Americans who paid federal income taxes fell by one million. Barely 2 percent paid any federal income tax at all by the end of the decade. Mellon would surely regard George Bush’s campaign statement that “no American should pay more than a third of his income to the federal government” as laudatory, and probably rather tepid as well.
The soak-the-rich crowd cried foul and painted dire pictures of a hemorrhaging treasury. But as Burton W. Folsom points out in The Myth of the Robber Barons, “the result for Mellon in government revenue was a startling triumph: the personal income tax receipts for 1929 were over $1 billion, in contrast to the $719 million raised in 1921, when tax rates were so much higher.” The economy grew by 59 percent in that period, America was awash in new inventions, and American wages became the envy of the world.
Mellon had to deal with class-warfare agitators who despised his policies at the treasury. During the debate over the 1926 tax cuts, Senator George Norris of Nebraska charged that if the administration had its way, Mellon himself would reap “a larger personal reduction (in taxes) than the aggregate of practically all the taxpayers in the state of Nebraska.” Norris never mentioned the other side of the coin: Mellon was paying more in taxes than all the people of Nebraska combined.
An even bigger thorn in Mellon’s side was a fellow Republican, Senator James Couzens of Michigan. Couzens was a maverick who fought the tax-cutting, penny-pinching ways of the Harding and Coolidge administrations at almost every turn.
Neither Norris nor Couzens, nor other congressional enemies, made much of a dent in the treasury secretary’s program in the 1920s. The great majority of what Mellon wanted he got, and very little of what he opposed ever passed.
To his further credit, Mellon exerted his influence to constrain the spending side of government. In 1928, total expenditures were actually a shade lower than they had been in 1923. In his own department, Mellon slashed expenses and eliminated an average of one treasury staffer per day for every single day during the 1920s.
Conventional history texts are prone to ignore these achievements of Mellon or even cavalierly declare that they set the stage for the Great Depression. But as any economist worth his salt will assert, it was mismanagement of the money and credit supply by the Federal Reserve that brought the good times to an end. Additionally, the massive hikes in taxes, tariffs, and regulations begun under Herbert Hoover reversed the Mellon program and assured Americans of a decade-long slump.
Will Paul O’Neill be another Andrew Mellon? We should all earnestly hope so.