Andrew Mellon: The Best Treasury Secretary in US History by Lawrence W. Reed, Foundation For Economic Education
His Greatest Contribution Was Allowing Others to Flourish
Of the 76 men who have held the office of Secretary of the Treasury of the United States, my choice for the best of them would be Andrew Mellon.
I must admit up front that I have a fondness for Mellon for a personal reason. Like me, he was of Scots-Irish ancestry and grew up in Western Pennsylvania (he in Pittsburgh, I in Beaver Falls). But in my mind, what he stood for is what stands out.
From 1921 to 1932, Andrew William Mellon served Presidents Harding, Coolidge, and Hoover as Treasury secretary. Only two other individuals in American history held the office longer than his 10 years and 11 months. Mellon’s business prowess before that 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 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. By the 1920s, he was the third-highest-income tax payer in the nation, behind only John D. Rockefeller and Henry Ford.
Arguably, Mellon’s greatest contribution to America was not the vast wealth he created or the vast wealth he gave away, but rather the vast wealth his fiscal policies allowed millions of other 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. Andrew 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.
Andrew 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 high the price and profit per car. 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.
Andrew 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. The budget was in surplus year after year in the 1920s as revenues soared and the national debt tumbled by almost half.
Soak-the-rich class warriors cried foul anyway, 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. In “Andrew Mellon: The Entrepreneur as Politician” (Freeman, December 2008), Folsom explains:
Why not, Mellon argued, cut the top rate from 73 to 25 percent? In fact, why not chop all rates by the same proportion? That idea — which would be called the Mellon Plan — would not only encourage the rich to invest in the American economy, it might actually generate more revenue.
“It seems difficult for some to understand,” he wrote, “that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates.”
Andrew 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 charlatan and a maverick who fought the tax-cutting, penny-pinching ways of the Harding and Coolidge administrations at almost every turn. He conducted witch-hunting investigations in an attempt to embarrass Coolidge and Mellon. He publicly charged that the Treasury Department was secretly giving refunds to rich, politically favored businessmen. (However, the senator was embarrassed when it became evident that the refunds were the result of clerical errors and Supreme Court decisions.)
Neither Norris nor Couzens, nor other congressional enemies, made much of a dent in the Treasury secretary’s program in the 1920s. Until President Hoover in 1930 began reversing his policies by jacking up tax rates, the great majority of what Mellon wanted he got, and very little of what he opposed ever passed.
To his further credit, Andrew 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. Mellon slashed expenses and, according to historian Folsom, he eliminated an average of one Treasury staffer per day for every single day during