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.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
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 the 1920s. The last significant redesign of American currency was Mellon’s doing in the 1920s; he even cut the size of our paper notes to save money.
As Mellon’s fiscal policies at the Treasury Department unleashed an explosion of productivity, investment, and innovation, the good times were being undermined down the street by unsustainable monetary policies at the Federal Reserve System. Artificially low interest rates, caused by the Fed’s inflation of money and credit from 1924 through 1928, added a dangerous froth to an otherwise healthy economy. When the Fed burst the bubble by raising interest rates starting in 1929, the boom gave way to the bust, made worse for a decade by tax and regulatory policies of two administrations. (See Great Myths of the Great Depression and “The 1932 Bait-and-Switch.”)
President Herbert Hoover wrote in later years that Mellon advised him at the onset of the Depression to pursue policies that would
liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate.… It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.
No corroborative evidence has ever surfaced to support Hoover’s claim. Hoover boasted that he didn’t follow the Treasury secretary’s advice but he should have. The fact is that the Depression only worsened under Hoover’s endless interventions (higher taxes, tariffs, and spending, along with bailouts and other failures that FDR would later build on and expand even more).
If Andrew Mellon indeed said what Hoover claimed, he was actually close to the truth. The sooner the economy could slough off the excesses and the unsustainable, artificial investments of the cheap-money boom, the sooner it could recover. When the Harding administration did just that in 1921, a sharp depression was over in a matter of months. (See James Grant’s superb book, The Forgotten Depression — 1921: The Crash That Cured Itself.)
Finding himself unpopular within the meddling Hoover administration, Mellon resigned his position as Treasury secretary in 1932 and then served one year as US ambassador to Great Britain.
In the mid-1930s, the Roosevelt administration went after Mellon with a frightening vengeance. The Justice Department empanelled a grand jury to look into his personal income taxes, but after intense investigation, it couldn’t even secure an indictment. Then at FDR’s direction, the government pursued a two-year civil action beginning in 1935. Known as the “Mellon Tax Trial,” it eventually exonerated Mellon of all charges. At the time, former IRS commissioner David Blair blasted the whole affair as “unwarranted abuse by high officials of the government.” It was one of many sorry episodes that exposed a nasty side of FDR that his idolaters rarely admit to.
Philanthropy was a big part of Andrew Andrew Mellon’s life. He gave away more of his own money than most likely any of his redistributionist political opponents ever gave of themselves. He donated more than $43 million to the University of Pittsburgh and millions more for the support of art and research. In 1937, he gifted his substantial art collection, along with another $10 million for construction, to establish the National Gallery of Art on the National Mall in Washington, DC.
Mellon’s generosity stands in stark contrast to Franklin Roosevelt’s insatiable money-grabbing. FDR had accomplished relatively little in private life before he became a politician and he received a monthly allowance from his mother for most of his presidency.
To score political points, FDR attacked rich people like Mellon for their “greed,” but the Tower of Greed was the White House itself, where the president was pushing for confiscatory tax rates in excess of 90 percent. By executive order, FDR once imposed a 100 percent income tax rate on all incomes over $25,000 but it was fortunately and quickly overturned by Congress. While Mellon was creating wealth and giving much of it away, the child-of-privilege Roosevelt was either stifling or swiping it, and squandering much of it for boondoggles, political patronage, and programs that generations later would yield destructive dependency and debt.
Andrew Mellon was John Galt from Atlas Shrugged in every sense but one: though he endured shameless abuse for his success, he never disappeared to a hideaway in the Colorado Rockies. But you couldn’t blame him if he had, along with other productive Americans who were vilified by Roosevelt and his henchmen. H.L. Mencken was spot on when he wrote that the president was surrounded by “an astonishing rabble of impudent nobodies,” “a gang of half-educated pedagogues, non-constitutional lawyers, starry-eyed uplifters and other such sorry wizards.” The New Deal, Mencken opined, was a “political racket,” a “series of stupendous bogus miracles,” with its “constant appeals to class envy and hatred,” treating government as “a milchcow with 125 million teats” and marked by “frequent repudiations of categorical pledges.” And, I might add, it didn’t cure the Great Depression; it prolonged it by at least seven years.
Mellon died in 1937 at the age of 82. In 1955, to commemorate the 100th anniversary of his birth, the federal post office honored the vindicated Mellon by placing his image on the three-cent postage stamp.
What a contrast Mellon is to the current secretary of the Treasury, Jacob Lew, on virtually every front:
- Mellon proved himself in the private sector before he ever took a government position; Lew’s experience in the private sector is pitifully minimal.
- Mellon wanted to unleash American enterprise with lower tax rates; Lew wants to shackle it with higher rates.
- Mellon’s signature on US currency and elsewhere was readable and elegant; Lew’s autograph generated controversy when he was appointed, because it was nothing more than a series of sloppy squiggles you would expect from a three-year-old with a crayon (he later cleaned it up for placement on US currency).
Statist historians are prone to ignore or besmirch the achievements of Andrew Mellon (after all, he was one of those “rich” guys we’re supposed to dislike). Some have even wrongfully declared that his policies set the stage for the Great Depression. Andrew Mellon, however, is worthy of so much more than all but a few of his critics ever were. He was a successful “1 percenter” who did more for the other 99 percent than all those critics combined.