TREASURY SECRETARY ANDREW MELLON AND THE “LIQUIDATE” POLICY

August 13, 2010 at 11:37 am | Posted in Economics, Financial, History, Research, USA | Leave a comment

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Andrew William Mellon and the “Liquidate” Policy

Andrew William Mellon (March 24, 1855 – August 26, 1937) was an American banker, industrialist, philanthropist, art collector and Secretary of the Treasury from March 4, 1921 until February 12, 1932.

Mellon became unpopular with the onset of the Great Depression. He advised Herbert Hoover to “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.”[7] Additionally, he advocated the weeding out “weak” banks as a harsh but necessary prerequisite to the recovery of the banking system. This “weeding out” was accomplished through refusing to lend cash to banks (taking loans and other investments as collateral), and by refusing to put more cash in circulation. He advocated spending cuts to keep the Federal budget balanced, and opposed fiscal stimulus measures. In 1929-31, he spent much of the time overseas, negotiating for repayment of European war debts from World War I. In February 1932, Mellon left the Treasury Department and accepted the post of U.S. Ambassador to the United Kingdom. He served for one year and then retired to private life.

Early life

He was born in Pittsburgh, Pennsylvania, U.S., on March 24, 1855. His father was Thomas Mellon, a banker and judge who was a Scots-Irish immigrant from County Tyrone, Ireland; his mother was Sarah Jane Negley Mellon. He was also brother of Richard B. Mellon. He was educated at the Western University of Pennsylvania (now the University of Pittsburgh), graduating in 1873.[1]

Financial prodigy

Mellon demonstrated financial ability early in life. In 1872 he was set up in a lumber and coal business by his father and soon turned it into a profitable enterprise.[2] He joined his father’s banking firm, T. Mellon & Sons, two years later and had ownership of the bank transferred to him in 1882. In 1889, Mellon helped organize the Union Trust Company and Union Savings Bank of Pittsburgh. He also branched into industrial activities: oil, steel, shipbuilding, and construction.

Three areas where Mellon’s backing created giant enterprises were aluminum, industrial abrasives (“carborundum“), and coke. Mellon financed Charles Martin Hall, whose refinery grew into the Aluminum Company of America. He became the partner of Edward Goodrich Acheson in manufacturing silicon carbide, a revolutionary abrasive, in the Carborundum Company. He created an entire industry through his help to Heinrich Koppers, inventor of coke ovens which transformed industrial waste into usable products such as coal-gas, coal-tar, and sulfur.

Mellon eventually became one of the wealthiest people in the United States. In the mid 1920s, he was the third highest income tax payer in the U.S. behind only John D. Rockefeller and Henry Ford.[3] His wealth peaked at around $300–$400 million in 1929-30.

Mellon was a member of the South Fork Fishing and Hunting Club, whose earthen dam failed in May 1889 and caused the Johnstown Flood. Mellon was a member of the Duquesne Club. Along with his closest friends Henry Clay Frick and Philander Knox, also South Fork Fishing and Hunting Club members, Mellon served as a director of the Pittsburgh National Bank of Commerce.

Career

Fundraising

During World War I he participated in many fundraising activities such as the American Red Cross, the National War Council of the Y.M.C.A., the Executive Committee of the Pennsylvania State Council of National Defense, and the National Research Council of Washington.

Cabinet secretary

Andrew Mellon was appointed Secretary of the Treasury by new President Warren G. Harding in 1921. He served for ten years and eleven months; the third-longest tenure of a Secretary of the Treasury. His service continued through the Coolidge administration and most of the Hoover administration.

President Harding, in his inaugural address on March 4, 1921, called for a prompt and thorough revision of the tax system, an emergency tariff act, readjustment of war taxes, and creation of a federal budget system. These were policies Mellon wholeheartedly subscribed to, and his long experience as a banker qualified him to set about implementing these programs immediately. As a conservative Republican and a financier, Mellon was irritated by the manner in which the government’s budget was maintained, with expenses due now and rising rapidly, with the failure of income or revenues to keep pace with those expense increases, and with the lack of savings.

The Mellon plan

Mellon came into office with a goal of reducing the huge federal debt from World War I. To do this, he needed to increase the federal revenue and cut spending. He believed that if the tax rates were too high, then the people would try to avoid paying them. He observed that as tax rates had increased during the first part of the 20th century, investors moved to avoid the highest rates—by choosing tax-free municipal bonds, for instance. As Mellon wrote in 1924:[4]

The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business.

If the rates were set more reasonably, taxpayers would have less incentive to avoid paying. His controversial theory was that by lowering the tax rates across the board, he could increase the overall tax revenue.

Andrew Mellon’s plan had four main points:

1. Cut the top income tax rate from 77 to 24 percent

2. Cut taxes on low incomes from 4 to 1/2 percent

3. Reduce the Federal Estate tax

4. Efficiency in government

Mellon believed that the income tax should remain progressive, but with lower rates than those enacted during World War I. He thought that the top income earners would only willingly pay their taxes if rates were 25% or lower. Mellon proposed tax rate cuts, which Congress enacted in the Revenue Acts of 1921, 1924, and 1926. The top marginal tax rate was cut from 73% to 58% in 1922, 50% in 1923, 46% in 1924, 25% in 1925, and 24% in 1929. Rates in lower brackets were also cut substantially, relieving burdens on the middle-class, working-class, and poor households.

By 1926 65% of the income tax revenue came from incomes $300,000 and higher, when five years prior, less than 20% did. During this same period, the overall tax burden on those that earned less than $10,000 dropped from $155 million to $32.5 million.[5]

Mellon also championed preferential treatment for “earned” income relative to “unearned” income. As he argued in his 1924 book, Taxation: The People’s Business[6]

The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs. Surely we can afford to make a distinction between the people whose only capital is their mettle and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earnings capacity is at an end.

Mellon’s policy reduced the public debt (largely inherited from World War I obligations) from almost $26 billion in 1921 to about $16 billion in 1930, but then the Depression caused it to rise again. By 1935, Franklin Roosevelt had gone back to high tax rates and wiped out Andrew Mellon’s initiatives. The top tax rate went to 80% by 1935 and the federal government increased excise taxes in an attempt to make up for the lost revenue.[5]

The Great Depression

Mellon became unpopular with the onset of the Great Depression. He advised Herbert Hoover to “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.”[7] Additionally, he advocated the weeding out “weak” banks as a harsh but necessary prerequisite to the recovery of the banking system. This “weeding out” was accomplished through refusing to lend cash to banks (taking loans and other investments as collateral), and by refusing to put more cash in circulation. He advocated spending cuts to keep the Federal budget balanced, and opposed fiscal stimulus measures. In 1929-31, he spent much of the time overseas, negotiating for repayment of European war debts from World War I. In February 1932, Mellon left the Treasury Department and accepted the post of U.S. Ambassador to the United Kingdom. He served for one year and then retired to private life.

Impeachment Proceedings

In January 1932, Rep. Wright Patman and others introduced articles of Impeachment against Mellon,[8] with hearings before the House Judiciary Committee at the end of that month.[9] After the hearings were over, but before the scheduled vote on whether to report the articles to the full House, Mellon accepted an appointment to the post of Ambassador to the Court of St. James, and resigned, thus rendering further action on the issue moot.

Personal life

In 1900, Mellon, then 45 years old, married Nora Mary McMullen (1879–1973), a 20-year-old Englishwoman who was the daughter of Alexander P. McMullen, a major shareholder of the Guinness Brewing Co. They had two children, Ailsa, born in 1901, and Paul, born in 1907. Their marriage ended in a bitter divorce in 1912, which was granted on grounds of Nora Mellon’s desertion and her adultery with Capt. George Alfred Curphey, an English soldier, and other men. Mellon did not remarry, though in 1923, his former wife married Harvey Arthur Lee, a British-born antiques dealer 14 years her junior,.[10] Two years after the Lees’ divorce in 1928, Nora Lee resumed the surname Mellon, at the request of her son, Paul.[11]

In 1913, along with his brother, Richard B. Mellon, he established a memorial for his father, the Mellon Institute of Industrial Research, as a department of the University of Pittsburgh. Today the institute is a part of Carnegie Mellon University. Mellon also served as an alumni president[12] and trustee[13] of the University of Pittsburgh, and made several major donations to the school, including the land on which the Cathedral of Learning and Heinz Chapel were constructed.[14] In total it is estimated that Mellon donated over $43 million to the University of Pittsburgh.[15]

During his retirement years, as he had done in earlier years, Mellon was an active philanthropist, and gave generously of his private fortune to support art and research causes. In 1937, he donated his substantial art collection, plus $10 million for construction, to establish the National Gallery of Art on the National Mall in Washington, D.C. The Gallery was authorized in 1937 by Congress.

Andrew Mellon was made a freemason in 1928, and Raised in 1931.

The Mellon tax trial

The Roosevelt administration subjected Mellon to intense investigation of his personal income tax returns. The U.S. Justice Department empaneled a grand jury, which declined to issue an indictment. A two-year civil action beginning in 1935, dubbed the “Mellon Tax Trial,” eventually exonerated Mellon, albeit several months after his death. Amity Shlaes argues that the prosecution was politically motivated.[16]

Death

Mellon died on August 26, 1937, in Southampton, Long Island, New York, and was buried at Trinity Episcopal Church Cemetery, Upperville, Virginia.

Legacy

The Andrew W. Mellon Foundation, the product of the merger of the Avalon Foundation and the Old Dominion Foundation (set up separately by his children), is named in his honor, as is the 378-foot U.S. Coast Guard Cutter Mellon (WHEC-717).

Books

· Mellon, Andrew W., Taxation: The People’s Business

Notes

1. Cannadine pp. 48, 165

2. Cannadine pp. 48-49

3. Cannadine, p. 349

4. Mellon, Andrew W. (1924). Taxation: The People’s Business. New York: Macmillan. pp. 13. ISBN 978-0405051012.

5. a b Folsom, Burton W. Jr. (1987). The Myth of the Robber Barons. Young America‘s Foundation. ISBN 978-0963020314.

6. Thorndike, Joseph J. (24 Mar 2003). “Was Andrew Mellon Really the Supply Sider That Conservatives Like to Believe?”. Tax History Project. http://www.taxhistory.org/thp/readings.nsf/ArtWeb/1D6628F544D4A43C85256EE0004D414D.

7. Hoover, Herbert (1952). Memoirs. Hollis and Carter. p. 30.

8. Congressional Record 1932 pg 1398-1401

9. “National Affairs: Texan, Texan & Texan”. TIME. 25 Jan 1932. http://www.time.com/time/magazine/article/0,9171,742975,00.html.

10. “Milestones: Jun. 11, 1928”. TIME. 11 June 1928. http://www.time.com/time/magazine/article/0,9171,881064,00.html.

11. “Names make news”. Time magazine. August 18, 1930. http://www.time.com/time/magazine/article/0,9171,789247,00.html. Retrieved 2009-03-30.

12. The 1937 Owl. University of Pittsburgh. 1937. p. 32. http://digital.library.pitt.edu:80/cgi-bin/t/text/pageviewer-idx?c=pittyearbooks;cc=pittyearbooks;g=documentingpitt;xc=1;xg=1;q1=Andrew%20W.%20Mellon;rgn=full%20text;idno=1937e49702;didno=1937e49702;view=image;seq=0037. Retrieved 2009-06-07.

13. Alberts, Robert C. (1986). Pitt: The Story of the University of Pittsburgh 1787–1987. University of Pittsburgh Press. p. 47. ISBN 0-8229-1150-7. http://digital.library.pitt.edu:80/cgi-bin/t/text/pageviewer-idx?c=pittmiscpubs;cc=pittmiscpubs;g=documentingpitt;xc=1;xg=1;q1=Andrew%20W.%20Mellon;rgn=full%20text;idno=00c50130m;didno=00c50130m;view=image;seq=0067. Retrieved 2009-06-07.

14. Starrett, Agnes Lynch (1937). Through one hundred and fifty years: the University of Pittsburgh. University of Pittsburgh Press. p. 256. http://digital.library.pitt.edu:80/cgi-bin/t/text/pageviewer-idx?c=pittmiscpubs;cc=pittmiscpubs;g=documentingpitt;xc=1;xg=1;q1=Andrew%20W.%20Mellon;rgn=full%20text;idno=00afj8718m;didno=00afj8718m;view=image;seq=0314. Retrieved 2009-06-07.

15. Alberts, Robert C. (1986). Pitt: The Story of the University of Pittsburgh 1787–1987. University of Pittsburgh Press. p. 182. ISBN 0-8229-1150-7. http://digital.library.pitt.edu:80/cgi-bin/t/text/pageviewer-idx?c=pittmiscpubs;cc=pittmiscpubs;g=documentingpitt;xc=1;xg=1;q1=Andrew%20W.%20Mellon;rgn=full%20text;idno=00c50130m;didno=00c50130m;view=image;seq=0202. Retrieved 2009-06-07.

16. Shlaes, Amity (2007). The Forgotten Man. Harper-Collins. ISBN 978-0061446146.

References

· David Cannadine, Mellon: An American Life, Knopf, 2006, ISBN 0-679-45032-7

· Biography at the U.S. Treasury Department

· Burton W. Folsom, Jr. The Myth of the Robber Barons (A New Look at the Rise of Big Business in America)

· Finley, David Edward. A Standard of Excellence: Andrew W. Mellon Founds the National Gallery of Art. Washington, D.C.: Smithsonian Institution Press, 1973.

· Holbrook, Stewart H. The Age of the Moguls. New York: Garden City, 1953.

· Koskoff, David E. The Mellons: The Chronicle of America‘s Richest Family. New York: Thomas Y. Crowell, 1978.

· Mellon, Andrew. Taxation: The People’s Business. New York: Macmillan, 1924.

· O’Connor, Harvey. Mellon’s Millions, the Biography of a Fortune: The Life and Times of Andrew W. Mellon. New York: John Day Co., 1933.

Andrew William Mellon and the “Liquidate” Policy

Andrew William Mellon (March 24, 1855 – August 26, 1937) was an American banker, industrialist, philanthropist, art collector and Secretary of the Treasury from March 4, 1921 until February 12, 1932.

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