Andrew Mellon: The Treasury Secretary Who Cut Taxes to 25%

On 4 March 1921 a thin, grey man of sixty-five took the oath as Secretary of the Treasury, and the reporters present discovered they could not hear him. Andrew William Mellon spoke barely above a whisper, avoided crowds, and had never stood for elective office in his life. He came to Washington from Pittsburgh carrying a fortune built on aluminium, oil, coke and banking, one that most contemporary reckonings placed third in America behind John D. Rockefeller and Henry Ford. He remained at the Treasury for nearly eleven years and three administrations, which by the middle of the decade had produced a standing Washington joke: three presidents had served under Mellon.

What he left in February 1932 was a statutory top rate of income tax at a quarter of income, a federal debt roughly a third smaller than the one he inherited, and a public reputation in freefall. Congress was drafting articles of impeachment against him as he packed for London.

The Bank on Smithfield Street

Mellon was born in Pittsburgh on 24 March 1855, the sixth of nine children of Thomas Mellon, an Ulster-born farmer's son who had become a county judge and then, in 1869, the founder of T. Mellon & Sons' Bank. Andrew went to Western University of Pennsylvania, left without graduating, and in 1874 was set up by his father in a lumber and coal business alongside his brother Richard. Judge Mellon assessed his children by their aptitude for money, and Andrew scored highest. In 1882, at twenty-seven, he was handed the bank outright.

Pittsburgh in the 1880s ran on coke, glass and steel, and the bank's business was lending against them. Mellon's method was to take equity rather than fees in enterprises he judged sound, which made him less a lender than an industrial promoter. He financed Henry Clay Frick's coke ovens and made Frick his closest friend for four decades. In 1889 two men walked in with a process for smelting aluminium electrolytically, invented by a young chemist named Charles Martin Hall; Mellon put money into their Pittsburgh Reduction Company, and by 1907 it had been renamed the Aluminum Company of America. When a wildcat well at Spindletop, Texas, blew in on 10 January 1901, it was Mellon money, routed through his nephew William Larimer Mellon, that turned the strike into what became Gulf Oil.

By 1921 he sat on the boards of some sixty corporations. He resigned from them formally on taking office and was accused for the next decade of having resigned from nothing that mattered, since the shareholdings stayed in the family and the family answered to him.

Scientific Taxation

The fiscal position Mellon walked into was a war hangover. To finance 1917 and 1918 the top marginal rate of federal income tax had been driven from 7 per cent in 1913 to 77 per cent, and an excess profits tax sat on corporate earnings. Gross federal debt stood near twenty-four billion dollars, against roughly one billion before the war. A sharp deflation was under way, the one examined in the depression of 1920 and 1921 that America let run, and Warren Harding had campaigned on normalcy without much notion of what it meant in ledger terms.

Mellon supplied the notion. His argument, which he set out in a slim 1924 book called Taxation: The People's Business, was not that high rates were unjust but that they did not collect. "The history of taxation shows that taxes which are inherently excessive are not paid," he wrote. Wealthy men facing a 73 per cent surtax did not hand over 73 per cent; they moved capital into tax-exempt state and municipal bonds, held assets rather than realising gains, and arranged their affairs so that taxable income failed to appear. Cut the rate far enough, and the same men would prefer taxable enterprise to shelter. Revenue from the top of the distribution would rise, not fall.

He paired this with an insistence on distinguishing between kinds of income that has outlasted most of his other ideas. "The fairness of taxing more lightly income from wages, salaries or from investments is beyond question," he argued, since earned income stops when the earner does while capital keeps working. The 1921 act he pushed through introduced a preferential rate on capital gains of 12.5 per cent, the first in American law, and the distinction between ordinary and capital income has been contested in every tax debate since (Brownlee, 2016).

Four Revenue Acts

Mellon never got the schedule he asked for in the form he asked for it. He wanted the top surtax at 25 per cent in 1921 and Congress gave him 50; he wanted the estate tax gone and Congress raised it. Across four acts, though, the direction never reversed.

Spending fell alongside the rates. Federal outlays had run above eighteen billion dollars in fiscal 1919 and were under three and a half billion by the middle of the decade. Every fiscal year from 1920 to 1930 closed in surplus, and the surpluses went to retiring debt, which came down from about twenty-four billion dollars in 1921 to roughly sixteen billion in 1930. No Treasury Secretary before or since has presided over a decade of continuous debt reduction on that scale.

Whether the rate cuts caused the growth of the 1920s is a question economists have not settled. Receipts from the highest brackets did rise after 1925 in both dollar and share terms, which Mellon's defenders have cited ever since as an early demonstration of a revenue-maximising rate. Careful work on the underlying returns finds the picture muddier: much of the apparent surge reflects capital gains realisations that the new 12.5 per cent rate made cheap to take, and a reallocation out of tax-exempt municipals rather than any large change in productive investment (Smiley and Keehn, 1995). The strongest claim the data will carry is that the top of the distribution responded to rates quickly and in the direction Mellon predicted, on a scale smaller than he claimed.

The Couzens Affair

Mellon's conception of his office did not include being questioned about it. In 1924 Senator James Couzens of Michigan forced through a Senate investigation of the Bureau of Internal Revenue and paid for its staff out of his own pocket. Couzens was a Republican who had made his own fortune as Henry Ford's business partner, and he regarded Mellon's programme as a raid on the Treasury by its custodian.

The Bureau, which reported to Mellon, responded by assessing Couzens roughly ten million dollars in back taxes on his 1919 sale of Ford Motor Company stock. Couzens fought it for four years and won: in 1928 the Board of Tax Appeals held that he owed nothing at all, and found in passing that the government's valuation had been constructed after the fact. The episode did more than any speech to fix the charge that the Treasury under Mellon was a private instrument, and it fed directly into the case against him seven years later (Cannadine, 2006).

There were sharper conflicts available to his critics. Alcoa held an effective monopoly on American aluminium throughout his tenure while the Treasury's customs and tariff machinery sat under his signature. Gulf Oil prospered while the Treasury shaped depletion allowances. The Bureau of Prohibition was a Treasury agency until 1930, and Mellon, whose family had long owned the A. Overholt rye whiskey distillery in Pennsylvania, enforced the Eighteenth Amendment with a visible lack of appetite.

Liquidation

The crash of October 1929 found Mellon seventy-four years old and certain that the economy would right itself. He said so publicly through 1930 and 1931, in language that grew thinner as the evidence accumulated. The Treasury's contribution to the downturn was mostly a matter of what it did not do: it held to the balanced-budget orthodoxy, resisted federal relief, and in 1930 supported the tariff described in the 1930 trade law that deepened the Great Depression. Meanwhile the money stock contracted by about a third and the central bank created at the secret meeting on Jekyll Island failed to arrest it (Friedman and Schwartz, 1963).

The sentence that has attached itself permanently to Mellon's name was published twenty years later by the president he served. In his memoirs, Herbert Hoover wrote that in the cabinet debates of 1931 "Mr. Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,'" a purge that would "purge the rottenness out of the system" and leave moral and enterprising people owning the wreckage (Hoover, 1952). No contemporaneous record of Mellon saying it exists, Hoover had reason by 1952 to distribute blame, and his biographer treats the quotation as a compression of a general attitude rather than a transcript. As a summary of Treasury policy between 1929 and 1932 it is closer to accurate than Mellon's admirers like to concede.

By 1932 the surpluses were gone. Receipts had collapsed with incomes, the deficit was running above two billion dollars, and the balanced-budget commitment that Mellon had made the centre of his tenure now required the reversal of his life's work. The Revenue Act of 1932, signed on 6 June, pushed the top marginal rate from 25 per cent back to 63 per cent — the largest peacetime tax increase in American history to that date, enacted into a contracting economy by a Republican administration. Mellon had left the building four months earlier.

Impeachment and London

In January 1932 Representative Wright Patman of Texas rose in the House and moved the impeachment of the Secretary of the Treasury. His charge rested on a statute of 1789 that barred the holder of the office from engaging in trade or commerce, and he read out a list of Mellon's continuing interests: the bank, the aluminium company, the oil company, shipping, coal. The votes were probably not there, but the hearings would have been ruinous. On 12 February 1932 Hoover announced that Mellon would become Ambassador to the Court of St James's, and the impeachment resolution died with the vacancy.

London was a demotion dressed as an honour, and Mellon spent fourteen months there arguing without success about European war debts, the issue that had shadowed sterling since Churchill's return to gold at the pre-war parity in 1925. He resigned in March 1933 when Roosevelt took office.

Then the government came for him. In 1934 a federal grand jury in Pittsburgh declined to indict Mellon for tax fraud on his 1931 return, and the Justice Department pursued the claim civilly instead, seeking some three million dollars in tax and penalties. The central allegation concerned a transfer of paintings and shares to charitable trusts he controlled. The proceeding ran for three years, with Mellon in his eighties appearing to testify, and the Board of Tax Appeals delivered its decision in December 1937: a modest deficiency was owed, and the fraud charge failed entirely. Mellon had died at Southampton, Long Island, on 26 August 1937, four months before the ruling.

The Gallery

On 22 December 1936 Mellon wrote to Franklin Roosevelt offering the nation his art collection and the money to house it, on the condition that the building carry no family name. Congress accepted by joint resolution on 24 March 1937, his eighty-second birthday. The gift comprised 126 paintings and 26 sculptures. Twenty-one of them had been bought from the Hermitage between 1930 and 1931, when the Soviet government was selling masterpieces for foreign exchange: Raphael's Alba Madonna, Jan van Eyck's Annunciation, Botticelli's Adoration of the Magi. He paid something over six and a half million dollars for the group, at a moment when he was also the American official most closely identified with hard money and balanced budgets. The National Gallery of Art opened on 17 March 1941. The Mellon Institute of Industrial Research, which he and Richard had endowed in 1913, merged with Carnegie Tech in 1967 to produce Carnegie Mellon University.

Mellon's tax architecture did not survive him by long. The 1932 increase was the first of a sequence that carried the top rate to 79 per cent by 1936 and past 90 per cent during the next war. A year later, the regulatory separation imposed by the 1933 wall between banking and speculation broke up the kind of combined banking and industrial position his fortune had been built from. What did survive was the argument. Every subsequent American debate about whether cutting the top rate raises the revenue taken from the top has been conducted in terms Mellon set out in 1924. It is usually conducted without the qualification he supplied in the same book: that a tax system has to be judged on the total it collects rather than on any single schedule within it (Mellon, 1924).

He is the only man to have run the United States Treasury for eleven years, faced impeachment, been prosecuted by the government he had served, and given it the building on the Mall where his Raphael now hangs eight hundred yards from the department he ran.