Andrew Mellon: Hero of the 1920s

The following article is excerpted from a speech delivered by the author in Pittsburgh, Pennsylvania, for Grove City College’s Institute for Faith & Freedom on June 6, 2023. The video is available here.

Of the nearly 80 people since Alexander Hamilton to hold the office of secretary of the treasury of the United States, my choice for the best of them is Andrew Mellon of Pittsburgh (1855–1937).

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 a legendary knack for backing promising technologies and finding 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. Its success was one of the many reasons Mellon was 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.

Mellon’s greatest contribution to America, though, was not the vast wealth he created or the vast wealth he gave away, but rather the vast wealth his policies allowed millions of other Americans to produce.

When Mellon came to Washington, the federal income tax hadn’t yet celebrated its 10th birthday, but the false prophets who had scoffed that it could ever get as high as 10 percent had already been dismissed by reality. The top marginal income tax bracket stood at 73 percent by 1921. Mellon noticed that confiscatory rates were prompting investors to seek refuge abroad or in sterile tax havens at home.

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 lighten up. 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.

So many exemptions were introduced or raised that between 1921 and 1929, the number of Americans who paid federal income taxes fell by 1 million. The budget boasted a string of surpluses as revenues soared and the national debt tumbled by almost half.

Mellon also worked to repeal the federal estate tax, but Congress cut it only from 40 to 20 percent.

Burton W. Folsom points out in The Myth of the Robber Barons that “the result 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.

To his further credit, Mellon exerted his influence to constrain the spending side of government. In 1928, total expenditures were 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. He even cut the size of our paper money to save printing costs.

It’s worth noting that the country endured a sharp economic contraction early in Mellon’s tenure in Washington — the 1921 Depression. A corrective downturn was inevitable after years of inflation spawned by the money-printing of the Woodrow Wilson years. What made the 1921 slump so remarkable was its short duration. Unemployment spiked well into double digits, but it was all over in eight or 10 months. Why? As James Grant explains in his superb book, The Forgotten Depression—1921: The Crash That Cured Itself, President Warren Harding followed Mellon’s advice and did the right thing: He cut spending and taxes, reduced the debt, balanced the budget, and refrained from regulatory interventions that would have prolonged the depression, as they would do a decade later under Hoover and Roosevelt.

For 13 years during the 1920s and early ’30s, the 18th Amendment (put in place under Wilson) required the federal government to ban alcohol. Mellon detested Prohibition, regarding it as unenforceable meddling in private habits, but enforcement was the responsibility of his department. Because the treasury agents who served in the Prohibition Bureau were underpaid and overworked, they were more than a little susceptible to bribery. Two-thirds were forced out on either suspicion or proof of corruption — proving Mellon’s hunch that the whole effort was futile and counterproductive.

Foreign embassies were exempt from Prohibition. Located on foreign soil, they could provide alcohol to their guests regardless of U.S. law. Congress tried to close this loophole in 1923 by demanding to know how much liquor the embassies were importing. Mellon was ordered by the House to provide a detailed report, but he refused, claiming rightly that such a disclosure would violate diplomatic immunity.

With the support of Presidents Hoover and Coolidge, the “Mellon Plan” fostered remarkable growth in productivity, investment, and innovation. But the “Roaring ’20s” included an insidious and unsustainable boost from monetary policies at the Federal Reserve. From 1924 to 1929, the Federal Reserve expanded the nation’s money and credit supply by two-thirds, driving interest rates to historic lows and creating a bubble that burst when the Fed reversed itself in 1929. It then presided over dramatic hikes in interest rates and a money and credit collapse that took down the stock market and the economy with it.

President Hoover made matters worse with his own version of a “New Deal.” He more than doubled income tax rates, boosted subsidies and spending, and crushed world trade by signing massive tariff hikes into law. He also removed Mellon from Treasury and sent him to London as America’s ambassador. As I explained in detail in Great Myths of the Great Depression, the country remained in the doldrums for a decade as taxes and regulations under Franklin Roosevelt acted as a wet blanket on economic recovery.

Mellon died in 1937 at the age of 82. His lifetime of generous philanthropy included the gift of his substantial art collection, along with $10 million, to establish the National Gallery of Art in Washington, D.C.

This week, the country marks the centennial of Calvin Coolidge stepping into the White House upon the unexpected death of Warren Harding. It ought to be a time for celebrating not only the legacy of a great president but also that of his superb treasury secretary. It was under Coolidge that the Mellon Plan achieved its fullest implementation, and the country was all the better for it.

Lawrence W. Reed is president emeritus of the Foundation for Economic Education in Atlanta, Georgia. He blogs at www.lawrencewreed.com.

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