Andrew Mellon
Andrew Mellon
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Now elected
President on his own, Calvin Coolidge set out to practice and preach
his religion of business. The United States, he declared, was
a business country and wanted a business government. He set
out to give them just that.
Perhaps
the best indication of how Cal was going to lead the country is
symbolized in his appointment of the man to head the Treasury--Andrew
Mellon. Andrew Mellon
incarnated the new Republican experiment: he was a banker from
Philadelphia, now in charge of regulating the monetary affairs of all
the banks in the country--in short, somewhat akin to putting the fox in
charge of the henhouse.
Mellon said that government was just a business, and should be run on
business principles. His first priority was to balance the
budget, and his second was to pay off the national debt. But most
of all, he wanted to lower the surtax on the rich. He thought
that paying a rate any higher than 25% would rob American businessmen
of their initiative. He favored a tax bill giving tax breaks to
millionaires, but even in the pro-business Twenties, such a bill was
not entirely popular. But Mellon kept at it, each year chipping
away more and more of the tax burden on the upper brackets.
Tax
reduction wasn't Mellon's only resource. When he could not get a
reduction,
then he could offer a refund--a process which had the advantage of
taking place behind closed doors. Not until the 1930s was it
revealed to the nation exactly what Mellon had done. In his first
eight years at the Treasury, Mellon had dispensed $3.5 billion in the
form of cash refunds, credits, and abatements. Several million
dollars went to Mellon's own companies; other millions went to those
who promised to do the most good to the Republican party. Each of
the 17 individuals contributing $10,000 to the Republican campaign in
1930 had benefited from Mellon's official generosity.
Meanwhile,
Mellon himself continued to speculate. In 1926, Mellon's
relatives made more than $300 million in the bull market on aluminum
and Gulf Oil alone. Nor was that the end of the possibilities of
family corporations. He wrote to the Commissioner of the Internal
Revenue Service: "Pursuant to your request for a memorandum
...[on] the various ways by which an individual may legally avoid tax,
I am pleased to submit the following." The following consisted of
ten methods of tax avoidance, five of which Mellon in time admitted
under oath he had actually employed. The Commissioner, in return,
sent a tax expert to help Mellon with his personal tax returns; the
expert even turned up on Mellon's personal payroll, using the knowledge
gained in public service for the Secretary's private benefit. It
was this expert who set up even more family corporations and, through
paper losses in stock sales among them, enabled the Secretary to slash
his tax payments at a time when, in his official capacity, Mellon was
appealing to taxpayers to pay their own income taxes.
Mellon's
tax programs not only had contradictions in ethics--it contained
contradictions in economics as well. Because, while tax reduction
might act as a sedative on the national economy, it also freed up money
for speculation. This added more fuel to an ongoing speculative
boom which hardly needed more encouragement. Yet this was what
the business community
said that it wanted.
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All Roads Lead to
Wall Street
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There were other
elements in the Republican experiment. One was the tariff.
Wilson, in one of his last acts as President, had vetoed raising the
protective tariff on imports. He knew
that the only way other countries could reasonably gain the income
necessary to purchase American goods was to export goods
themselves.
The only other ways that European countries could obtain money was
either to borrow it from us or sell gold to us, neither of which Wilson
felt would be good for trade in the long run. He realized that
you could not long carry out a policy that, while beneficial at home,
was damaging to your trading partner's economy. That kind of
trade would not last long. Towards this end, he favored low barriers on
both sides. Not the Republicans. Coolidge favored a higher
tariff.
(In 1924, Congress passed the high Fordney-McCumber Tariff.)
Moreover, his Secretary of Commerce, Herbert Hoover, favored
allowing
Europeans countries to pay for American goods with money borrowed from
American banks. And why not? By letting them borrow from
American banks, New York bankers would be able to collect the interests
on those loans, as well as the profits from the sale of goods.
In the Republican governmental experiment, one government hand neatly
washed the other hand in business, and vice versa.
In the same way that Coolidge had appointed a banker, Andrew Mellon, to
head the regulatory agency of banks, so he now appointed businessmen to
run the regulatory agency of business, the Federal Trade Commission
(FTC). The new head of the FTC, W.E. Humphrey, viewed the FTC as
an instrument of oppression for business. Under his guidance, he
declared that the agency would no longer serve as "a publicity bureau
to spread socialistic propaganda." He set out to drastically
change policies and procedures within the FTC. Whereas the FTC
had been set up to discourage monopoly, it now espoused the cause of
self-regulation of business, sponsoring industry-wide "trade
associations" through which an industry could police itself.
Washington thus began to smile upon tendencies towards economic
concentration, which,
for the better part of a century, it had, in theory at least,
disapproved. Hoover, in the Commerce Dept., favored these trade
associations, and
helped
to work out codes, which were then endorsed by the FTC and adopted
by industry. These codes in some cases provided fronts behind
which businessmen could conspire to evade the antitrust law.
More overt forms of concentration thrived equally. Holding
companies moved
into utilities and transportation, chain stores moved into
distribution; in all areas, big firms swallowed small firms and merged
with other big ones. By 1930, two hundred of the country's
largest non-banking corporations controlled more than fifty precent of
the nations' corporate wealth. And from the viewpoint of the
Republican-controlled government, the nation's wealth could not be in
safer hands.
On the surface, this view did not seem unjustified. The economy
of the Twenties boomed. Living standards rose and economic
opportunities expanded. The imagination of the American
capitalist and the American engineer had never been more apparent to
the people. For a time, the country seemed to be on the edge of a
new abundance.
Yet the very process of plenty created problems. The most
important fact was
the increase
in technological efficiency and productivity. The output per
man-hour rose
about forty percent during the decade. The central economic
challenge would
be to distribute the gains of productivity in ways that would maintain
employment and prosperity.
By the rules of orthodox economics, the reduction in production costs
brought about by new technology and efficiency should have brought
about either a
reduction in prices, a rise in wages, or both. But the rigidity
of the economy, in part symbolized by the increasing concentration
of wealth, interfered with the normal response between business and the
market. Prices remained high, and wages low.
One reason wages remained low was because of the poor bargaining power
of the unions.
Unions had suffered as a result of the postwar strikes, and as a
result, businessmen were able to monopolize the gains of increasing
productivity. Just to give an example of the disparity:
profits rose over eighty percent as a whole, or twice as much as
productivity; and the profits of financial institutions rose a
staggering one-hundred fifty percent.
The increase in profits naturally pushed up the prices of corporate
securities; and
as securities rose in value, corporations found that the easiest way
to obtain new cash was to issue more securities. This
was cheap money, because there was no need to pay a return on stock
issues the way you would have to pay interest on a loan from a
bank. Corporations
then plowed the money back into increasing production, which pushed
more
goods onto an already flooded market; or, as time passed, they funneled
more funds into speculation. The result was to push stocks up
again,
and start the whole process anew at an even higher level. So as
the Twenties proceeded, the value of stocks continued to spiral upward,
and the stock market continued to suck off an increasing share of the
nations's profits, and so money was kept out of circulation and failed
to be distributed downward to the wage-earner.
The stock market boom
had not always been artificial; it had its origins in solid industrial
expansion, such as that brought on by the auto industry and its
associated supply. But the diversion of gains into profits rather
than wages would eventually result in a fall in the people's
purchasing power.
Because of Mellon's tax policy, with its emphasis on tax relief for
millionaires rather than consumers, created a maldistribution of
income and
stimulated
oversaving. By 1929, the 2.3% of the population
with incomes over $10,000 were responsible for two-thirds of the 15
billion dollars in savings. The 60,000 families in the nation
with the highest incomes saved almost as much as the bottom 25
million.
What this meant was that the richest Americans were not spending their
money to purchase goods, and the rest of the country did not have the
purchasing power to absorb the amount of goods being poured of the new,
efficient assembly lines.
Rural people were hurt by the agricultural depression.
Farmers lost many
of their markets after the war, and the resulting sag in agricultural
income built a basic imbalance in the economy. But the Republican
administration just couldn't quite get as worked up over the problems
of farmers as they could over businessmen. Coolidge, himself the
son of a farmer, said: "Farmers have never made money.
I don't believe we can do much about it." With Washington
unwilling
to help them, farmers fell further behind the rest of the nation, and
the agricultural half of the economy could not do its share in
maintaining demand for farm goods.
As for city people, whose wages failed to keep pace with productivity,
they received no more help from Washington that the farmers.
While businessmen might talk a good deal in public about American faith
in high wages, in practice they let the percentage of wages lag behind
the rise of output and profit. Between 1923 and 1929, output per
man-hour in manufacturing rose thirty-two percent, while hourly wages
rose only slightly over eight percent.
The unsatisfactory level of wages and farm income meant that
"prosperity" was steadily less able to generate buying
power in sufficient volume to meet the steadily rising productive
capacity--or, in other words, in time to carry goods off the market.
Finally, all of this was worsened in the end by the country's
weak banking structure . By the mid-Twenties, the whole
economic process was focused on a single point--the stock market.
The aim of business now seemed to always be maintaining the prices of
securities, or floating new ones. In order to float and maintain
these securities, corporations invented holding companies and new
investment trusts. Soon, the financial structure was so
intricate,
it was not certain that anyone could decipher it. But for the
moment, no one cared. All they cared about was the endlessly
spinning roulette wheel on Wall Street.
Speculative
loans were on the increase. "Brokers'
loans" were issued to customers by brokers so that customers could
speculate in stocks that were far beyond their means to purchase.
"Buying on the margin" meant using brokers' loans to buy stock at
only a fraction of their worth. When brokers' loans were at
twenty-five percent, this meant that one customer's hard dollar was
worth four on the market. With such a system, it seemed that
everyone could get rich.
Government, meanwhile, looked on with benign approval. The
Federal Reserve System, established by Wilson as a means of steadying
the economy, was now
used to generate easy money. In part, this was in deference to
the situation in Europe. By keeping interest rates low and credit
cheap, the Board thought it could discourage the import of gold from
Europe and make more American money available for foreign loans.
But the easy-money policy had the result of accelerating inflation in the
United States.
Soon,
even sober businessmen were beginning to look with concern on the
Frankenstein's Monster they'd created. But every time the market
seemed to falter, the administration could be relied on to speak words
of encouragement.
Some
economists spoke out. In 1927, William Z. Ripley, a Harvard
professor, protested the ongoing process whereby ownership was being
dispersed, through issues of securities, while control remained ever
tighter on
Wall Street. While stocks and bonds flowed from Wall Street to
Main Street, power flowed from Main Street to Wall Street. The
consequence, Professor Ripley felt, was to encourage corporate secrecy
and
deceit.
By the
end of 1927, brokers' loans went to nearly $4 billion mark. To
many, this seemed a wobbling basis for the nation's financial
superstructure. But on January 7, 1928, President Coolidge came
to the rescue by saying that brokers' loans were a natural expansion of
the securities market, and that he saw nothing wrong with it. And
so the market continued to rise.
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