Andrew Mellon

THRIFT AND PROGRESS

Just How Savings Create Business, Which in Turn Creates Jobs for Workmen. The Government's New Thrift Campaign

By ANDREW W. MELLON

Secretary of the Treasury

PRODUCTION and saving cannot be too strongly emphasized as essential factors in bringing about a business revival. The tremendous destruction wrought by the war, and the spending and extravagance which followed, resulted in a scarcity of capital which can be overcome only by rigid economy and well directed production. It has been estimated that before the war approximately one sixth of the wealth produced in this country each year was added to our capital equipment, but during the war much of our industrial development was suspended on account of the huge expenditures of the Government. The whole thought and energy of the people were directed toward the production of war supplies, and the normal capital accumulations for the upkeep and extension of industries not directly utilized for war purposes were reduced. There were fewer buildings constructed, fewer miles of railway built, fewer repairs made, and less industrial equipment purchased than normally. The shortage of dwelling houses and the rundown condition of parts of our transportation system are among the most obvious examples of the fact that capital has been diverted into other channels, but there are other evidences that much remains to be done to bring our capital supply up to normal conditions.

It has become more and more apparent

within recent years that the capital needs of the American farmer have never been adequately supplied. The farmer has been allowed to get along on what he could secure on mortgages, frequently on unfavorable terms, and one of his great handicaps has been lack of capital to make adequate improvements. The plant needs of the American railways run into billions of dollars in order to enable them to handle efficiently the growing traffic which will come with the gradual improvement in business conditions. The new industries brought into existence by the war will, in all probability, make increasing demands on the capital supply. Moreover, the anticipated world-wide demand for American machinery, tools, and hardware generally, which will doubtless come with the gradual rehabilitation of industry, must be provided for. Buildings, railways, machinery, and farm improvements constitute a part of our necessary industrial equipment—they are our producers' goods, our capital accumulation. Their upkeep and extension must come from the savings of the people. The lack of production of goods is especially noticeable in the war-torn European countries and it is one of the greatest impediments to a rapid resumption of normal business. The industrial progress of a country is measured by its productive power, and one of the most important things we can do with our productive power is to make it add to itself year by year. This can be accomplished only through saving and proper investment, in order that the supply of capital employed in manufacturing, producers' goods may increase. An American economist has described the three stages in the creation of industrial capital as follows: "(0 The production of a surplus of commercial values over and above the necessities of subsistence and maintenance; (2) the exercise of personal abstinence requisite to the saving and accumulation of that surplus; and (3) the conversion of the wealth thus accumulated into active capital—the process of investment." In reality, the trend of production is determined by the trend of buying. Men generally provide what men are willing to buy. If 50 per cent. of a nation's income is spent in buying tools, machinery, equipment, and other instruments of production, it is obvious that 50 per cent, of its productive capacity will be employed in producing them. On the other hand, if 90 per cent, of a nation's income is spent for current consumption, it is equally obvious that the same percentage of its productive capacity will be employed in producing consumers' goods. In the former case, the productive power of the country is increasing at a rapid rate and ultimately the volume of consumers' goods will increase in equal proportion. In the latter case, productive power grows comparatively slowly and industrial progress is retarded. It is evident that the thrifty man or the thrifty nation has more to spend in the long run and enjoys a larger volume of consumers' goods than the thriftless.

THE EVOLUTION OF CAPITAL

CAPITAL and Labor are two fundamental factors in production, and each factor is most efficient when combined with the other. The primitive man had little or no capital to work with and practically his entire efforts were spent in providing a bare subsistence; he lived from day to day with little provision for the future. The gradual process of saving and capital accumulation has resulted in the manifold increase in per capita production and the higher standard of living which prevails to-day. The simple fact is that under capitalistic production the man-power of the nation has increased in efficiency until it is no longer necessary for the whole population to be engaged in producing food, clothing, and other actual necessities of life. A part of our

productive power is directed toward building roads, schools, art galleries, or developing and perfecting further instruments of production. It is a cumulative process.

Under modern industrial conditions, the time element is of great importance in productive processes. Roads and bridges are constructed, canals are dug, buildings are erected, and industrial enterprises are begun which frequently require years for completion and decades before expenditures made are returned in the form of income, yet the laborers must be fed and clothed during that time. Such advances can be made only out of accumulated savings. Even to-day, many great constructive projects which would add much to the public welfare are not undertaken because of lack of capital. In his book on Poverty and Wasle, Hartley Withers, in speaking of economic conditions in England, expressed this thought as follows: "All over the country there are big things waiting to be done to equip this old land and help it to grow more stuff for us, and to bring the good stuff from the grower to the user. With capital plentiful and cheap and the energy of the people put into the work, it might multiply its output manifold."

During the war we accustomed ourselves to thrift, we were willing to reduce our expenditures and do without much that we had been accustomed to, in order to help win the war. We put our savings into government securities in order that the Government might have sufficient purchasing power to equip and send across the sea an effective fighting force. It was an emergency, and thrift was one of the methods employed to meet it. No amount was too small to be of assistance to the Government, and an army of small investors sprang up who had doubtless never before learned to save. With the return of peace, however, the need for saving was not so great, the lessons of thrift seemed to be forgotten, and an era of extravagant buying followed. Many who had accumulated small savings during the war spent them in luxurious living. We turned from a nation of savers to a nation of reckless spenders.

It should not be forgotten, however, that the efficacy of thrift is no less in times of peace than in times of war. In the present state of industry generally it is obvious that government thrift is no less important than individual thrift. Even with the most rigid economy the government outlay will be unusually heavy for years to come, on account of expenditures directly or indirectly attributable to the War. The public debt of the country is nearly 232 billions of dollars and the Treasury must not only meet the current operating expenses of the Government but must meet the interest payments on this debt and must make provision for its gradual retirement. A large part of the tax revenues of the Government is undoubtedly coming from the current savings of the nation and, therefore, is depleting the current capital accumulations. Our very best thought, therefore, should be directed to seeing that no avoidable expenditures are made and that our system of taxation shall interfere to the least possible extent with the return of the country to normal industrial conditions.

FEDERAL EXPENDITURES

ONE of the chief factors in the gradual return to normal conditions throughout the country has been the marked reduction in Federal expenditures which has already occurred, and this has in turn permitted the lightening of the burden of taxation. What has been accomplished along these lines within less than a year, through the cooperation of the Congress and the Executive, makes a concrete record of achievement in economy which is worthy of our highest efforts to maintain. Through the organization perfected by the Bureau of the Budget, all departments and independent establishments of the Government are responding to the call to uphold and join in the movement now being directed by the Budget Bureau toward economies in the expenditure of public funds, the limitation of activities, the elimination of duplication of work, the more efficient distribution and sale of surplus supplies and equipment, and improved methods of administration and operation. The following extract from the annual report of the Secretary of the Treasury for the fiscal year 1921 states briefly the reductions which have been made in Government expenditures:

Expenditures in the fiscal year ended June' 30, 1920, amounted to almost $6,500,000,000, while for the fiscal year ended June 30, 1921, ordinary expenditures, including sinking fund and miscellaneous fixed-debt charges, still ran over $5,500,- 000,000. This cash outgo it has been the constant endeavor of the Administration to reduce, and it now expects to hold expenditures on the same basis for the fiscal year 1922 down to $4,000,000,000, or

thereabouts, a reduction of about 81,500,000,000 below the year 1921. In some measure this reduction reflects the liquidation of war liabilities, but to an important extent it represents a reduction in the cost of government.

It has become evident however that there will probably be no surplus in either 1922 or 1923, but that, on the other hand, in order to balance the budget, expenditures must be still further reduced. The Government faces a heavy shrinkage in receipts; internal-revenue collections in particular are subject to great uncertainty. In view of the depression in business, there is grave doubt whether the estimates of receipts which appear in the budget can be realized, and up to date the shrinkage has rather more than kept pace with the shrinkage in expenditures. It is clear that under these conditions the Treasury is in no position to undertake new or extraordinary expenditures.

The Treasury Department has continued the thrift campaign which it began during the War and now offers to the public a most attractive investment in a new series of Treasury Savings Certificates. Through the Post Office Department an opportunity is given to persons of small means to invest safely. The Postal Savings will accept deposits of ten cents and upward and issue postal savings stamps to the depositor. These stamps can then be transferred into Treasury Savings Certificates. On this and on all deposits of one dollar or more, interest is paid at the rate of 2 per cent, a year. There is now pending in Congress a bill which will increase the interest rate to perhaps 3 per cent. The Government, through the Treasury Department, issues to depositors of one dollar a Treasury Savings Stamp. This may be obtained at all post offices throughout the country. When a purchaser has acquired twenty stamps he may exchange them for a Treasury Savings Certificate having a maturity value of $25 five years from the date of purchase.

These Treasury Savings Certificates are offered in denominations of 825, $100, and Si,ooo, maturity value, and are sold at flat prices of $20, S8o, and $800. This means an interest yield of about 43 per cent, if compounded semi-annually. These certificates may be issued to the amount of 85,000 to one individual in any calendar year. They can be purchased at post offices, banks, and other agencies, or from Federal Reserve banks, or direct from the Savings Division in the Treasury Department

 

Andrew Mellon From Wikipedia, the free encyclopedia
49th United States Secretary of the Treasury
In office March 4, 1921 – February 12, 1932
Preceded by	David F. Houston
Succeeded by	Ogden L. Mills
Born	March 24, 1855(1855-03-24) Pittsburgh, Pennsylvania, U.S.
Died	August 27, 1937 (aged 82) Southampton, New York, U.S.
Political party	Republican
Spouse	Nora McMullen Mellon
Alma mater	Western University of Pennsylvania
Profession	Banker, politician

Andrew William Mellon (March 24, 1855 — August 27, 1937) was an American banker, industrialist, philanthropist, art collector and Secretary of the Treasury from March 4, 1921 until February 12, 1932.

 

Early life

He was born in Pittsburgh, Pennsylvania, U.S., on March 24, 1855, the son of Scots-Irish immigrants from County Tyrone Ireland. His father was Thomas Mellon, a banker and judge; 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.^{[citations needed]}

 

Financial prodigy

Mellon demonstrated financial ability early in life by starting a lumber business at the age of 17. 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 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.^[1] 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 friend 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 income or revenues not keeping 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, that 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:^[2]

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 25 percent
2. Cut taxes on low incomes
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.^[3]

Mellon also championed preferential treatment for "earned" income relative to "unearned" income. As he argued in his 1924 book, Taxation: The People's Business:^{[citation needed]}

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 to make up for the lost revenue.^[4]

 

The Great Depression

Mellon on U.S. stamp

Mellon became unpopular with the onset of the Great Depression. Many economists today (such as Milton Friedman and Fed Chairman Ben Bernanke, to give two prominent examples^{[citation needed]}) partially attribute the collapse of the American banking industry to the popularity among Federal Reserve leadership of Mellon's infamous "liquidationist" thesis: weeding out "weak" banks was seen 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 measures for relief of public suffering. 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.

 

 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,.^[5] Two years after the Lees' divorce in 1928, Nora Lee resumed the surname Mellon, at the request of her son, Paul.^[6]

In 1913, along with his brother, Richard B. Mellon, he established a memorial to his father, the Mellon Institute of Industrial Research, today a part of Carnegie Mellon University

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.

 

The Mellon tax trial

The Roosevelt administration subjected Mellon to intense investigation of his personal income tax returns. The 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.^[7]

 

Death

Mellon died on August 27, 1937, in Southampton, Long Island, New York. Buried at Trinity Episcopal Church Cemetery, Upperville Virginia.