The G-20: What would Andrew Mellon do?

He'd unleash the economy by keeping the dollar stable and taxes down

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As the leaders of the G-20 nations meet in Pittsburgh this week to discuss how their governments should continue to address the economic crisis. It's an interesting place for them to convene -- Pittsburgh. For the city sponsored this nation's industrial revolution a century ago. Incredible entrepreneurs such as Andrew Carnegie, Henry Clay Frick and H.J. Heinz combined their business sense and drive with the efforts of the greatest labor force ever assembled to launch the nation into prosperity.

Not a single economist, or even policy wonk, can be counted among the heroes of Pittsburgh's great industrial age. Such figures were unnecessary in the late 1800s and early 1900s, as entrepreneurs focused on profits and ingenuity, and labor on doing a good job and getting ahead. Fittingly, the first economists of any note to emerge from Pittsburgh, at Carnegie Mellon University in the 1970s, were torchbearers of the free-market revolution: the future Nobel Prize-winners Robert Lucas, Finn Kydland and Edward Prescott. Pittsburgh's clear message on economic policy is for government to get out of the way.

There was one time, however, when a Pittsburgh lion of the industrial revolution responded to the call of government service. This was in 1921, when Andrew Mellon -- the greatest banker the nation has ever seen outside of J.P. Morgan -- acceded to the president's plea that he become treasury secretary of the United States.

From 1919 to 1921, the United States experienced the worst economic crisis it had ever seen. Prices, which had gone up 100 percent from 1913 to 1919, collapsed by 30 percent. Business revenues sunk like never before and companies engaged in mass layoffs.

There were no labor unions to react to it all, but somehow a spontaneous mass steel strike occurred anyway. In Boston, the strikers were the police force, and as a result, the city descended into mayhem. Entrepreneurs could not be called on to start small businesses to mop up the unemployed, because the income tax punished people who suddenly did well with progressive rates all the way up to 73 percent.

The reason that this terrible mess did not become the Great Depression is that Andrew Mellon took his spot in new president Warding Harding's Cabinet in early 1921. As treasury secretary, Mellon devised a solution to the economic crisis that was clear, simple -- and effective. First, he told the Federal Reserve to stop fooling around with engineering historic inflations and deflations and focus on one thing only: keeping the value of the dollar stable. If prices go down, print money, if they go up, call money in, he implored the Fed, which took his advice.

In turn, Mellon drew up and got through Congress a series of tax cuts that brought the top rate tw0-thirds of the way down, to 25 percent. Now if people earned money they would keep it, and when they did, it would be worth what they expected. Naturally, what immediately ensued was the Roaring '20s, when growth surged, prices were flat, and jobs, wages and entrepreneurialism boomed.

Mellon's actions in the early 1920s are the greatest example of economic stewardship on the part of a governmental official in the industrial history of the United States. The essence of Mellon's actions was to restrain the two great means of governmental intervention in the economy, the Federal Reserve and the income tax, which had both come into being just a few years before, in 1913.

As a banker in Pittsburgh, Mellon knew that the way to keep the economy humming and entrepreneurs going -- and thus making payments on their loans -- is to ensure that the medium of exchange, the dollar, is not subject to chaotic shifts, and that money made is money kept and not lost to taxation. As Mellon put it in his own book on the subject: "Any man of initiative in this country can get what he wants out of life. But when that initiative is crippled by legislation or a tax system which denies him the right to receive a reasonable share of his earnings, then he will no longer exert himself and the country will be deprived of the energy on which its continued greatness depends."

Leaders of the G-20 seem content to watch their tax rates surge far beyond levels Mellon thought prudent and have displayed no particular resolve in getting the Fed to stop debasing the world's currency, the dollar. These leaders also have an excellent chance, by virtue of coming to Pittsburgh, to absorb the lessons of the greatest public servant the city has ever produced.

Brian Domitrovic , a Pittsburgh native, teaches at Sam Houston State University. He is the author of the newly published "Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity" (


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