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A short history of the other Pittsburgher who became treasury secretary (a cautionary tale, too)
Friday, January 26, 2001
By Barbara Burstin
The appointment of former Alcoa Chairman Paul O'Neill to be secretary of treasury is not the first time that a Republican president has gone to Pittsburgh to pick his nominee. In 1921, Warren G. Harding, in a surprise move, nominated Andrew W. Mellon to take charge of the Treasury Department.
O'Neill's worldview and economic beliefs are in stark contrast to Mellon's. Yet we would all do well to note the dramatic turnaround in the fortunes of Mellon and his Republican Party. Mellon came on the scene as the hero of business, a man who undoubtedly would know how to manage the American economy. He ended in a cloud of dust, done in by his own short-sightedness and misguided politics.
Mellon was to serve under three successive Republican presidents and be acclaimed during much of that time as the "greatest secretary of the treasury since Alexander Hamilton." But when the economic good times of the 1920s ended abruptly with the stock market crash of 1929 and the Great Depression hard on its heels, his reputation dramatically fell and he was mockingly called "the greatest secretary of treasury since Carter Glass" (his immediate predecessor).
He and the Republican administration took the hit as the Democrats under Franklin Roosevelt came charging back into power. Mellon was blamed, not unreasonably, for the economic chaos. His policies had done nothing to cushion, let alone prevent, the catastrophe that had befallen the country.
Mellon, a son to the scion of the clan, Thomas Mellon, was 65 at the time he was tapped (the same age O'Neill is now) and ripe for public service. He had a long career as an extremely successful investment banker with huge holdings in Pittsburgh giants like Alcoa, the Mellon National Bank and Gulf Oil. He was one of the richest men in America, in the same league with John D. Rockefeller and Henry Ford.
Ironically, however, Harding had not heard of Andrew Mellon before his name was suggested by Pennsylvania politicians. Unlike his close colleague and long-time friend Henry Clay Frick, who had died just two years earlier, Mellon had made sure he had stayed out of the newspapers. He was described as a "timid and shrinking figure" - except of course when it came to making money - and he jealously guarded his privacy. George Seldes, a Pittsburgh newspaper reporter in that era, noted that reporting about the Mellon family was all but prohibited in town.
Harding, like George W. Bush, did not want a "Wall Street insider" in his Cabinet. Yet this was to be a Republican administration in which businessmen were to rule, a "return to normalcy" after the turmoil of World War I and its aftermath. With Andrew Mellon, Harding had a respected banker, a man who up to his swearing-in sat on the boards of 63 corporations, including 26 banks.
Mellon was convinced he knew what was best for the economy - dismantle the progressive tax structure that had been erected during the previous administration of Woodrow Wilson. In 1921, just a few months after coming into office, he presented the House Ways and Means Committee a package of tax reductions that totaled $800 million. He proposed the abolition of luxury taxes that has been imposed during World War I, the abolition of the excess profits tax and a sharp cut in the maximum surtax on personal incomes from 65 percent to 40 percent to go eventually down to 33 percent. There would be no tax cut for those with incomes under $55,000.
While Congress voted for some modifications in the tax code, Mellon was not able to get all he wanted until 1926 during the administration of Calvin Coolidge, a man who Mellon predicted was going to make a great president. The Revenue Act of 1926 wiped out the gift tax, cut the estate tax in half and trimmed the minimum surtax from 40 percent down to 20 percent. Mellon personally saved millions in taxes.
Mellon fervently believed that businessmen knew what was best for America and that public officials should follow the dictates of the business class. He was convinced that federal spending and taxes should both be slashed. To him, higher taxes on higher incomes were morally wrong because it penalized those industrious people who worked long and hard to earn their money. High taxes, he believed, prevented those very people from reinvesting their excess capital - which would presumably stimulate economic growth and benefit all Americans with more jobs and lower prices.
While Mellon was convinced of the wisdom of his thinking, his critics called it the "trickle-down theory" or "feeding the sparrows by stuffing the horses."
As long as the 1920s continued to roar, no one could touch Mellon. But when things began to go sour in 1929 and the onset of the Great Depression, the luster of the omniscient secretary of the treasury began to wear off.
The Saturday Evening Post, which had heretofore been so lavish in its praise, by 1932 had concluded that "no hasty or sweeping statement can be made as to how great a man Mr. Mellon is. We may admit that Mr. Mellon was not necessarily the financial genius which he was once advertised to be by his loving admirers."
President Herbert Hoover, who was struggling to deal with the crisis that was facing the nation, knew that his treasury secretary's advice to "liquidate labor, liquidate stock, liquidate farmers, liquidate real estate" was simply not acceptable. He began searching for a way to relieve himself of a treasury secretary who was becoming a lightning rod for criticism and a political liability. As luck would have it, Charles Dawes, ambassador to the Court of St. James, was ready to call it quits. Hoover appointed Mellon to succeed him in London.
Today another Pittsburgher has taken over the Treasury Department. But the times and the two men are very different. O'Neill seems to be far more sensitive to the importance of government programs to help those in need, and is not merely an advocate for the rich and famous. Tax policies that look appetizing in the short run might prove disastrous in the long run.
We don't know what exactly will happen, where O'Neill will push and how the economy will respond. But if Bush asks O'Neill down the road to become an ambassador someplace, we know we are all in trouble.
Barbara Burstin teaches history at the University of Pittsburgh and Carnegie Mellon University.