by Burt Folsom
On the day of the verdict, he chose to play golf with friends. In the middle of their game, a frantic messenger came running through the fairways to deliver the bad news to Rockefeller. He calmly looked at the telegram, put it away, and said, "Well, shall we go on, gentlemen?" Then he hit his ball a convincing 160 yards. At the next hole, someone sheepishly asked Rockefeller, "How much is it?" Rockefeller said, "Twenty-nine million two hundred forty thousand dollars/' and added, "the maximum penalty, I believe. Will you gentlemen drive?" He ended the nine holes with a respectable score of 53, as though he hadn't a care in the world.34
Landis' decision was eventually overruled, but Rockefeller was not so lucky in his fight against the Sherman Anti-trust Act. Rockefeller had set up a trust system at Standard Oil merely to allow his many oil businesses in different states to be headed by the same board of directors. Some states, like Pennsylvania, had laws permitting it to tax all of the property of any corporation located within state borders. Under these conditions, Rockefeller found it convenient to establish separate Standard Oil corporations in many different states, but have them directed in harmony, or in trust, by the same group of men. The Supreme Court struck this system down in 1911 and forced Standard Oil to break up into separate state companies with separate boards of directors.
This decision was puzzling to Rockefeller and his supporters. The Sherman Act was supposed to prevent monopolies and those companies "in restraint of trade." Yet Standard Oil had no monopoly and certainly was not restraining trade. The Russians, with the help of their government, had been gaining ground on Standard in the international oil trade. In America, competition in the oil industry was more intense than ever. Over one hundred oil companies—from Gulf Oil in Texas to Associated Oil in California—competed with Standard. Standard's share of the United States and world markets had been steadily declining from 1900 to 1910. Rockefeller, however, took the decision calmly and promised to obey it.35
Even more remarkable than Rockefeller's serenity was his diligence in tithing. From the time of his first job, where he earned 50 cents a day, the sixteen-year-old Rockefeller gave to his local Baptist church, to missions in New York City and abroad, and to the poor— black or white. As his salary increased, so did his giving. By the time he was 45, he was up to $100,000 per year; at age 53, he topped the $1,000,000 mark in his annual giving. His eightieth year was his most generous: $138,000,000 he happily gave away.36
The more he earned the more he gave, and the more he gave the more he earned. To Rockefeller, it was the true fulfillment of the Biblical law: "Give, and it shall be given unto you; good measure, pressed down, and shaken together, and running over, shall men give unto your bosom." Not "money" itself but "the love of money" was "the root of all evil." And Rockefeller loved God much more than his money. He learned what the prophet Malachi meant when he said, "Bring the whole tithe into the storehouse, . . . and see if I will not throw open the floodgates of heaven and pour out so much blessing that you will not have room enough for it." He learned what Jesus meant when he said, "With the measure you use, it will be measured to you." So when Rockefeller proclaimed: "God gave me [my] money," he did so in humility and in awe of the way he believed God worked.37
Some historians haven't liked the way Rockefeller made his money, but few have quibbled with the way he spent it. Before he died, he had given away about $550,000,000, more than any other American before him had ever possessed. It wasn't so much the amount that he gave as it was the amazing results that his giving produced. At one level he built schools and churches and supported evangelists and missionaries all over the world. After all, Jesus said, "Go ye into all the world, and preach the gospel to every creature."
Healing the sick and feeding the poor were also part of Rockefeller's Christian mission. Not state aid, but Rockefeller philanthropy paid teams of scientists who found cures for yellow fever, meningitis, and hookworm. The boll weevil was also a Rockefeller target, and the aid he gave in fighting it improved farming throughout the South.
Rockefeller attacked social and medical problems the same way he attacked the Russians—with efficiency and innovation. To get both of these, Rockefeller gave scores of millions of dollars to higher education. The University of Chicago alone got over $35,000,000. Black schools, Southern schools, and Baptist schools also reaped what Rockefeller had sown. His guide for giving was a variation of the Biblical principle—"If any would not work, neither should he eat." Those schools, cities, or scientists who weren't anxious to produce or improve didn't get Rockefeller money. Those who did and showed results got more. As in the parable of the talents, to him who has, more (responsibility and trust) shall be given by the Rockefeller Foundation.38
At about age sixty, Rockefeller began to wind down his remarkable business career to focus more on philanthropy, his family, and leisure. He took up gardening, started riding more on his horses, and began playing golf. Yale University might ban the tango, but Rockefeller hired an instructor to teach him how to do it. Even in recreation, Rockefeller wanted to discipline his actions for the best result. In golf, he hired a caddy to say, "Hold your head down," before each of his swings. He even strapped his left foot down with croquet wickets to keep it steady during his drives. 39
In a way, Rockefeller's life was a paradox. He was fascinated with human nature and enjoyed studying people. Yet his unparalleled success in business made friendships awkward and forced him to shut out much of the world. To his children Rockefeller was the man who played blind man's bluff with great gusto, balanced dinner plates on his nose, and taught them how to swim and to ride bicycles. But from the world he had to keep his distance: he was a target for fortune hunters, fawners, chiselers, mountebank preachers, and hundreds of hard-luck letters written to him each week.40
Retirement, however, liberated him more to enjoy people and nature. On his estate in New York, he studied plants and flowers. Sometimes he would drive out into the countryside just to admire a wheatfield. Down in Florida, he liked to watch all the people who passed his house and guess at what they did in life. He handed out dimes to the neighborhood children and urged them to work and to save.41
Naturally, Rockefeller had some disappointments in his last years. He was sad that Standard Oil had been broken up by the Sherman Act and that the Russians had increased their foreign oil sales. He was also saddened by the Great Depression of the 1930s. Still, Rockefeller knew he had lived a full life and had been a key part of the two big transformations in the oil industry: the making of kerosene for lighting homes and the making of gasoline for running cars. Rockefeller loved life and wanted to live to be one-hundred, but he died in his sleep during his ninety-eighth year in 1937.
CHAPTER SIX
Andrew Mellon and the 1920s
Andrew Mellon is one of the most misunderstood men in American history. As Secretary of Treasury, he persuaded Congress to cut taxes to help generate the capital that made the 1920s so prosperous for so many Americans. But many textbooks claim he aided only the rich, and that he helped trigger the Great Depression. Even during the 1920s, when Mellon became one of the best known men in America, he stirred emotions with his sensational tax plan. If we look at the facts, and cut away the myth, the story of Andrew Mellon can tell us much about which tax policies work and which don't.
We all think we know that raising taxes increases revenue and that slashing taxes always lowers revenue. But Mellon challenged this conventional wisdom. "It seems difficult for some to understand," he wrote, "that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates."1 Had Mellon not been a success as an oil and aluminum entrepreneur, few would have taken his tax philosophy seriously. Yet on December 14, 1929, the U. S. Senate passed Mellon's sixth and final tax cut of the decade. It climaxed his tax revolution: from 1921 to 1929 the tax rates on those earning under $4000 per year had been chopped eightfold (from 4 to Vi percent); those in the $4000 to $8000 bracket had their bu
rden slashed fourfold (from 8 to 2 percent); and taxes on top incomes had been cut threefold (from 73 to 24 percent). And the result for Mellon 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. Editors, economists, and politicians across the nation were astonished and many labeled Mellon "the greatest Secretary of Treasury since Alexander Hamilton."2
I
Andrew Mellon came by his philosophy of low taxes and limited government quite naturally. His grandfather, a thrifty Scots-Irishman, fled Ulster in 1818 to escape the high taxes of the Napoleonic Wars. He farmed near Pittsburgh and taught his son Thomas, Andrew's father, to avoid debt, be honest, and work hard in life. As Thomas later wrote, "the hardships experienced by... my own parents, from oppressive taxation, became so thoroughly ingrained in my nature, when a child, that I have always felt a strong opposition... to all measures rendering an increase of taxes necessary. It was the universal complaint which drove our people from their homes... ."3
Young Thomas became more than a tax critic. He moved to Pittsburgh to practice law, start a bank, and raise a family. He developed a knack for finance and trained his five sons at the dinner table in how to use money to make money. Andrew, born in 1855, proved to be an eager learner. At age nine, he learned about supply and demand by selling apples from the family orchard. As a teenager Andrew went on business trips for his father, buying land near Baltimore and hiring a theater operator in Philadelphia. He went into the lumber business with his brother Richard and sold out at a nice profit just before the Panic of 1873. Thomas, a proud father, retired early and turned the family bank over to Andrew and Richard, his two youngest sons.4
They were an excellent team: Richard was outgoing and jovial; Andrew was introverted and quiet. Richard would greet customers and do ribbon cuttings; Andrew would do more of the thinking and planning. Many workers at T. Mellon and Sons Bank, even some officers, knew Richard as a friend but knew Andrew hardly at all, even by sight. Andrew was 5'9" tall, lean in body, sharp in features, and had a thick moustache. For exercise he liked to walk and did so with a firm pace and erect back, even into his seventies. When he spoke, which was not often, his voice was soft, like a whisper. He would sometimes preface his words with a slight cough. Pauses were frequent. Yet his mouselike manner hid a mental toughness that always commanded respect. When Andrew gave advice, ears strained to listen.5
What Mellon lacked in rhetorical skill he made up for with his exceptional judgment of people and ideas. He had a remarkably creative mind and liked to think about strategies that would change industry and society. As a banker, for example, he backed industrialists who were strong on ideas but weak on finances. The production of aluminum, for example, was slow, expensive, and irrelevant to most Americans in the 1890s. But when Mellon backed Alcoa he believed that aluminum, with its light weight and excellent conducting qualities, would challenge steel and copper as a major industrial metal. Mellon and his family sank $15 million into Gulf OH in the early 1900s, because he believed that they could build and run a vertically-integrated oil company that could compete with mighty Standard Oil. He was right; Gulf built pipelines from Texas to Oklahoma, invented offshore drilling, and built the first corner service stations to provide gas for cars.6
The key to the success of these industries, and dozens of other Mellon enterprises, was capital—high-risk, venture capital. Somebody had to have the nerve, the money, and the vision to back risky ideas that had potential. Mellon had done this so ably that by 1920 he was worth close to one billion dollars, which ranked him with John D. Rockefeller and Henry Ford as one of the three wealthiest men in America. Mellon's superior grasp of economics caught the attention of national political leaders after World War I. They were struggling with a stagnant economy, a rising national debt, and a crushing tax burden. Republican Warren G. Harding, winner of the 1920 Presidential election, asked Mellon to be his Secretary of Treasury and do for the American economy what he had done with aluminum and oil.7
Mellon hesitated to accept Harding's offer. In the industrial world he directed a worldwide economic empire. He would have to resign his position on the boards of directors of sixty corporations to take a $12,000-a-year job trying to straighten out a mess. At age 65, though, Mellon had been the entrepreneur long enough. His family urged him to accept, and he was challenged by the idea of applying his business experience to government problems. So Mellon went to Washington, bought an apartment on Massachusetts Avenue, and took command of the Treasury Department. In a sense, he was very comfortable with his work: corporate problems and government problems were often similar; he delegated the detail work to his undersecretaries and applied his talent to strengthening the postwar economy. In another sense, Mellon had to make adjustments. Newspapers publicized his wealth and reporters pried into his life. They freely accosted him, even as he walked to work. The taciturn Mellon stumbled so completely in his first interview that he couldn't articulate a thought. After some practice, and some good press clippings, Mellon warmed up to most reporters. All through his term, though, the less he was forced to say about something the more at ease he was. When Mellon held a press conference, or spoke before Congress, he usually wrote out his message and had his undersecretary read it. If possible, he even had the undersecretary field the questions.8
Mellon came to Washington at a crucial time in U. S. history. World War I had been a turning point in the way many perceived the role of government in economic life. Before the war, the federal role in operating, regulating, and taxing American business was small. Federal budgets were less than $1 billion per year. The taxes needed to run the American government were low and fairly easily collected; land sales and tariffs were the major sources of revenue.9 In the 1910s, two things helped change all of this: the passing of the income tax and the outbreak of the First World War.
The idea of taxing incomes had long been debated in American history. During the Civil War, Congress passed a 3 percent tax on all incomes over $800, and raised the rate and taxable amounts twice, but repealed the tax in 1872. Then in 1894, during an economic downturn, Congress passed a flat 2 percent tax on all incomes over $4000. The next year, however, the Supreme Court declared this law unconstitutional. Conservatives tended to oppose the income tax: high taxes stifled investment, they argued, and any income tax, once passed, was easy to raise and hard to reduce. Existing taxes were adequate, conservatives argued, and business should be left relatively free. "Progressives," as they called themselves, favored the income tax and fought to pass a constitutional amendment giving Congress the right to levy taxes on personal and corporate incomes. The income tax, in Progressive theory, could be used instead of tariffs to raise revenue, and also to increase the powers of the federal government. The leading Progressive spokesmen during the 1920s were Senators Robert M. LaFollette of Wisconsin, George W. Norris of Nebraska, and James Couzens of Michigan.10
The period from 1900 to 1920 is sometimes called the Progressive Era because during this time Progressives entered politics and increased the role of the federal government in the American economy. In 1913, they secured the 16th amendment, which enabled Congress to tax personal incomes. The income tax passed that year was light: individuals earning less than $3000 per year and married couples making $4000 per year paid no tax. Those who earned more were taxed only 1 percent up to $20,000 income. Then the tax became progressive, that is, the rates increased as income increased. Those earning from $20,000 to $50,000 were taxed at 2 percent; from $50,000 to $75,000 at 3 percent; and so on. The top rate was 7 percent of incomes over $500,000. Under this law, few Americans paid any income taxes; of those who did, most paid only 1 percent. The revenue raised from this law was small, but the government itself was small in 1913 and it needed little revenue to run efficiently.11
In 1916, in response to President Wilson's program of preparedness for war, Congress hiked the income tax rate. It became 2
percent on incomes under $20,000 and rose to 15 percent on incomes of $2 million or more. The exemptions were unchanged. The next year the U. S. entered the First World War: expenses soared to the highest levels in U. S. history; massive government programs bought food, weapons, and equipment for America and her allies. The government also set prices and wages, and controlled production of scores of industries. Wilson used the income tax to raise much of the money needed to wage war: rates started at 4 percent and soared to 77 percent on top incomes. Corporate taxes rose to 18 percent. Most Americans were willing to sacrifice for this emergency and paid over $7 billion in taxes during the war years. They also bought billions of dollars in "Liberty bonds" to aid the allied cause. In the wake of military victory, the national debt had skyrocketed from $1.5 billion in 1916 to $24 billion in 1919.12
This controlled economy fulfilled the dream of many Progressives. They had problems, though, when the revenue raised from high taxes plunged in 1919 and 1920. The federal spending that Progressives desired could not continue after the war because of this shrinking revenue and a dramatic increase in the national debt. "There is a point," President Wilson discovered, "at which in peace times high rates of income and profits taxes discourage energy . . . and produce industrial stagnation with consequent unemployment and other . . . evils." The by-products of war— high taxes and a soaring national debt—would clearly be issues in the 1920s. Andrew Mellon agreed with Wilson's new way of thinking and went from there.13
