by Burt Folsom
The Progressives denigrated his achievements whenever possible. They could hardly dispute his results; instead they challenged his motives. In 1925, Senator Norris announced, "Mr. Mellon himself gets a larger personal reduction than the aggregate of practically all the taxpayers in the state of Nebraska." The records showed, however, that Mellon also paid more in income taxes than did all of the taxpayers of Nebraska. John Nance Garner, the Democratic leader in the House, said in 1924 that the Mellon Plan had "for its sole purpose the reduction of the larger taxpayers at the expense of the smaller taxpayer." To Senator LaFollette, the Mellon Plan meant that "wealth will not and cannot be made to bear its full share of taxation."38
The results of Mellon's tax cuts in 1926, however, as seen in Table 2, show that the tax burden shifted toward, not away from, the rich. In 1921 people who earned less than $10,000 per year paid almost as much in total income taxes as did those who earned over $100,000 per year. In 1926, the ratios changed: those who earned over $100,000 per year paid over ten times as much in aggregate income taxes as those who earned less than $10,000 per year. Meanwhile, the total revenue from 1921 to 1926 had increased. These trends continued with Mellon's smaller tax cuts in 1928 and 1929. In 1929, the income-tax revenue surpassed $1 billion. Those in the $100,000 bracket paid 65 percent of it; those in the under $10,000 bracket paid only 1.3 percent of the total tax.39
As a last resort, Progressives attacked Mellon's integrity. He manipulated tax audits, they charged, and refunded $3.5 billion during the 1920s to Republican friends and to corporations in which he had a large interest. Alcoa, for example, received a $15 million refund for supposed overpayment of taxes during the war. Refunds also went to Gulf Oil and to seventeen people who contributed $10,000 to the Republican party in 1930.40
These attacks suggest that Mellon used his office to ladle cash to himself and his cronies. Mellon, however, had little to do with granting refunds; a Board of Tax Appeals ruled on these cases. This Board did award $3.5 billion in refunds to taxpayers during the 1920s, as the Progressives charged; but it also reassessed other taxpayers $5.3 billion during this same period. In other words, the Treasury department took in more revenue in reassessments than it lost in refunds. And prominent Democrats, as well as Republicans, were among the winners and losers in tax cases during the 1920s.41
Table 2: THE TAX REVENUE COLLECTED ACCORDING TO INCOME GROUPINGS BEFORE AND AFTER THE 1926 TAX CUTS
Net Income Grouping Tax Revenue Collected from Income Grouping (In Millions of constant 1929 Dollars)
1921
1926
Less than $10,000 $155.1
$ 32.5
$10,000 to $25,000 121.8
70.3
$25,000 to $50,000 108.3
109.4
$50,000 to $100,000 111.1
136.6
Over $100,000 194.0
361.5
Total $690.2
$710.2
Source: James Gwartney, "Tax Cuts: Who Shoulders the Burden?" Economic Review (March 1982).
Mellon usually avoided critics and stayed out of public arguments.42 Reporters often quoted Mellon's critics to him to see how he would respond. "It is merely vicious piffle," Mellon once said when asked about a criticism. Another time, a Republican leader asked him what he thought of Senator Borah, a regular critic of Treasury policies. Mellon replied, "I never think of him unless somebody mentions his name." Some listeners probably thought this retort was clever; but Mellon meant it. He knew his energy was limited and he wanted to spend it working on ways to strengthen the economy. "Worry," concluded Mellon, "is the sport of men who have nothing to do and plenty of time in which to make a mess of doing it."43
This attitude served him well in the 1930s, the last years of his life, when the New Dealers came into power and his policies came under attack. After Coolidge's term, Mellon stayed on as Herbert Hoover's Secretary of Treasury. But the two men clashed over how to respond to the Great Depression. Mellon resigned in February, 1932, and served as Hoover's Ambassador to Great Britain until Franklin Roosevelt took office as President in 1933. Under both Hoover and Roosevelt federal income taxes were raised. By 1935, the top marginal rate had again reached almost 80 percent, and investors again manipulated their investments to avoid taxes. To make up for lost revenue, Congress passed a series of excise taxes on bank checks, movie tickets, telephone calls, gasoline, tires, cars, electricity, lubricating oils, and grape concentrates. The New Deal was funded in large part by the money raised from these taxes. Excise taxes, however, are considered regressive because they hit lower income groups proportionally more heavily than richer groups. Mellon had slashed excise taxes during the 1920s to lighten the burden on the common man. But even though Mellon's tax policies were overturned, he believed that his ideas would endure and that history would vindicate his policy of low tax rates. He retired from politics, donated his $50 million art collection to the National Gallery of Art, and died peacefully in 1937.44
III
College textbooks have naturally devoted space to Andrew Mellon and the 1920s. One of the most widely used texts is The National Experience by John M. Blum of Yale, William S. McFeely of the University of Georgia, Edmund S. Morgan of Yale, Arthur Schlesinger, Jr., of the City University of New York, Kenneth Stampp of Berkeley and C. Vann Woodward of Yale. In 1993, this text went into its eighth edition. Blum and Schlesinger, who has won a Pulitzer Prize, wrote the sections on the 1920s and 1930s, and here is what they say about Mellon:
Foremost among Harding's advisers was Secretary of the Treasury Andrew Mellon, a reticent multimillionaire from Pittsburgh whose intricate banking and investment holdings gave him, his family, and his associates control, among many other things, of the aluminum monopoly. A man of slight build, with a cold and weary face, Mellon exuded sober luxury and contemptuous worldliness. "The Government is just a business," he believed, "and can and should be run on business principles."
Great businesses, as Mellon knew, thrive on innovation and expansion. Yet the only business principle he considered relevant to government was economy. With small regard for the services that only government could furnish the nation, Mellon worked unceasingly to reduce federal expenditures. Expenses had to be cut if he was to achieve his corollary purpose: the reduction of taxes, especially taxes on the wealthy. It was better, he argued, to place the burden of taxes on lowerincome groups, for taxing the rich inhibited their investments and thus retarded economic growth. A share of the tax-free profits of the rich, Mellon reassured the country, would ultimately trickle down to the middle- and lower-income groups in the form of salaries and wages. Robert LaFollette paraphrased that theory succinctly: "Wealth will not and cannot be made to bear its full share of taxation."45
But Mellon did not want to "place the burden of taxes on lower-income groups." On the contrary, as we have seen, he cut taxes proportionally more on the lower income groups. The rich were carrying almost the entire income-tax burden after Mellon's tax cuts. It was the tax hikes of the 1930s that shifted the burden of taxation back to the lower-income groups. But Schlesinger almost completely ignores these tax hikes. He never mentions that large incomes were taxed at 63 percent after 1932, and at 79 percent after 1934. He also never mentions the new excise taxes that became law after 1932 and were used to fund New Deal programs. Another best-selling textbook has been The American Nation, by John Garraty of Columbia University. Garraty describes Mellon's ideas this way:
Mellon carried his policies to unreasonable extremes. He proposed eliminating inheritance taxes and reducing the tax on high incomes by two-thirds, but he opposed lower rates for taxpayers earning less than $66,000 a year, apparently not realizing that economic expansion required greater mass consumption as well. Freeing the rich from "oppressive" taxation, he argued, would enable them to invest more in potentially productive enterprises, the success of which would create jobs for ordinary people. Little wonder that Mellon's admirers called him the greatest secretary of the treasury since Ale
xander Hamilton.
Although the Republicans had large majorities in both houses of Congress, Mellon's proposals were too reactionary to win unqualified approval.46
Garraty's account, in content and in tone, is similar to Schlesinger's. When Garraty says Mellon "opposed lower rates for taxpayers earning less than $66,000 a year. . . ." he is wrong. Those earning under $66,000 a year, as we have seen, had the largest proportional tax cut and had most of their tax burden lifted. Also, Mellon did not propose "eliminating inheritance taxes," as Garraty claims. Mellon wanted the states, not the federal government, to receive revenue from inheritance taxes. Like Schlesinger, Garraty never mentions the specific tax rates on large incomes during the 1930s. Nor does he mention the excise taxes of the New Deal period.
Probably the best-selling college history textbook is The American Pageant by Thomas A. Bailey and David M. Kennedy, both of Stanford. This text is in its tenth edition and has sold over two million copies, according to its promotional literature. Bailey and Kennedy describe Mellon's ideas. Then they conclude that "Mellon's spare-the-rich policies thus shifted much of the tax burden from the wealthy to the middle-income groups."47 This, of course, is the same error that Schlesinger and Garraty make. Mellon's tax cut produced one result; and these historians have said that the opposite occurred. Bailey and Kennedy also ignore the tax increases of the 1930s.
Other texts are similar. There seems to be almost no correct information in any college history text on the impact of Mellon's tax cuts, or on the New Deal tax hikes. Yet the tax records have been available for almost sixty years. And studies of these records by Roy and Gladys Blakey, Benjamin Rader, James Gwartney, and Thomas Silver have also been available for some time. This situation is especially perplexing because Schlesinger has written well-respected books on the 1920s and 1930s, and Garraty has written widely in economic history. Expertise in the field, in fact, does not seem to correlate with presenting accurate information. Irwin Unger, for example, is also an economic historian, and even won a Pulitzer Prize for a book on the Greenback era. Yet in his textbook, These United States, he writes:
[Mellon] persuaded Congress to eliminate the wartime excess-profits tax and reduce income tax rates at the upper levels while leaving those at the bottom, untouched. Between 1920 and 1929 Mellon won further victories for his drive to shift more of the tax burden from high-income earners to the middle and wage-earning classes. (48)
It's hard to know who would have been more startled by Unger's account: Mellon or the lower-income taxpayers, who saw both their income and excise taxes drastically cut during the 1920s. George Santayana once said that those who do not learn from the past are condemned to repeat it. But how can we learn what happened in the past if historians either will not teach it or do not know it? National debates over tax cuts occurred in the 1960s, 1980s, and the 1990s, but how can we debate a subject intelligently if we are misinformed about the facts?49
Andrew Mellon never made an investment without knowing the relevant facts; his business success demonstrated his grasp of financial situations. In similar fashion, modern politicians, businessmen, and historians would do well to learn the facts of American tax history before they try to plot its future.
CHAPTER SEVEN
Entrepreneurs vs. The Historians
A nation must believe in three things. It must believe in the past. It must believe in the future. It must, above all, believe in the capacity of its people so to learn from the past that they can gain in judgment for the creation of the future.
—Franklin D. Roosevelt
One reason for studying history is to learn from it. If we can discover what worked and what didn't work, we can use this knowledge to create a better future. Studying the rise of big business, for example, is important because it is the story of how the United States prospered and became a world power. During the years in which this took place, roughly from 1840 to 1920, we had a variety of entrepreneurs who took risks and built very successful industries. We also had a state that created a stable marketplace in which these entrepreneurs could operate. However, this same state occasionally dabbled in economic development through subsidies, tariffs, regulating trade, and even running a steel plant to make armor. When the state played this kind of role, it often failed. This is the sort of information that is useful to know when we think about planning for the future.
The problem is that many historians have been teaching the opposite lesson for years. They have been saying that entrepreneurs, not the state, created the problem. Entrepreneurs, according to these historians, were often "robber barons" who corrupted politics and made fortunes bilking the public.1 In this view, government intervention in the economy was needed to save the public from greedy businessmen. This view, with some modifications, still dominates in college textbooks in American history.
American history textbooks always have at least one chapter on the rise of big business. Most of these works, however, portray the growth of industry in America as a grim experience, an "ordeal" as one text calls it. Much of this alleged grimness is charged to entrepreneurs.2
Thomas Bailey, in The American Pageant, is typical when he says of Vanderbilt: "Though ill-educated, ungrammatical, coarse, and ruthless, he was clear-visioned. Offering superior railway service at lower rates, he amassed a fortune of $100 million."3 If this second sentence is true, to whom was Vanderbilt "ruthless?" Not to consumers, who received "superior service at lower rates," but to his opponents, such as Edward Collins, who were using the state to extort subsidies and impose high rates on consumers. This distinction is vital and must be stressed if we are to sort out the impact of different types of entrepreneurs.
I have systematically studied three of the best-selling college textbooks in American history: The American Pageant, by Thomas Bailey and David Kennedy of Stanford University; The American Nation, by John Garraty of Columbia University; and The National Experience, by John Blum of Yale University, Edmund Morgan of Yale University, William S. McFeely of the University of Georgia, Arthur Schlesinger, Jr., of the City University of New York, Kenneth Starnpp of the University of California at Berkeley, and C. Vann Woodward of Yale University. These works have been written by some of the most distinguished men in the historical profession; all three books have sold hundreds of thousands of copies.4 In all three, John D. Rockefeller receives more attention than any other entrepreneur. This is probably as it should be. His story is a crucial part of the rise of big business: he dominated his industry, he drastically cut prices, he never lobbied for a government subsidy or a tariff, and he ended up as America's first near-billionaire.
The three textbooks do credit Rockefeller with cutting costs and improving the efficiency of the oil industry, but they all see his success as fraudulent. In The National Experience, Woodward says that:
Rockefeller hated free competition and believed that monopoly was the way of the future. His early method of dealing with competitors was to gain unfair advantage over them through special rates and rebates
arranged with the railroads. With the aid of these advantages, Standard became the largest refiner of oil in the country. ... In 1881 [Standard Oil] controlled nearly 90 percent of the country's oil refining capacity and could crush any remaining competitors at will.5
In The American Nation, John Garraty commends Rockefeller for his skill but adopts roughly the same line of reasoning as does Woodward:
Rockefeller exploited every possible technical advance and employed fair means and foul to persuade competitors either to sell out or to join forces.... Rockefeller competed ruthlessly not primarily to crush other refiners but to persuade them to join with him, to share the business peaceably and rationally so that all could profit.... Competition almost disappeared; prices steadied; profits skyrocketed. By 1892 John D. Rockefeller was worth over $800 million.6
In these views the cause and effect are clear: the rebates and "unfair competition" were the main causes of Rockefeller's success; this success gave him an alleged m
onopoly; and the alleged monopoly created his fortune. Yet as we have seen, Rockefeller's astonishing efficiency was the main reason for his success. He didn't get the largest rebates until he had the largest business. Even then, the Vanderbilts offered the same rebates to anyone who shipped as much oil on the New York Central as Rockefeller did. In any case, the rebates went largely to cutting the price of oil for consumers, not to Rockefeller himself.
Perhaps even more misleading than the faulty stress on the rebates is the omitting of the most important feature of Rockefeller's career: his thirty-year struggle with Russia to capture the world's oil markets. Not one of the three texts even mentions this oil war with Russia.
Three facts show the importance of Rockefeller's battle with the Russians. First, about two-thirds of the oil refined in America in the late 1800s was exported. Second, Russia was closer than the U. S. to all European and Asian markets. Third, Russian oil was more centralized, more plentiful, and more viscous than American oil. If Rockefeller had not overcome Russia's natural advantages, no one else could have. America would have lost millions of dollars in exports and might have even had to import oil from Russia. The spoils of victory—jobs, technology, cheap kerosene, cheap by-products, and cheap gas to spur the auto industry—all of this might have been lost had it not been for Rockefeller's ability to sell oil profitably at six cents a gallon. The omitting of the RussoAmerican oil war was so striking that I checked every college American history text that I could find (twenty total) to see if this is typical. It is. Only one of the twenty textbooks even mentions the Russian oil competition.7
