by Amity Shlaes
Hoover believed that government might help business do better, functioning as a sort of beneficent hand. Coolidge liked Adam Smith’s old invisible hand. The men were different breeds of Republican. Hoover believed that action was necessary to make the country live up to its potential. Coolidge had long ago determined that the world would do better if he involved himself less. Finally, there was a difference in temperament. Hoover strewed around phrases about individuality, but he could not control his own sense of agency. He was by personality an intervener; he liked to jump in, and find a moral justification for doing so later. People like Frederick Winslow Taylor, the great efficiency expert, and Herbert Hoover, the great engineer, had done so well in the private sector. Bringing some of them into government might allow some of that knowledge to rub off.
Coolidge by contrast believed that the work of life lay in holding back and shutting out. He conducted his official life according to his own version of the doctor’s Hippocratic Oath—first, do no harm. It sounded easy, and many mocked Coolidge as being lazy in office—the same people who made fun of him by calling him Silent Cal. But Coolidge was not silent; he later estimated that each year as president he wrote or spoke 75,000 words, a share of those involving laying out his explanation for vetoing legislation. And Coolidge’s “no harm” rule came out of strength of character. By holding back, Coolidge believed, he sustained stability, so that citizens knew what to expect from their government. If things were going well, he adhered to a stricter version of his rule: change less.
That, in fact, was how Hoover had come to be Coolidge’s man at Commerce in the first place. When President Harding died suddenly one night in August 1923, Coolidge, then vice president, looked around and decided that stability was the most important factor in the Harding-Coolidge transition—important to the people, and important to the economy. Harding’s last months had been clouded by scandal, and Coolidge wanted no more disruption. So he had kept on Harding’s cabinet, including those he liked—Andy Mellon, at Treasury—as well as others, like Hoover. Coolidge’s transition plan had been a success, at least insofar as the most precise measure of such things, the stock market, was concerned. The Dow Jones Industrial Average had stood at just below 88 the Friday before Harding died, and it was just below 89 a week later.
As a new president, Coolidge had been especially confident because the country had just seen a demonstration of his philosophy at work. During the Harding administration, recession had hit, and the downturn had been hard: one in ten men lost his job. But struggling firms had cut costs by reducing wages, and the country bounced back fast. By 1923, it was hard to find an unemployed man. Left alone, the majority’s impression was, the economy would usually bounce back. That same year, a few months before Harding’s death, Justice George Sutherland had led the Supreme Court in a sweeping rejection of the minimum wage in the District of Columbia. In his opinion—the case was called Adkins—Sutherland said that the minimum wage infringed on the individual’s liberty to contract with his employer. The Sutherland opinion fit in with Coolidge’s own general attitude, that the individual should have primacy—“All liberty is individual,” he had said in a speech in 1924.
Coolidge’s personal wager about the 1920s was that the private sector would and should take the lead, and that then the possibilities for progress would be boundless. His reserve did not mean that he was not interested in modern technology. He followed Charles Lindbergh’s flights avidly, and the daughter of one of his closest friends, Dwight Morrow of Wall Street, would eventually marry Lindbergh. Citizens had proven their willingness to test Coolidge’s propositions again by voting overwhelmingly for the refrainer in 1924, despite the fact that he had been vice president to Warren Harding, whose short time in office had been clouded by scandal.
At first, the differences between Coolidge and Hoover were nearly indistinguishable to the public eye. Both men, after all, deeply respected the Constitution and the gold standard. Both respected the independence of the Supreme Court—like Woodrow Wilson before them. Wilson had said that while it was within the power of government to overwhelm the Court on an issue, by, say, “increasing the number of justices and refusing to confirm any appointments,” presidents recognized that this violated the spirit of the Constitution, and that the public would make “such outrages upon constitutional morality impossible by standing ready to curse them.” Both believed in enterprise. In 1925 Coolidge summed up his philosophy, telling the American Society of Newspaper Editors that “the chief ideal of the American people is idealism.” But he also offered a counterpart to that: “The chief business of the American people is business.” It was the latter line that was remembered, and proved too moderate for some. They shortly altered it to the now better-known phrase “the business of America is business.”
Finally, both men were humble about the position of the federal government relative to business. Compared to the private sector, after all, the federal government was a pygmy. Its size was less than 2 percent of the national economy, smaller even than that of state and city governments. Lawmakers of their generation constantly feared that the fast-growing private sector might further diminish their already questionable relevance. Back in 1910, word of the rise of the skyscraper in New York had panicked congressmen, who promptly zoned height limits for buildings in the District of Columbia, so that no private building could ever overshadow the Capitol.
Both men, too, shared an understanding of traditional economics, with its emphasis on the producer. “Supply creates its own demand,” the classical economist Jean-Baptiste Say had written in France a century earlier, and in the case of many new industries, that seemed to be proving true again. Why focus on Coolidge, or Hoover? had been the attitude of the mid-1920s. The business leaders were the ones who would pull the country forward, and were therefore the ones worth watching.
Most dramatic was Henry Ford, who, the week after Harding’s death, reported he was selling automobiles under a new trade agreement to Russia. Twenty years before, Ford had started with just a few employees and $27,000. By constructing the modern assembly line, he was creating modern Detroit and conquering the rest of the country, buying up its own coal and iron mines. Part of his success was due to his religiously plowing back profit into the business, forgoing dividends. In fact, as Benjamin Anderson, the chief economist at Chase Bank, would write later, the first quarter century had offered “case after case of Fords,” all “showing the history of small businesses which, employing three or four laborers, had in relatively short periods of time (fifteen or twenty years) grown into very substantial businesses.” In 1923, Ford plants were already producing 6,000 cars a day, a record.
During the war the government had begun work on a dam and power operation at Muscle Shoals, Alabama—the point being to make ammunition. The war ended before the plant was running, and recently Henry Ford, who had his own political ambitions, had put in a bid to take over Muscle Shoals. Only the private sector, some believed, had the wherewithal to develop America’s most important new industry, and the key to its growth: electric power. Muscle Shoals could be “the Detroit of the South.” Ford had tried to write a contract with the government to run Wilson Dam as a nitrate plant—indeed, Hoover hoped to broker the deal. But Congress had rejected it. Lawmakers like George Norris believed the government should control power.
Another hero on the horizon throughout the decade was Thomas Edison, the man who started the electrification boom. Across the country, people revered him; from time to time Edison would mount a contest to find young men of “all around ability” at his East Orange labs, and hundreds signed up. A young Vermonter named Bill Wilson who sat for and won one contest later recalled that seeing Edison in his lab coat, with the faint scars from a chemical explosion on his cheek, was to see the personification of American genius. In the summer of 1928, Congress would ask Mellon at the Treasury to strike a medal in Edison’s honor. Mellon traveled to Llewellyn Park in New Jersey to give Edison the medal. From the base
of a “small and illustrious company,” Mellon told the crowd in his whispery voice, Edison had delivered what a businessman ought to. Edison had “not only changed the conditions under which men live” but also “helped to bring about a new social order.”
Yet another hero was the British-born Sam Insull, who had started out in America keeping Edison’s books. While on the East Coast with Edison, Insull had discovered that selling electric irons to Schenectady housewives was a good way to increase household use of power. His second insight had involved the economy of scale. Wall Street believed that each family or street needed a generator. There was even the idea that each gentleman should have his own generator, just like his own yacht; J. P. Morgan had one belching on his property in New York’s Murray Hill. But Insull, feeling that the yacht was inefficient, had gone to Chicago. What Wall Street could not see, La Salle Street perceived, providing Insull capital to finance central power stations. In this fashion he achieved a miracle: he established power prices that were acceptable to the small consumer.
Insull’s Chicago was a rough place. Before the war a college student from Indiana named David Lilienthal described his experience on a visit in 1917: he came across a crowd surrounding a puddle, and stuck his head among the others to see “what these busy-men-of-the-world were watching with such evident enjoyment.” It was “but a tiny mouse, swimming about in the pool.” Lilienthal was disgusted to see that “whenever he would struggle to a place of safety—someone would stick out his mahogany cane and throw the poor quivering thing back to his death. When this would happen,” Lilienthal noted, “some portly comfortable looking son-of-a-gun would shift his cigar and chuckle.” The young man commented on the Chicagoans in his diary: “And such creatures expect mercy for themselves from some higher authority, as they are to mice!”
Where others saw lawlessness, though, Insull saw opportunity. He was brave, he was aggressive—a frontier man—and few laws stood in his way. Insull wired the city, then the state, and then other parts of the country—like Ford, always plowing cash back into projects. When banks could not provide cash, he had used equity vehicles to raise the money, repeatedly creating holding companies, parent companies that owned operating utilities.
Critics said that he was watering down stock. But all Insull saw was the need for cash—the industry was the world’s most promising and would grow only if it got capital. And it did: the line on graphs of the American utilities industry in the 1910s and ’20s moved up in an incontrovertible diagonal, consumption increasing each year, even in the early 1920s recession, seemingly independent of the overall economy. At his high point Insull provided a full eighth of America’s electrical power. To reward Chicago for the prosperity it had given him, Insull would spend the late 1920s building an opera house as ambitious as his business empire: a forty-five-story giant equipped with electric elevators designed so that every seat in the house, including the high gallery seats, would offer as good a view as the dress circle. Insull’s opera house had no boxes for aristocracy; he wanted to prove that the world of electricity was a democratic one. The plans revealed a building in the shape of an armchair, a symbolic throne for Insull. The armchair faced west, the ultimate gesture of defiance toward New York.
On Wall Street, there were other, different figures to watch. Henry Morgenthau Sr., Felix Warburg, and Bernard Baruch were joining the Morgans as leaders in the financial district in the early part of the century. Some were continuing the success of a dynasty—Warburg. Others were bent on establishing new dynasties—Morgenthau especially. In the 1920s a young man named Alfred Lee Loomis had taken a firm that was nearing bankruptcy, Bonbright, to heights of profitability with innovative investments in Insull’s industry, public utilities. Half of the nation’s homes were electrified; together with his friend and partner Landon Thorne, Loomis wanted to electrify the rest. The industry began recruiting talent wildly. One of its finds was a corporate lawyer who had worked for Firestone, one of the tire companies in Akron, Wendell Willkie.
Like Insull, Alfred Lee Loomis and Thorne had seen that older investment houses were not sure they wanted to pour cash into the new utilities industry. And like Insull, they had seen the efficiency of holding companies: little local companies could save cash if they banded together into “superpowers.” One of the most promising markets, they had recognized, was the South, a laggard in modernization. Electrifying the South, they had realized, would also do enormous social good. As it was often said, the South was tired of living in the dark. Lone state companies could not do the work; they needed to hook up a network and share resources. Georgia Power Company had provided indifferent service to some customers, in part because it lacked the advantages of a larger holding company. One customer who wrote to complain was a polio patient from Warm Springs, Georgia—Franklin Roosevelt, the future New York governor.
In the 1920s two other big figures loomed large. The first was the treasury secretary, Andrew Mellon of Pittsburgh. Mellon’s father, whose family had come from county Tyrone in Ireland, had been a faithful reader of Benjamin Franklin: “The way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality. That is, waste neither time nor money, but make the best use of both.” Thomas Mellon, a merchant banker, believed in investing in commodities, but also, like Insull, in investing in ideas. Among the new bank’s first visitors—while Andrew was still a student—had been a twenty-one-year-old bookkeeper with a scheme to build fifty coke ovens. He thought he could serve the growing steel industry, but he needed $10,000. An agent whom Mellon sent to evaluate Frick wrote: “Lands good, ovens well built, manager on job all day, keeps books evenings, may be a little too enthusiastic about pictures but not enough to hurt.” Judge Mellon struck a deal with him.
That man, Henry Clay Frick, remained affiliated with the Mellons from that point on. He and Andrew, good friends, traveled to Europe together; on such a trip Andrew started to build an art collection, buying his first picture.
But what was more important at the time was that Andrew also built a great business empire. He and his brother Richard created first a national bank, then a steel concern, and then an empire. Young Mellon cornered the bauxite market. He shared in the profits of Carnegie Steel, of which Frick was president. The Mellons together established the enormous Aluminum Company of America; later they picked up Bethlehem Steel. They invested in Spindletop, the Texas gusher that opened the Gulf Coast oil industry. By the time Hoover reached adulthood, the Mellons also were players in the steel, railway, construction, and insurance industries. Succeeding Andrew Carnegie and Henry Clay Frick, Andrew Mellon ruled Pittsburgh in a way that not even the president ruled Washington.
Mellon had stayed close to his father’s original formula: thrift that emphasized the accumulation of capital. But he had also created value—and not merely by cornering a market as a robber baron would, though he had done this with bauxite. Mellon invested in new innovations, functioning as an early version of the modern venture capitalist. The magazine World’s Work described the Mellon formula thus: “Find a man who can run a business and needs capital to start or expand. Furnish the capital and take shares in the business, leaving the other man to run it except when he is in trouble. When the business has growth sufficiently to pay back the money, take the money and find another man running a business and in need of money and give it to him, on the same basis.”
In the late 1880s an inventor named Charles M. Hall had showed up in Mellon’s offices. Hall had developed a new way to smelt aluminum, but he lacked capital to sell his product. Mellon, for his part, agreed to lend $250,000 in return for a controlling share of a new firm, the Pittsburgh Reduction Company. Pittsburgh Reduction, iterations later, became the Aluminum Company of America.
Hoover himself, impressed, later recounted an anecdote an official from the same company would tell him about working with Mellon. The Mellon Bank had refused to lend to an inventor. But Mellon told the man, “I sometimes persona
lly loan money on the security of character.” Mellon gave the man $10,000 and then invested yet more, and then yet more when the pilot showed prospects. For his cash efforts, Mellon eventually agreed to a fifty-fifty ownership. The inventor wondered aloud why Mellon was settling only for half. Now that his project had value, Hall reminded Mellon, Mellon might foreclose and own all. But the answer came back: “The Mellons never did business that way.”
To Mellon the formula was obvious—invest in the private sector, do not intervene too much, wait silently, and the returns would be all the greater. Eventually, he was so successful at producing innovations that he created the Mellon Institute in Pittsburgh to make the resources of his empire available to other, less innovative companies. The institute came under the general Mellon rubric “self-improvement,” though whether that “self” was Mellon or his business or the U.S. economy generally even he left unclear. In the same spirit, Mellon also undertook to improve his knowledge of the French language at around the same point. It was an early version of the modern science think tank. Companies brought their cash to the Mellon Institute; this funded scientists who could solve their problems through efficient applied research. Hundreds of books and papers, as well as more than 600 patents, resulted. By the time he entered public life, Mellon would serve on the board of more than 150 corporations, presiding over hundreds of millions.
