As members of the G20 prepare to meet in Pittsburgh later this month, it is unlikely that any of them will pause and reflect upon the legacy of Pittsburgh native Andrew Mellon who, following a distinguished banking and investment career, served as Secretary of the Treasury for most of the 1920s, under three successive Republican presidents (or, as some would have it, had three U.S. presidents serve under him). But maybe they should, for at least two reasons.
One, Mellon’s lasting achievement is the reduction of massive federal debt following World War I. He succeeded in doing so not by following the policies of the earlier Wilson and later FDR and successive administrations by raising existing taxes and inventing new ones, but rather by cutting tax rates, reasoning that “the history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business.” As finance ministers ponder how to reduce sky-high debt following intervention in financial markets, they are widely expected to follow the opposite path of raising taxes.
Two, Mellon was widely vilified after the onset of the Great Depression when he voiced his theory that the recovery of the banking system was contingent upon a process of weeding out and liquidating the weak banks. He also opposed deficit spending, instead advocating spending cuts to keep the federal in balance. At the outset of the current crisis, a small number of economists warned of the dangers of keeping “too big to fail” banks afloat, but to no avail.
Times have changed since the 1920s, and for better or worse, there likely is no going back to the largely limited-government views held by Mellon and Coolidge. We will never know how the Great Depression would have played out if Mellon’s policies had been carried out. We do know that his record for much of his tenure as Treasury Secretary was outstanding and his instincts, honed by a lifetime in business, were keen. It may well be that his policy prescriptions have some value for our time as well; maybe someone should leave copies of his book Taxation: The People’s Business on the desks of G20 participants.