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.The Eternal American Battle - Humans V Money

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Saturday, October 18, 2008

AFTER THE CRASH

I bring to your attention Mr. Andrew William Mellon, a scarecrow of a man whose life reads like a Balzac novel. He is virtually forgotten today, but he should be remembered. First, he is one of the men who brought you the Great Depression; second, he is the man who invented “trickle down economics”, which may yet bring you the next depression; third, his name has appeared on more dollar bills than anybody, with the possible exception of George Washington; and fourth his obsession with money was so great that its poison has leached into our own time, for Andrew William Mellon was the 'prater profectio' of the “vast right wing conspiracy.” Suffice it to say that if Freud had ever met Andrew Mellon, psychiatry would be a recognized science today. Andrew was lucky enough to be born at a time and a place (Industrializing Pittsburg – “hell with the lid off”) and to a Scrooge-like father (who “…disapproved of those possessed of festive dispositions”) both of which characteristics gave Andrew an advantage over the rest of humanity. His father was a successful banker, and when Andrew was 17 he loaned the boy enough cash - at reasonable interest rates - so that he could found his own lumber company, following the mantra, “What would father do?” After paying daddy back and making a small fortune of his own, Andrew sold out because he felt the market was about to take a downturn – which it promptly did. Andrew then joined with his father and brother in founding a bank, T. Mellon & Sons. In 1882 Andrew became the President and primary shareholder. Using it as a base, and his connections with the Pittsburg elite of Carnegie and Rockefeller, Andrew helped form ALCOA, B.F. Goodrich, Gulf Oil, Heinz Foods and dozens of other corporate giants in the dawning 20th century. He was, by 1899, the fourth richest man in America. But he was still living with his parents and eating porridge for dinner. Surly life had something warmer to offer Andrew than an “Oedipal competition” with his father that he could never win.It did. But Andrew screwed it up. In 1900 the 45 year old Andrew tried to escape his desolate fate by marrying the vivacious 19 year old Nora Mary McMullen, of the Scottish Guinness Brewing fortune McMullen’s. But instead of Nora providing Andrew with a way out, he dragged her into his miserable life. She tried to make dirty, foul Pittsburg a home. Nora had a daughter in 1901 and a son in 1907, but she also had occasional liaisons with an old boyfriend, the debonair and dashing Captain George Alfred Curphey. It was obvious that Nora was even more desperately miserable in Pittsburg than Andrew had been. But even after Andrew bought Curphey off for $20,000, Nora eventually ran away to England with him. In the end, after having refused Nora’s desolate pleas for a divorce for a decade, in 1912 Andrew charged her with adultery and fought her in court for custody of their children. He won, but that just meant that now he and the children were all miserable.
By 1920 Andrew had become so brittle that one biographer has described him as a “dried-up dollar bill waiting to be blown away”. And this was the man the new President, Warren G. Harding, named as his Secretary of the Treasury. And why not: if you believed in the power of unfettered capitalism then why not place its future in the hands of one of its most successful capitalists? After resigning from the sixty boards of company directors he sat upon, Andrew accepted the post. Of course he still maintained close contact with the family bank, now under the stewardship of his brother. The entire modern Republican economic game plan was on display while Andrew Mellon ran Treasury through the terms of Presidents Harding, Calvin Coolidge and Herbert Hoover. Through the entire decade of the 1920’s the economy grew at 7% per year, while unemployment remained between just three and four percent.(Sound familar?) Mellon moved to quickly retire much of the World War One debt, cutting it by $10 billion. He also pushed hard to cut the upper income tax rate from 77% to 24%, and cut taxes for middle class Americans at the same time, although by not nearly as much. He also reduced the Estate Tax, (known in current Republican circles as the “Death Tax”). But more importantly he moved to improve the “efficiency” of government. Remember this was when the largest civilian department in the government was the Post Office. In 1920 federal spending was $1,329.77 per person. By 1927, after seven years of Andrew Mellon efficency at Treasury, that spending had fallen to $180.57 per citizen - for the Post Office, the Navy, the Army, everything. So if Mellon was getting everything he wanted in 1929, what went wrong? As one historian has explained, “Between 1923 and 1929 manufacturing output per person-hour increased by 32 percent, but workers’ wages grew by only 8 percent. Corporate profits shot up by 65 percent" (Sound familar?)"… In 1929 60% of families were living on less than $1,500 a year….” And then, the Revenue Act of 1926 cut the taxes of those making $1 million or more by more than 2/3rd . As a result by 1929 the top 1/10th of 1% had an income equal to that of the bottom 42%. Another historian observed that, "The Mellon tax policy, placing its emphasis on relief for millionaires…made the mal-distribution of income…even worse." The middle class of Americans had been squeezed out of existence by 1929. And since Federal budgets had been progressively cut year after year, the economic health of the nation became dependent solely on the swing of business cycles, until the money in circulation contracted past the point where the economy could recover from the next stumble. The market fell from a high of 294 points in early October 1929, to 230.07 points on October 29th. Without cash moving through the system “Industrial production fell by nearly 45% between the years 1929 and 1932. Home-building dropped by 80%...” Does any of this sound familiar? One wag put it to verse; “Mellon pulled the whistle, Hoover rang the bell, Wall Street gave the signal, And the country went to hell.” Mellon saw what was happening, but favored what he called a “liquidationist” approach to the problem. (Sound familar, again?) As was recently tried again in the case of Lehman Brothers, Mellon believed that weak banks then (and weak brokerage firms now) should be allowed to fail. Mellon called it “weeding out”. What that strategy produced, in 1929 and in 2008, was panic selling, when confident investors realized they could be the next loser if their bank failed, and acted accordingly. In the public’s mind Mellon, who was by then 70 years old, had become the face of the “old system”. During 1930 and 1931 Hoover saw to it that Andrew Mellon spent much of his time in Europe with the thankless job of trying to get ex-allies to repay wartime debts. It was during this time that the Hoover administration, still following Andrew Mellon’s approaches, drove the economy from recession into depression, eventually dropping the market, on July 8 1932, to an all time low of just 41.22 points. And rightly or wrongly, in the public’s mind, Andrew Mellon bore most of the responsibility for the disaster. It was his business philosophy that had led to the crash, even if it wasn’t his philosophy alone. Finally, in February of 1932, Andrew agreed to step down from Treasury, and accept the post of Ambassador to England. He served for just one year and then resigned. In 1937 the Roosevelt administration opened “The Mellon Tax Case”, investigating Andrew and his ties to the family bank. Eventually the Mellon Bank settled for $668,000 (equivalent to $9,552,000 in 2007). But by then, Andrew was dead, on August 27, 1937. And though his estate had been hurt by the massive tax settlement, and even though Andrew had spent the last years of his life giving away much of the wealth he had accumulated, Andrew still managed to hold on to enough so that in 2007 the various trusts that Andrew created saw that his grandson, 75 year old Richard Mellon-Scaife, was still collecting about $45 million a year, some of which was used to finance the impeachment campaing agaisnt President Bill Clinton in 1998.
As Honor de Balzac wrote in his novel, “Father Goriot”, “Behind every great fortune…is a crime that has yet to be discovered.”
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