AFTER THE CRASH

I would like to introduce you to 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 anyone, with the possible exception of Alexander Hamilton; and fourth, his obsession with money was so great that its poison has leached into our own time, for Andrew William Mellon is 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.

Andew was lucky enough to be born in Pittsburg during the latter half of the ninteenth century – “hell with the lid off” - and to a Scrooge-like father who disapproved of those with..."festive dispositions”. 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. 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 found ALCOA, B.F. Goodrich, Gulf Oil, Heinz Foods and dozens of other corporate giants of the dawning 20th century. And he took a share in the stocks of every one of them.

Andrew (above) was, by 1899, the fourth richest man in America. But he was still living with his parents and eating porridge for dinner. Did life have anything to offer Andrew other than an “Oedipal competition” with his father which 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 (above), "The prettiest woman in London", and heir to part of the Scottish Guinness Brewing fortune. 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. The couple had a daughter in 1901 and a son in 1907, but Andrew became convinced that Nora was seeing a certain debonair and dashing cavalry Captain, George Alfred Curphey - who had already been named as co-respondant in the South African Vivian divorce case of 1907. Perhaps she was having an affair. But the microphones Andrew had hidden in their home failed to produce any evidence of it. So Andew smashed 12 of them with an axe. For a decade Nora pleaded with Andrew for a divorce, but Andrew wanted custody of the children. Finally, in 1912, he actually charged her with adultry in court papers. Nora strongly denied the accusation and a special master who carefully examined Andrew's evidence, rejected his claim. However , Nora had suffered enough. In exchange for a $2 million settlement and her freedom, Nora did not fight Andrew when he demanded primary custody of the children. But that merely meant that now the children would be just as miserable as Andrew was.

By 1920 Andrew had become so brittle that one writer would 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, what better man to guard its future than one of the most devoted and disciplined unfettered capitalists in the world? 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 his brother's stewardship.

The entire modern Republican economic game plan was on display while Andrew Mellon (above, center) ran Treasury through the terms of Presidents Harding, Calvin Coolidge (above, left)  and Herbert Hoover (above, right). Through the entire decade of the 1920’s the economy grew at 7% per year, while unemployment remained between just three and four percent.

Mellon moved to quickly retire much of America's 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 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 the federal government was providing $1,329.77 per person per year in benefits. By 1927, after seven years of Andrew Mellon 'efficency' at Treasury, that spending had fallen to $180.57 per citizen per year - for the Post Office, the Navy, the Army, for everything.

So if Mellon was making government efficent by 1929, what went wrong? As one historian has explained, “Between 1923 and 1929 manufacturing output per person-per hour increased by 32 %, but workers’ wages grew by only 8 %. (Meanwhile) corporate profits shot up by 65 %" (Sound familar?) "… In 1929 60% of families were living on less than $1,500 a year….”

And then the Revenue Act of 1926 , pushed hard by Andrew Mellon, cut the taxes of those making $1 million or more a year by more than 2/3rds. As a result, by 1929, the top 1/10th of 1% of Americans had an income equal to that of the bottom 42% of Americans. Another historian has observed that, "The Mellon tax policy, placing its emphasis on relief for millionaires…made the mal-distribution of income…even worse."

By 1929 the American middle class was being squeezed out of existence. 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. But without consumers, there was not much of a swing. The M-1, the money supply in circulation, had contracted past the point where the economy could recover from the next stumble.

Without cash moving through the system; “Industrial production fell by nearly 45% between the years 1929 and 1932. Home-building dropped by 80%...” The stock market simply followed suit. It fell from a high of 294 points in early October 1929, to 230 points at the end of the month. 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?) Mellon believed that weak banks (like weak insurance conglomerates, weak car companies and weak brokerage firms today) should always be allowed to fail. Mellon called it “weeding out”. What that strategy produced in 1929, and in 2008, was panic selling, when over-confident investors suddenly realized that actually applying the rules of capitalism to them meant that, besides being the next winner, they might also be the next loser. Realizing this they then acted accordingly. They got out of the market. Fast.

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 Herbert Hoover saw to it that Andrew Mellon spent much of his time out of the public purview, in Europe, with the thankless job of trying to get America's ex-allies to repay wartime debts. But since they were also suffering in a recession, they could not.

It was during these years that the Hoover administration, still following Andrew Mellon’s theories, drove the economy from a recession into the depression, eventually dropping the market, on July 8, 1932, to an all time low of just 41 points. And rightly or wrongly, in the public’s mind, Andrew Mellon as well as Hoover bore the responsibility for the disaster.

Capitalism had reached such a point of concentration of capital that while the millionairs still had plenty of money, there was no where for them to invest it. There was no consumer demand because the consumers had been "weeded out" of Mellon's system. What was needed was what Roosevelt called "priming the pump", but such ideas were anathama to Mellon's economic thinking, and anatham to Republicans today.

Finally, in February of 1932, with Hoover looking for some way to get the disgraced economic mastermind out of the public eye before the November elections, Andrew agreed to step down from Treasury, and accept the post of Ambassador to England. He served for just one year, and performed such assignments as introducing Emilia Erhart to the King of England (above). And then he resigned.

In 1937 the Roosevelt administration opened “The Mellon Tax Case”, investigating Andrew and his ties while serving at Treasury to the family bank. Eventually the Mellon Bank settled for $668,000 (the equivalent to $10 million, today).

But by then Andrew had died, 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 held so much money that, in 2007 (seventy years later!) the various trusts that Andrew created saw that his grandson,...

 ...75 year old Richard Mellon-Scaife, was still collecting about $45 million a year from them. He used some of this unearned wealth to finance the impeachment campaign against President Bill Clinton in 1998, and the idea that Barak Obama didn't have a valid U.S. birth certificate in 2008. It is as if this part of the family, and the Republican Party, is still trying to prove that old man Andrew Mellon was right back in 1929,  and that the Great Depression did not happen.

As Honor de Balzac wrote in his novel, “Father Goriot”, “Behind every great fortune…is a crime that has yet to be discovered.”

- 30 -

THE WALTZ KING

I have always thought of Joseph II, Emperor of Austria, as a bit of a schizophrenic, half enlightened revolutionary and half unsighted dictator, and totally a legend in his own mind. He explained himself this way; “I am a royalist by trade”, a truly conflicted description by a man whom, I suspect, did not fully understand what a tradesman was or did.

But Benedict Anton Michael Adam Hapsburg (his real name) was astute enough to hire Amadeus Mozart to waltz his court, and turned him lose to produce his greatest opera, Don Giovanni; and for that we all should be grateful to the man they called the “Musical King”. I prefer Mozart’s “The Wedding of Figaro” myself, but then it is a generally accepted truth that I have no taste in opera.

(http://www.youtube.com/watch?v=wQ7PKtS2BR8&feature=related)

But I love the “il catalogo e questo” when the servant Leporello comforts the rejected Donna Elvira by listing Don Juan’s feminine conquests. “In Italy, six hundred and forty; In Germany, two hundred and thirty-one; A hundred in France; in Turkey, ninety-one; But in Spain already one thousand and three.” But I digress... 

Joseph’s catalog of failings came into sharp focus in 1787 when, displaying a miserable sense of geopolitical timing, Joseph declared war on the Ottoman Turkish Empire. He was just trying to live up to a treaty with Catherine the Great of Russia, but it was not a popular decision with the ruling elite in Vienna. The conservatives were unhappy with the new taxes levied to pay for the war. The price of bread in Vienna went so high that bakeries in the capital were actually looted. And that simply encouraged the young liberals to see the war as a betrayal of the democratic ideas Joseph had seemed to support. They found reasons to travel abroad and avoid their draft notices.

The rest of the polyglot empire had fewer options. While the army was officered almost solely by German speaking Austrians, the bulk of the soldiers were divided between Italian speaking Lombards from south of the Alps and Slavic speakers from the Balkans. And no attempt was made to bridge the divides between them. When Joseph took the field in the summer of 1788 to join his 100,000 man army in laying siege to Belgrade, disaster seemed inevitable to everybody except Joseph.

The decision to lay siege to Belgrade was logical. The Turkish city on the Danube had been captured by Austrian armies in 1688 and again in 1717. Each time it had been lost again, the last time in 1739, but there was a young leader on the throne in Turkey, and Joseph was looking to grab a quick trophy to assuage his critics.

Unfortunately Joseph encamped his army on mosquito infested marshland outside of Belgrade, and over the next few weeks 33,000 of his troops contracted malaria, including Joseph. He had lost a third of his army and he hadn’t even fought a battle yet. And then in early September Joseph received intelligence that the Turks were sending troops to reinforce the fortress of Vivda, on the Timas River, a tributary of the Danube.

The fortress was called Bada Vida, or Grandma Vida, because it had been a border fort since before the Romans. Clearly the Turks were intending on opening a supply line to Vida, down the Timas and then up the Danube to Belgrade, breaking the seige. Joseph decided the best way to counter that move was to take Bada Vida, before the Turkish reinforcements arrived. So between attacks of debilitating fevers, Joseph ordered an immediate forced march to capture Vida, and the nearby village of Karansebes.

You see, Joseph had a logical reason for doing everything he did. On paper Joseph was a genius. It was only in reality that he was a complete fool. Having been raised to be a King, Joseph expected his army to have blind faith in him. So he didm't tell most of his officers where they were going or why. But in reality his army lacked faith in them selves, faith in their leaders and they certainly had no faith in Joseph. That just left everybody blind.

The troops dispatched to Vida had no idea why they were marching away from Belgrade so quickly. In a few hours their joy at escaping the stinking marshes was replaced by exhaustion. And still their Austrian officers drove them onward, without stopping for food or rest. By September 17th the forward cavalry scouts had reached the Timis River. Crossing over the bridge late in the afternoon, the fatigued scouts fell upon a camp of tzigani, commonly called gypsies. The tzigani were well stocked with schnapps, which they reluctantly sold to the cavalrymen. Suddenly things were starting to look up in this crummy war.

An hour behind the scouts in the gathering dusk came an equally weary infantry battalion. The cavalrymen, well drunk by this time, decided the infantry were after their booze. They constructed a makeshift fort from the gypsy wagons and, as the infantry approached, fired a warning shot or two. The infantry officers, unsure what was going on, shouted for their men to halt, pronounced in German as “halfte, halfte”. What the Slavic infantry heard was “utisit, utisit”, which is Czech for “Allah”. They thought their own officers were warning them the shooting was coming from Turkish Muslims.

Some returned fire. When the infantry fired back, more of the drunken cavalry fired. This exchange of gunfire, first, convinced the infantry officers it was Turks to their front, and second, stampeded the tzigani’s horses, which convinced the officers they were about to be attacked by Turkish cavalry. The Austrian officers ordered a retreat, wondering why their scouts had not warned them the enemy was so near. The retreat immediately turned into a rout.

As the following battalions crossed the bridge they heard shooting to their front. Understandably they mistook the retreating solders for advancing Turks. They threw their men into firing lines and let go with volley after volley. And still the attackers came on, charging through the darkening shadows. From the “Turks” point of view, they were not attacking they were retreating, under heavy fire. They had to get to the bridge, to escape the Turkish trap they had obviously stumbled into. And like dominoes the Austrian battalions fell over, one after the other.

On the other side of the bridge, officers were throwing up a defensive line to hold back the Turks, of whom there were actually none within fifty miles.

Meanwhile the drunken scouts had begun to suspect they might be in some trouble. They grabbed their booze and went galloping for the only escape route. As they thundered over the wooden bridge, the Austrian artillery opened up. The cavalry overran them, and the entire Austrian army melted away, pausing only to plunder a few villages and rape a few peasant women. The retreat reached such levels of panic that Joseph was knocked off his horse and fell in a stream, not a recommended treatment for a man recovering from malaria. The army did not stop until they returned to their siege lines outside of Belgrade and the perception of safety.

Forty-eight hours later a small part of the real Turkish army, sent to secure the fortress of Vida, stumbled upon the remains of a great battle. Ten thousand dead and wounded Austrian soldiers, with their equipment, were scattered across the fields around the village of Karansebes. It was a great victory which didn’t cost the Turks a dime. They weren't even there. The only other losers,, besides the Ausrians, were the tzigani who not only lost their schnapps but also lost their horses, and an unknown number of human casualties.

Joseph abandoned the army in front of Belgrade, turning it over to retired Field Marshal Gideon von Loudon. Loudon would capture Belgrade the following year. By then Joseph was near death, weakened by malaria. He died in November 1788, broken by his failures. And by dying, Joseph now abandoned Mozart.

Amadeus Mozart lost his cushy court job. He never wrote another opera, and spent the next two years spending more time writing letters begging for money than he spent writing music. He died in 1791, famously buried in a pauper’s grave. Realizing this makes watching the the final scene in “Don Giovanni” all the more poignant. The aging reprobate hero is challenged to either repent or burn in eternal damnation. Don Juan has the chutzpa to sing, “To none will I succumb! For me there's no repentance.” How refreshing to meet an honest liar, if only on the stage.

It was almost as if Mozart was trying to send a message to Joseph. I wonder if the Emperor ever got it?

- 30 -

1920 - DOG DAYS OF SUMMER

I admire the way the Boston Post handled the attack on Charles Ponzi. They respected him as an opponent. He had sued one of their compatriots and won a half million dollars, and they were not going to let that happen again. So on Friday, July 30th, 1920, they began to draw away the curtain, slowly, like a magician unveiling a disappearing elephant. First there came Mr. Barron’s detailed explanation of the impossibility of Ponzi’s plan to buy and sell international mail coupons. And then on Monday, August 2nd, the paper featured a column written by Mr. William McMasters. He had been a writer for the Post, until Ponzi had hired him as a Press Agent. And nobody can cut your throat more quickly than a Press Agent who suddenly starts telling the truth.

The Press Agent, it seems, had gotten a better gig. McMasters’ ex-employer, The Post, had paid him $500 for the all the dirt on his new employer. McMasters said he had not been a Ponzi employee for very long before he realized that his boss was, in McMasters’ own words, “a financial idiot who didn’t know how to add”. The press agent quoted from documents he had found in the company offices which showed that, contrary to the public records (such as those which Mr. Barron had access to), Mr. Ponzi was not worth $8 million, but was $4.5 million in debt. There was an immediate run on the “Old Colony” offices.

Terrified investors jammed Room 227 in the Niles Building, each demanding to withdraw their cash. And Charles Ponzi greeted them with cookies and coffee and a smile and gentle words and…cash. Over three days he paid out an estimated $2 million in cold hard cash to panicked investors. Overnight they had confidence again in Charles Ponzi. Many put their money back into his company. A few new investors even lined up to hand over their life savings. And if it had remained merely a matter of Ponzi verses the Boston Post, he might have won that battle. But a new player had entered the arena.

His name was Joseph Allen, and he was the Massachusetts Bank Commissioner. Following Ponzi’s amazing adventures in the Post, Mr. Allen.grew suspicious. Where had that most recent $2 million in cash come from so fortuitously, so suddenly? Normally no business, certainly not an investment program such as the “Old Colony”, has that much cash on hand. Following normal investment procedures the cash is out, earning interest for the customers. And when Mr. Allen learned that the little cheerful Italian had received over a quarter of a million dollars in loans from the Hanover Trust Bank, he ordered in two examiners.

It took the examiners only a couple of days to realize that McMasters had probaly gotten it right; Charles Ponzi was in all likelyhood overdrawn. And he had used his position at Hanover Trust to get a loan he could never hope of repaying. Using his own authority, the Commissioner ordered Hanover to freeze Ponzi’s accounts while they checked further. And then he went one step further himself, beyond his authority.

Mr. Allen got together a group of unfortunate investors in the “Old Colony” and helped them to all file for bankruptcy. That forced an immediate audit of the company. And that again confirmed McMasters’ documents; Ponzi was worse than broke. Ponzi was at least $8 million in the hole.

And then on the morning of Wednesday, August 11th, 1920, the Post delivered the coup de grace. They revealed that Charles Ponzi had served time in a Canadian Prison, convicted of forgery. The people of Boston, now ready to believe that Ponzi might be a liar and a crook after all, were handed proof that he had been a liar and a crook in the past. That very afternoon, Commissioner Allen seized Hanover Trust. The next day Ponzi surrendered to the cops, and was charged with mail fraud. He made bail, but the bondsman revoked it the very next day, on Friday the 13th. Even the bondsman now considered Ponzi a bad risk.

In all six banks were pulled under by the Ponzi scheme. And the investors, many of whom had stood in line for hours to hand over their lives’ savings, got back just thirty cents on every dollar. And the furniture dealer, who had started all the questions about Charles Ponzi, he did not even get his furnture back.

On Monday, August 16, 1920, Bartolomeo Vanzettii was bought back before Judge Webster Thayer for sentencing in the Bridgewater attempted robbery case. And almost no one was surprised when Judge Webster Thayer threw the book at him; twelve to fifteen years in prison.

August had shown a resurgence for the Boston Red Sox.  It was interrupted on the 20th when the Red Sox were schedualed to play the Cleveland Indians. On that day the entire Cleveland team was on the train back to Cleveland to attend the funeral of their teammate, shortstop Ray Chapman.  On the 16th "Chappie" was hit in the head by a pitch from the Yankee pitcher Carl Mays. He died 12 hours later; the only player ever killed in a baseball game. The Red Sox finished the month just five games below .500, their record now at 59 wins and 64 losses. The season was finally winding to a sad end for Boston.

- 30 -