The Rise of the Billionaires Leaves the Middle Class Stranded
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Friday, September 14, 2012
DESIGNER OF DISASTER
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 is trying very hard to 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 as the town was described”. And he was born 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. He ran the firm 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” which he could never win? It turns out 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 Nora 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, and she didn't want them trapped as Andrew was. 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 as director from the sixty corporate boards 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 to its citizens. 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, food inspectors, for everything.
So if Mellon was making government so 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….” (equal to $18,500 in 2012)
And then in the Revenue Act of 1926 , pushed hard by Andrew Mellon, taxes were cut for 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. (Sound familar?) And since the economic health of the nation became dependent solely on the swing of business cycles, without consumers, there was not much of a swing left. The M-1, the money supply in circulation, had contracted past the point where the economy could recover from the next stumble.
And when the next "stumble" came, 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 hedge funds 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, actually the odds were they would 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 the Great Depression, 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 a 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. (This is true again today, except today big banks can invest their money in each other, trading vast fortunes and claiming imaginary profits by doing so) There was no consumer demand in America 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's ties with the family bank while he was serving at the Treasury Department. 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 personal wealth, 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. Scaife used some of his 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 really happen.
As Honor de Balzac wrote in his novel, “Father Goriot”, “Behind every great fortune…is a crime that has yet to be discovered.”