President Coolidge’s first Annual Message to Congress delivered the previous year, December 6, 1923
President Coolidge would open his second Annual Message to Congress by assessing the pervasive destruction of unsound economics, declaring,
The fallacy of the claim that the costs of government are borne by the rich and those who make a direct contribution to the National Treasury can not be too often exposed. No system has been devised, I do not think any system could be devised, under which any person living in this country could escape being affected by the cost of our government. It has a direct effect both upon the rate and the purchasing power of wages. It is felt in the price of those prime necessities of existence, food, clothing, fuel and shelter. It would appear to be elementary that the more the Government expends the more it must require every producer to contribute out of his production to the Public Treasury, and the less he will have for his own benefit. The continuing costs of public administration can be met in only one way — by the work of the people. The higher they become, the more the people must work for the Government. The less they are, the more the people can work for themselves.
To restore the proper ownership of what people earn was what drove Coolidge and Mellon to insist upon Congress cutting rates across the board, fighting to eliminate penalties like the estate tax and genuinely reducing expenditures (remember this was before baseline budgeting). While the Revenue Act of 1924 retained the tax on estates (to Coolidge’s disappointment), it would continue the decrease of rates from 58 to 46% at the top and down to 1.125% at the bottom. For Coolidge, tax and expenditure reduction was a moral obligation. Higher and higher rates bore inescapable costs on everyone. Though the Federal minimum wage would not arrive until 1933 ($0.25/hr), it (like all taxes on what is earned) only harm everyone, employer and employee, rich and poor alike, shackling the future to government spending habits. Higher rates, as they had become in Coolidge’s lifetime, were an avoidable source of division for what should be a United States. As President Coolidge knew all too well, feeding class warfare as the basis for tax policy would only spread suffering and prevent the return of economic health.
The Revenue Act of 1932 was the single largest peacetime tax increase up to its time. It raised the top rate from 25% to 63%, doubled the estate tax, increased the corporate tax 15%, and ushered in taxes on numerous items that had never before been charged. A tax on gasoline, now taken for granted, began that year. Sales taxes were imposed on candy, toiletries, refrigerators, tires, cars, checks, stamps, telephone messages and numerous other items. All this was intended to save the country from the first deficit to occur in ten years. The loss of revenue from the Smoot-Hawley Tariff combined with the repeated hemorrhage of expenditures on everything from “work-sharing” programs to Veteran’s bonuses to maintaining wage and price rates to launching the National Credit Corporation and other government-driven actions gave the country a $2 billion deficit in 1931. Hoover had to correct the correctives by stopping the outflow of capital and “balance” the budget with more revenues. In marked contrast to 1921, 1922, 1924, 1926 and 1928, the “balance” was to be achieved not by cutting down the spending of government but by raising revenue to meet those expenditures. In his annual message to Congress in December of 1931 he presented the coming rate increases as the measure to restore “balance” and “cushion the violence of liquidation.” As Secretary Mellon had urged though, liquidation was exactly the medicine required for a sound economy to return. The marked differences between the President and his Treasury Secretary by this time were publicly known. President Hoover no longer permitted Mellon to set policy, as he was allowed to do under President Coolidge. Instead, he was instructed, managed and kept on a shortening leash. It was the Assistant Secretary Ogden Mills who had the President’s ear and confidence. Mellon was no more than a face to “sell” the tax increases. He had lost the internal battle in Hoover’s Administration for continuing what had been achieved during his two predecessors. Virtually being shown the door, Mr. Mellon was about to experience the price of crossing Hoover: Go before Congress and propose what would become the rate increases of 1932. He, with Ogden Mills as the principal speaker, did. By then, however, no one was interested in what Mr. Mellon thought on the subject. He was a liability now to the Administration. The Democrat majority in Congress would pass the Act decisively and while it stopped the flow of capital, Mellon’s predictions for high rates would come true. Revenue fell even more to $1.9 billion, suffering spread more equally and a decade of tax reform was repealed. But, as Mr. Cannadine observes in his biography of Mellon, “[E]ven before the measure was passed, Mellon had ceased to be even nominally responsible for it” (p.449). Commenting on what the looming decisions of Congress from his embattled friend’s department, former President Coolidge recalled the danger at work when taxes are increased, “Secretary Mellon has convincingly stated the approaching necessity of devising a tax system when business becomes normal to make national revenues more nearly depression proof. Assessing taxes where they can best be borne is sound enough. The rich are necessarily the immediate source of the income taxes. But mixed up with our tax laws have been certain social theories for dispossessing the rich in the name of reform rather than for revenue.” The former President then elaborated a warning that rings true in our current “tax the rich” redistribution climate, “Now, when we especially need surplus money for relief purposes, we find Treasury receipts greatly reduced. The vacillating income of persons and corporations does not supply certain sources of revenue. Taxes should provide a sure income and a balanced budget for the government without reference to social theories. It would be cheaper for the people of small incomes to pay one direct tax to the government than many indirect taxes on what they consume. A broad base of income assessments enabled Great Britain to balance its recent budget with little increased taxes. If government is to be able to relieve future depressions and encourage business it must first provide a revenue system that will not itself be depressed and also demonstrate ability to pay its own bills from current receipts” (May 28, 1931).
Looking back on his response to the Depression as President, Herbert Hoover explained in his “Memoirs” the sharp conflict that persisted inside the Administration between himself and Andrew Mellon, “First was the ‘leave it alone liquidationists’ headed by Secretary of the Treasury Mellon, who felt that governments must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.’ He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people’…At great length, Mr. Mellon recounted to me his recollections of the great depression of the seventies which followed the Civil War…He told of the tens of thousands of farms that had been foreclosed; of railroads that had almost wholly gone into the hands of receivers; of the few banks that had come through unscathed; of many men who were jobless and mobs that roamed the streets. He told me that his father had gone to England during that time and had cut short his visit when he received word that the orders for steel were pouring toward the closed furnaces; by the time he got back, confidence was growing on every hand; suddenly the panic had ended, and in twelve months the whole system was again working at full speed. I, of course, reminded the Secretary that back in the seventies an untold amount of suffering did take place which might have been prevented; that our economy had been far simpler sixty years ago…But he shook his head with the observation that human nature had not changed in sixty years” (pp.30-31). Indeed, eighty years has not changed that nature.
This illustrates not only the divergent outlooks on the same problem but also shows how little former President Hoover understood what had taken place and why just over twenty years before. Mr. Mellon, nineteen years his senior, had learned from a very young age what it meant to build a business from nothing. He also knew the cost of making poor decisions. He had seen the pervasive suffering of what up to that time was called the “great depression” of the 1870s. He had learned from human nature. Similarly, Mr. Coolidge, who was seventeen years younger than Mellon, was a keen student of people. He observed the benefits of allowing bad economic decisions to work themselves out on their own and the exponential increase of suffering that results when government prevents that natural corrective. He, like Mellon, understood that the complexity of the market does not change the nature of people. The nature of people does not change. This stark difference in approach between Hoover and that of Mellon and Coolidge turned what was an “ordinary boom-slump” into something of unprecedented scope and duration because of repeated efforts to stop, suspend or slow down, through legislation and fiscal policy, the market’s natural ability to heal. Of course, good intentions were behind it all. The leadership of the 1930s was not trying to destroy the economy. But destruction and prolonged suffering did result. By trying to administer corrections through government, they unwittingly ushered in the very trouble they thought was being minimized. In terms with which Mellon would firmly agree, former President Coolidge would point back to something obvious lost in the flurry of calls to “do something” and “save the markets from themselves,” when he wrote, “The government has never shown much aptitude for real business. The Congress will not permit it to be conducted by a competent executive, but constantly intervenes. The most free, progressive and satisfactory method ever devised for the equitable distribution of property is to permit the people to care for themselves by conducting their own business. They have more wisdom than any government” (January 5, 1931).