BEST OF DOUG NOLAND

June 20, 2005

From the Department of Treasury’s website: "Andrew W. Mellon was nominated by President Harding to be the 49^th Secretary of the Treasury. He was retained by President Coolidge and President Hoover, serving the three Administrations from March 4, 1921 until February, 1932. Secretary Mellon demonstrated financial ability early in life by starting a successful lumber business at the age of 17. He joined his father’s banking firm, T. Mellon & Sons, two years later and had the ownership of the bank transferred to him in 1882 at the age of 27. In 1889, he helped organize Union Trust Company and Union Savings Bank of Pittsburgh. He also branched out from banking into industrial activities, and built a great personal fortune from oil, steel, shipbuilding, and construction… Through the prosperous 1920’s, Mellon was a popular individual, but the onslaught of the depression affected his standing."

Mr. Mellon was recognized by his contemporaries as a brilliant and compassionate American policymaker, businessman, philanthropist and statesman. Yet economic historians – not unjustifiably so – deride him for his most famous "tough love" approach to the "roaring twenties" hangover:

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. … 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 from less competent people."

It helps to appreciate the backdrop for Mr. Mellon’s comment. By the late-‘20s, he and others had grown quite concerned over what they considered a momentous inflationary boom that had transpired since the end of the First World War. Having witnessed recurring inflationary booms and subsequent painful busts during the second half of the nineteenth century, he believed that restraint and hardship were the only viable antidote for an extended period of excess. A difficult adjustment period was necessary to restore the financial and economic systems to stability, in the process returning both businessmen and workers to more industrious pursuits. Deflation must follow the inflationary boom because attempts to sustain the inflated price level, with its attendant profligacy and speculation, would prove futile, only spurring more dangerous excesses and imbalances. Sustaining or reigniting booms – while failing to "purge" unsound elements - would necessitate only more arduous and protracted adjustment periods.