Of Treasures and Treasury Secretaries

OF CHRISTMAS TREASURES AND TREASURY SECRETARIES Jay Cochran, PhD

Seventy-two years ago this Christmas, the United States received one of the largest gifts in its history. It all began simply enough with the delivery of a letter. Over Christmas dinner at the White House in 1936, President Roosevelt was informed, through his uncle (acting as an intermediary), that former Treasury Secretary Andrew Mellon wished to establish a National Gallery of Art in Washington, modeled after the similarly-named British gallery in London.

In his letter to the president, Mr. Mellon offered to pay for the construction of the gallery building, provide a generous endowment for its operation and subsequent additions to its collections, and to give his own substantial collection of art, which would form the nucleus of the gallery's original collection. For a gift of its size and value, one of Mellon's most telling stipulations was that the gallery could not be named for its donor. David Cannadine, in his excellent biography of Andrew Mellon, calls this gift, "...a philanthropic gesture which in both its scale and the willful self-effacement of its benefactor had no precedent or parallel in the nation's history."1

Mellon's remarkable and dignified generosity triggered some thoughts about how the current Treasury Secretary, Henry Paulson, compares to his predecessor. Beyond the obvious Republican Party affiliation, the two men share some other characteristics in common, but they differ in some important respects as well.

Both men came to public service from the pinnacles of achievement in private finance. Mellon's namesake-bank underwrote and financed productive enterprises such as Koppers, Carborundum, Alcoa, and Gulf Oil for example; sometimes, even taking direct ownership stakes in the firms he financed. Paulson's Goldman-Sachs, by contrast--a product and producer of our modern era of financial engineering--underwrote leveraged buyouts, mergers, and acquisitions, lobbied for increases in permissible leverage ratios for investment banks, and profited from its special position as a primary dealer for the Federal Reserve, among other things.

Both men were/are poor public speakers. Mellon spoke quietly often to the point of inaudibility, while Paulson's speaking style is gravelly and stumbling sometimes to the point of incomprehensibility. After the 1929 crash, when Mellon would speak reassuringly about the economy, the stock market frequently swooned anew; an unfortunate response Mr. Paulson's public speaking also seems to inspire.

Both men were/are private and reserved, even in matters of legitimate public discourse. Other than vague reassurances about the underlying soundness of the system, Mellon's aloof and laconic style made him seem disengaged. His straight-forward answer to the post-crash troubles was to, "'Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate,' ... [Mellon's] only cure was to let economic forces run their downward course as they had in '73. But Hoover, convinced that the economy was basically sound, saw no reason for bringing misery to every sector of society. Where laissez faire policy would call for putting the whole structure of prices through the wringer, the New Era philosophy called for the maintenance of price levels and of spending. If this could be done, Hoover reasoned, then the stock market crash could be contained."2

1 Cannadine, David (2006), Mellon: An American Life, New York: Alfred A. Knopf, p. 560. 2 Schlesinger, Arthur (1965), The Age of Roosevelt: The Crisis of the Old Order, Sentry Edition, vol. 1, Boston:

Houghton Mifflin Co.

To be sure, in spite of his laissez faire prescription, Mellon did acquiesce to Hoover's increasing interference in markets, and in that respect he shares some similarity to Paulson and the modern era. However, acquiescence is not activism. Paulson's approach to the current troubles is thoroughly in sync with Hoover's: in trying to arrest the asset price deflation by any means necessary, including, for example, forcing capital onto unwilling banks.

Equally important and instructive is Paulson's reluctance to publicize the decision-making criteria and meeting minutes surrounding the disbursal of TARP funding. While there may be sound reasons for such reticence, Paulson's secrecy also smacks of someone with something to hide--perhaps because of incompetence, negligence, or worse. It's hard to say just what that something may be when the man in charge will not say, but if there are untoward reasons, once revealed, they could lead to some unpleasantness for Mr. Paulson.

As Mr. Paulson approaches the end of his tenure, a look at Andrew Mellon's post-Treasury years provides some clues about what may be in store for the current Secretary. After all, we have a change in administrations coming that many have likened to a change in eras--not entirely unlike the sea-change from Hoover to FDR. And as often happens with such changes, what was once viewed as normal, acceptable, or successful in the old era, comes to be seen in a less favorable light through the lens of the new era. Such was certainly the case with Andrew Mellon. He went from the highest ranks of esteem to the lowest in just a couple of years. The speed of fate's reversal in his case was breathtakingly swift.

The Ghost of Christmas Past Mellon's generous gift of art to the American people has already been mentioned, but what was not mentioned were the circumstances under which he made it. For almost three years prior to Christmas 1936, Mellon was pilloried and prosecuted by the Roosevelt Administration in a game of political vengefulness, orchestrated from behind the scenes by FDR himself. FDR was after the "malefactors of great wealth," and Mellon was near the top of his list.

First, the administration attempted to try Mellon on criminal tax fraud charges despite separate investigations by the Bureau of Internal Revenue, the Justice Department, and the Treasury Intelligence Unit that no such grounds for fraud existed.3 Undeterred, the attorney general impanelled a grand jury to seek indictment of Mellon on tax fraud. Grand juries have deserved reputations for being prosecutorial rubber stamps--so much so, that it is said, only half in jest, that they will indict a ham sandwich if the prosecutor wishes it--but the grand jury in Mellon's case refused to do so.

Thus defeated in criminal court, FDR and his attorney general changed tack to pursue Mellon instead on civil tax evasion charges. The stress of back to back trials eventually took their toll however, and Mellon's health began to deteriorate rapidly. In August 1937--after the second trial concluded but before its verdict was rendered--Andrew Mellon passed away, living to see neither his gift fully realized, nor his reputation restored. Ground breaking for the National Gallery of Art only began earlier that summer shortly before his death. On December 7, 1937, Andrew Mellon was completely, albeit posthumously, exonerated in the civil tax case by the Board of Tax Appeals.4

3 See Cannadine (2006, pp. 508-535 and passim) for a comprehensive treatment of the Mellon tax trials, including FDR's personal involvement and interest in them.

4 ibid, pp. 583-585.

Now it is true that some contended then (and some probably still believe today) that the gallery was simply Andrew Mellon's quid pro quo for an acquittal on the tax fraud charges. Cannadine, however, decisively refutes this canard with the observation that, "Mellon had conceived the gallery many years before he was charged with tax evasion...Indeed, his creation of his educational and charitable trust as the instrument for endowing and realizing the gallery was one of the major acts upon which the tax charge was hung: to that extent, it was the gallery that led to the tax trial, rather than the tax trial that led to the gallery."5 Perhaps even more persuasive than the sequence of events, however, was Mellon's demeanor throughout the tax trial and especially in connection with his gift. "Mellon's tone was anything but that of a suppliant bargaining for his life and eager to pay for his acquittal: he dealt as one who held all the cards, leaving the federal government to take or leave his offer."6 In spite of his mistreatment at the hands of the very government he had so long served, Mellon was clearly thinking longer term. To David Finley, a long-time confidant, Mellon observed, "Eventually the people now in power in Washington will be dead, and I will be dead, but the National Gallery, I hope, will be there, and that is something the country needs."7 With this background in mind, the generosity of Mellon's 1936 Christmas gift becomes all the more extraordinary. Moreover, the fact that he made the gift to the American people through his nemesis, FDR, and did so without rancor or bitterness is nothing short of remarkable. For Mellon, "The edification of the American people outweighed the vindictiveness of any American president."8

Merry Christmas Mr. Paulson, may you fare at least as well in your retirement.

P.S. The next time you're in Washington, visit the National Gallery of Art and remember its grandeur, its extraordinary collections, and even its very existence is not a product of your government, but rather of a gift to your government.

5 Cannadine (2006, p. 566). 6 ibid., p. 567. 7 Finley, David E., (1973), Standard of Excellence: Andrew W. Mellon Founds the National Gallery of Art At Washington,

Washington: Smithsonian Institution Press, pp. 36-37. [As quoted in Cannadine (2006), p. 567] 8 Cannadine (2006, p. 567).

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