An insightful economist, Mellon approached his task systematically. Appointed by Harding at the very beginning of Harding’s first term, Mellon inherited a national debt of over twenty-six billion dollars: a staggering sum at the time. Tax revenue was anemic, and Mellon saw that high tax rates were dampening business activity. Cuts to the tax rates would energize business, which would in turn boost personal income for workers, and finally increase tax revenue to pay off the debt.
Mellon encouraged Congress to cut taxes; by 1926, income tax rates had fallen from a high of 50% to 20% in the highest brackets. Further tax cuts would be enacted, and by 1928, the national debt had fallen to 17.6 billion.
During the war, the United States had lent huge sums to various European nations. France, in particular, was teetering on the edge of economic collapse, and Mellon recognized that such a collapse would have ripple effects which would harm the U.S. economy. He achieved an agreement whereby some of debt would be forgiven. He calculated that the amount which the U.S. lost by canceling French debt would be less than the harm generated by a French economic breakdown.
Likewise, Mellon was instrumental to the design and implementation of the Dawes Plan. The plan, named after Coolidge’s vice-president Charles Dawes, stabilized the German economy by restructuring its debt, preventing both the outbreak of war and the serial collapse of several European economies; it was enacted in 1924, and revised in 1929 under the name ‘the Young Plan.’
In addition to cutting taxes, Mellon found ways to reduce government spending. He restructured the way in which paper money was printed, saving taxpayer dollars in the process.
Mellon’s years in government were at a time when a shift was taking place: earlier in history, the government’s revenues were largely from tariffs; later in history, a larger percentage of revenue would come from income tax. Whether Mellon encouraged this change, or whether it was taking place around him and despite him, is a matter open to debate. Did he welcome it, or simply acknowledge it as inevitable?
The tax cuts which Mellon persuaded Congress to pass were carefully calculated to ensure that taxpayers at the very bottom of the wage scale would benefit by being allowed to keep more of their earned wages. Mellon argued that unearned income could be taxed at a higher rate than earned income.
While Mellon agreed with Coolidge and Harding about the broad principles of federal policy, there were some differences. As historian Amity Shlaes writes,
As he got to know the Treasury secretary, Coolidge could see that he and Mellon came at the question of the budget and money differently. Coolidge believed that higher taxes were wrong because they took away from men money that was their property; he believed that lower rates were good precisely because they encouraged enterprise, but also because they brought less money. Low rates starved the government beast.
While Mellon’s policies were successful at rescuing both the American and the European economies, his embrace of a progressive income tax and his willingness to tax unearned income at higher rates than earned income may have planted the seeds for future economic difficulties.