Say Capitalism Like You Mean It
Warren Harding and Calvin Coolidge (Alamy)
By William Beach and Amity Shlaes
This essay is from Amity Shlaes’s regular column “The Forgotten Book,” which she pens for “Capital Matters” as a fellow of National Review Institute.
Americans’ top concern this election year is the economy, as CNN hosts pointed out when they opened the first presidential debate of the election season.
President Biden more or less brushed off the question. Almost any Democrat would do the same. The party prefers to pound the topic of social injustice, relegating economic policy to a tool for social leveling.
Former president Trump did better, underscoring the value of his tax cuts. But even the Donald didn’t deliver the kind of full-throated defense of capitalism we heard in the years of Ronald Reagan or Barry Goldwater. The platform he released recently robustly assails inflation. But it contains scant reference to the worst economic challenge that will drive inflation, the federal debt. And when it comes to taxes, the specifics of the plan are disappointingly narrow: tax cuts for workers and an end to taxation of tips.
And that too is typical.
Republicans these days will fight for capitalism. But not too hard.
Call it “conditional capitalism.” The “conditional” stems from a spreading suspicion that the interests of markets conflict with the interests of the average American. As Senator Marco Rubio put it recently, “What is best for the markets is not what is best for the American people.” Most Republicans will still drop a few lines about the merits of markets, or propose a mild reform—indexing capital gains, say, or sustaining Trump’s tax cuts. But the days when campaigning Republicans vied to propose the most dramatic tax cut—think of Dick Armey, Steve Forbes, and Phil Gramm in 1996 in New Hampshire—are over. The old describer of tax reforms, “across the board,” appears to be “obs.”—as in the sad little Oxford English Dictionary abbreviation. In our times, Republicans are not above hawking tariffs, as President Trump does. Or pushing for the breakup of big companies. Especially when they think doing so draws votes away from Democrats.
You can explain the hesitation. We live, alas, in the Age of Apology. We apologize for education. We apologize for purchases. We even apologize for celebrating the Fourth of July. So, of course, we apologize for free markets.
Still, unapologetic support for free enterprise has its charms.
That at least is the evidence of the understudied records of another moment of conditional capitalism, the period after World War I.
“Nothing is so imperative today as efficient production and efficient transportation,” said Warren Harding in 1920.
The Pack Animal Bucks
Armistice came in 1918, but it brought no economic peace here at home. The burden of war debt dramatically restricted the ability of lawmakers to spend. Yet angry returning veterans demanded benefits—the famous “bonuses.” The vets’ families likewise cried out for federal support. Dropping commodity prices shortly infuriated and bankrupted farms, driving farmers to push for federal subsidy. Unacknowledged inflation made a mockery of pay stubs, yet authorities preferred to blame merchants for high prices. Rioting crowds in cities from Seattle to Boston demanded minimum-wage laws and new statutes to support unions.
The lawmakers of the period counted on private industry to serve as the loyal pack animal of postwar recovery. Business, they told themselves, would pull us through in the long term. But many politicians also believed they first had to appease voters. The modern form of appeasement—spending—was not available to them, in part because the U.S. economy was not the impervious superpower it is today. Nor was raising income taxes to collect more revenue an option: the top rate was already over 70 percent.
At least, the politicians reasoned, they could placate the public by making class war on its behalf, attacking large companies and wealthy individuals. Perhaps capital gains, some politicians argued, ought to be taxed heavily, at income-tax rates.
A typical conditional capitalist of the period was Comptroller of the Currency John Skelton Williams, who ordered that banks across the nation make public the aggregate of salaries of their executive officers, along with the number of officers.
The country’s most important industry, railroads, had been nationalized during the war. Keeping such industries in government hands, some politicians told themselves, would tame the rioters. The pack animal would go along.
It didn’t. The mixed signals from the federal and state officials disconcerted and depressed business leaders. Some bucked like mules. Jules S. Bache of J. S. Bache, a large investment bank, warned that “if present conditions continue, I fear that we will have plenty of labor and plenty of management, but that capital will disappear.” Firms even spoke of mounting a “capital strike.”
Others raged over the treatment of capital gains. Since the establishment of the income tax in 1913, authorities had gotten away with—the law wasn’t especially well thought out—taxing capital gains at income-tax rates. That hadn’t mattered when the top income-tax rate stood at its initial 7 percent, but a 73 percent capital-gains rate was another matter. The treatment of capital gains was of course being contested. As in the case of regulation before and after the Supreme Court’s Chevron decision, uncertainty over the issue did its damage as well. “Every Tax Hurts” ran a headline in the New York Sun. “Thousands upon thousands, business men and corporations, will presently cut into their already diminished capital to pay income and excess taxes,” pointed out the paper. “No wonder men interested in the business of investments seize the occasion to point out the fault of the whole system of taxes.”
Heeding such warnings, one party, the Republicans, determined to drop the “conditional” in conditional capitalism. Where priorities had been blurry, the 1920 GOP candidate, Warren Harding, clarified them. “Nothing is so imperative today as efficient production and efficient transportation,” the throaty Harding intoned. Government’s priority must be establishing economic “normalcy” so that business could find its footing again. In an era when papers still routinely vilified robber barons, Harding, once elected, provocatively selected a certified plutocrat, the Pittsburgh magnate Andrew Mellon, as treasury secretary. Federal policy, Mellon said as he launched “normalcy,” must remove whatever obstacles might retard the “development of business and industry on which…so much of our prosperity depends.”
In the 1920s, the wealthy shouldered a greater share of all income taxes paid than they had under President Woodrow Wilson.
The Roaring Twenties
The part of the Harding administration’s capitalist campaign that is best known today is the drive to cut the income tax dramatically, from 73 percent to 30 percent or, if Harding and Mellon could manage it, even lower. In 1921, Mellon made his first move, seeing through Congress legislation that dropped the top income-tax rate to 53 percent. Mellon also locked into statute a low capital-gains rate of 12.5 percent. What’s more, Mellon pointed out the logic of a yet lower rate, or no rate at all: “The alternative is to refuse to recognize either capital gains or capital losses”—not to tax them. “This is, in fact, the practice which has been followed in England for many years.” The low Mellon rate mattered, but so did the new certainty.
But to view the exercise in tax-rate management in isolation is to miss the larger drama of Harding’s and Mellon’s campaign. The administration went out of its way to make clear that all taxes should go in only one direction: downward. Closer scrutiny of the 1921 law shows that it also punched down smaller levies that discouraged consumers and business. “Nuisance taxes,” as they were then known, Mellon slammed as “unnecessarily vexatious.” The 1921 law likewise removed various transportation taxes, including a 3 percent tax on freight, a 1 percent tax on express shipments, and an 8 percent tax on the transport of oil by pipeline. Mellon also sought to squelch class warfare by Congress or government officials, dropping, for example, the order that forced banks to disclose salaries.
To say that this all-out-for-business crusade met resistance is to understate. One of the coming progressive Republicans of the period—they had those, too—was Senator Robert M. La Follette of Wisconsin. La Follette called for Mellon’s removal: “He is in favor of a system of taxation that will let wealth escape.” Others threw their shoulder into opposition as well.
“Why in the name of right and justice,” asked the minority report by Democrats of the Ways and Means Committee of Mellon’s plans, “should these big profiteering corporations and millionaires and multimillionaires who filled their rapacious maw with these fabulous billions of blood money be relieved of taxation?” Nor was the pro-business tax drive instantly popular: Republicans lost seats in both the House and Senate in the 1922 midterms.
When Harding passed away in 1923, the new president, Calvin Coolidge, nonetheless amped up the pro-business campaign. Nothing captures the extent of their determination more than the “forgotten books” of this column, the annual reports of the secretary of the treasury from the period.
In the Revenue Act of 1924, Coolidge and Mellon managed to get the marginal tax rate yet lower. One way or another, Mellon et al. also axed the five- and ten-cent taxes on telegraph and telephone messages. They brought relief to the young soft-drink industry when they eliminated the tax on soft drinks. Other small excise taxes levied during the war, such as those on the candy and the motorboat industries, were now repealed. Mellon’s Treasury saw to it that yet other taxes were reduced or limited in scope. A tax on tires and auto parts went from 5 percent to 2.5 percent. A 3 percent tax on trucks was repealed for vehicle frames sold for $1,000 or less and for vehicle bodies sold for $200 or less.
Antitrust prosecutions, a feature of the preceding administrations of Presidents Theodore Roosevelt, William Taft, and Woodrow Wilson, now slowed as well.
The business response was unmistakable. Stock prices rose, and issues of new stocks—what we now call Initial Public Offerings—increased dramatically. What’s more, contra the 1920s reputation of being an overheated market, scholarship by Jie Gan, Paul Mahoney, and Jianping Mei suggests that the 1920s offerings were underpriced. As Joint Economic Committee economist Christopher Frenze pointed out in a review of the 1920s completed in the Reagan years, the recovery was dramatic: Manufacturing expanded 25 percent in a single year, 1922. The wealth did not “escape” government’s clutches, to use La Follette’s image. Indeed, the wealthy shouldered a greater share of all income taxes paid than they had under President Woodrow Wilson. Jobs proliferated, and, as important, new and better products became available to workers. The Twenties commenced their roar.
Voters rewarded Coolidge and Mellon by handing Coolidge a stunning victory—Coolidge won more votes than his two conditionally capitalist opponents, a Democrat and the Progressive, combined.
Prosperity—and Victory
Mellon and Coolidge did not relent. They made support for business the centerpiece of the 1924 presidential campaign: Coolidge promised to “bend all my energies” to get a further income-tax-rate cut. Mellon even published a book on tax cuts to make the case to the public, Taxation: The People’s Business. After considering running on his own, the nation’s most important capitalist, Henry Ford, backed the Coolidge ticket, saying that the election featured no issue “except Coolidge.”
Today, one can imagine President Trump inviting Elon Musk, Jeff Bezos, Mark Zuckerberg, Sergey Brin, and Larry Page for a group-photo op, though most of those fellows would surely spurn the invite. Almost any other campaigning Republican, however, would hesitate before publicly hosting leading billionaires. The resulting snapshot would look just too capitalist.
Yet a hundred years ago this August, the campaigning Coolidge hosted his era’s equivalents—Thomas Edison, Henry Ford, and Harvey Firestone—at his birthplace and invited photographers as well. This time, voters rewarded Coolidge and Mellon by handing Coolidge a stunning victory—Coolidge won more votes than his two conditionally capitalist opponents, a Democrat and the Progressive, combined. Strong Republican majorities in the House and Senate enabled more dramatic pro-business legislation.
Year in, year out, through 1925, 1926, and 1927, Coolidge and Mellon sustained their pro-business push. In 1926, they even managed to cut the income-tax rate down to 25 percent. This did not much affect the average earner, since he did not pay income tax in those days. But that earner did notice a stunning set of upgrades in the quality of life: the proliferation of jobs, the spread of indoor plumbing, and the shorter workweek being three examples.
Perhaps the most compelling symbol of the economic surge was Henry Ford’s Model A, introduced in 1927. “New Ford Makes 70 Miles Per Hour” blared the headlines. That was quite an improvement over the 40 miles per hour of the old Model T.
In a 1925 speech to American newspaper editors, Coolidge underscored his pro-business work. “The chief business of the American people is business,” he said. That line has been mocked by progressives ever since. Of course, those same progressives fail to report that Coolidge closed his argument with a second point, his explicit indication that he saw no contradiction between support for business and moral behavior: “The chief ideal of the American people is idealism.”
The takeaways here are simple. Big tax cuts and deregulation matter. But so do little measures, the kind that scrutiny of the data reveals. Supporting capitalism like you mean it can be a winning strategy. Both victory and prosperity come faster when the message is wholehearted.
William Beach, a former Bureau of Labor of Statistics commissioner, is a fellow at the Coolidge Foundation. Amity Shlaes chairs the Coolidge Foundation, is the author of Great Society, and is a fellow of National Review Institute. This article first appeared in National Review’s “Capital Matters.”