America's Fiscal Constitution (29 page)

D
ISILLUSIONMENT

The expense of the federal government became a central issue in postwar politics marred by the bitter aftertaste of the costly war. Historian Richard Hofstadter noted that “the war was justified to the American public—perhaps had to be justified—in the Progressive rhetoric and on Progressive terms.”
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Wilson had argued for US entry into the nationalistic conflict based on the heady morality of making the world “safe for democracy” and sought to conclude it with a peace treaty he claimed was accomplished “by no plan of our conceiving, but by the hand of God, who led us in this way.”
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Many Americans, including veterans, blamed the Wilson administration, rather than God, for a war that they viewed in hindsight as accomplishing little.

The momentum of progressive reformers was still strong enough in 1919 to allow them to gain ratification of constitutional amendments giving women the right to vote and prohibiting the sale of alcoholic beverages. Disillusionment with the war did, however, alter the course of the progressive movement. The moral authority of progressive idealism had been wounded, along with so many Americans, by the brutal reality of war. The intense war also exacted a physical toll on federal leaders. Congress toiled without air conditioning through hot summers. Many senators died. Theodore Roosevelt, a symbol of national vigor and champion of military strength, aged rapidly after losing a son in combat. The strong-willed Kitchin collapsed with a stroke on the House floor in 1920.

President Wilson’s stroke in September 1919 left him isolated in the White House with his wife and physician. He lost touch with public sentiment. His arrogant response to criticism of the Treaty of Versailles—including a refusal to answer questions about its terms from the Senate—exemplified a general decline in the civility of public life. Many immigrants felt targeted by campaigns against suspected traitors and communists after the war. Military veterans resented their sacrifices in light of civilians whose wages had risen to ten times the pay of most soldiers. Farmers who had been encouraged to expand production to feed wartime allies watched anxiously as bumper crops led to a sharp decline in produce prices.

A postwar recession resulted in part from the Federal Reserve Bank of New York’s policy of curbing inflation with an innovative “open market operation” that soaked up liquidity by selling bonds in exchange for cash. That first experience with the policy of slowing growth and inflation by selling debt undermines any assumption that rising unmonetized debt leads to growth.

Progressives suffered setbacks at the 1920 nominating conventions of each major political party. McAdoo, with Bryan’s help, attempted to fill the political vacuum resulting from his father-in-law’s physical decline. He led the early balloting for the Democratic presidential nomination until Tammany boss Charles Murphy rallied urban delegations behind the party’s nominee, Ohio Governor James Cox. General Leonard Wood, a Roosevelt protégé and former Rough Rider, took an early lead among Republican convention delegates. Senators, weary of strong presidential leadership, blocked Wood’s nomination and arranged for the selection of a personable but nondescript colleague, Warren Harding of Ohio.

The 1920 vice presidential nominees foreshadowed each party’s future. Cox picked Theodore Roosevelt’s thirty-nine-year-old cousin, Franklin Roosevelt, explaining that “his name is good, he’s right geographically, and he’s anti-Tammany.”
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The Democratic Roosevelt, a former New York state senator and assistant secretary of the navy, campaigned in favor of greater fiscal discipline. The convention hall erupted with overwhelming approval when a delegate rose to nominate Massachusetts governor Calvin Coolidge as Harding’s running mate. The modest Coolidge had supported progressive reforms while also symbolizing traditional authority after he broke an unlawful strike by Boston police.

The backlash against the war, inflation, and the postwar economic downturn led to a Republican landslide in 1920. The GOP won the White House and a solid majority in the House and Senate. Republican candidates even prevailed in some urban ethnic precincts considered to be Democratic strongholds. The Republican triumph hardly indicated a major shift in national ideology; neither party’s platform repudiated the fruits of progressive reforms. Though many commentators stereotype the 1920s as “conservative,” Harding described himself as a “rational progressive.”
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State governments continued to enact much of the old progressive agenda, including laws protecting employees and funding large-scale construction of roads, schools, and hospitals. Harding’s election did, however, promote a measure of political reconciliation, as exemplified by his pardon of socialist labor organizer Eugene Debs. (The Wilson administration had imprisoned Debs for condoning wartime labor unrest.)

T
HE
D
RIVE FOR
E
FFICIENCY

The United States entered the 1920s with economic growth spurred by a remarkable technological revolution in automobiles, aviation, electricity, radios, and telephones. American corporations had lowered costs with new techniques of mass production, and many taxpayers longed for that type of efficiency in government. Progressive ideals of expertise and efficiency moved to center stage in the 1920s. Many cities responded by adopting charter amendments that gave nonpartisan professional managers authority over their budgets and operations.

President Harding preferred to delegate management responsibility. He marred his reputation by putting his corrupt Ohio political gang in charge of law enforcement and veterans’ benefits. In contrast, he assigned
power over budgets, taxation, and economic policy to honest and seasoned corporate managers, most notably Charles Dawes, Herbert Hoover, and Andrew Mellon. They and their expert staffs refined Kitchin’s tax system, institutionalized a new federal budget process, and paid down federal debt. Dawes, Hoover, Mellon, and Harding’s successor, Calvin Coolidge, approached government in a manner that defined a new “conservative” Republican mainstream. Before the 1920s Democrats—not Republicans—were generally identified with the cause of smaller government. That would change by the end of the decade.

Herbert Hoover and Charles Dawes emerged from the war with reputations as brilliant managers. Hoover, a forty-six-year-old former mining executive, achieved international renown by alleviating war-related starvation in Europe. Dawes, a Chicago banker and utility executive nine years older than Hoover, excelled in his role as a brigadier general in charge of army logistics.

Harding initially had trouble bringing Hoover and Dawes into his administration. Republican senators objected to a cabinet post for Hoover, a hero to reformers in both parties who was being touted as a possible presidential candidate. Harding asked Dawes to manage the budget as secretary of the treasury, but Dawes declined on the grounds that he would need more authority in order to manage budgets across departmental lines.

A role for Andrew Mellon, one of the country’s wealthiest people, posed an even greater challenge. Mellon made his fortune as a banker and owner of a steel company that he sold to J. P. Morgan’s US Steel and an oil company that he sold to Rockefeller’s Standard Oil. His wealth continued to grow as a result of investments in the Aluminum Corporation of America and in Gulf Oil’s early entry into petroleum production and refining in Texas.

Powerful Pennsylvania senator Philander Knox suggested that Harding tap Mellon for the Treasury position that Dawes had turned down. Harding agreed to the appointment on the condition that Knox would clear the way for Hoover’s confirmation as secretary of commerce. The president correctly anticipated that Mellon’s appointment would generate public criticism, “as bad as appointing J. P. Morgan.”

Yet Secretary of the Treasury Mellon’s solid performance eventually won over most skeptics. They found that he was neither an ideologue nor a dilettante. He mastered the details of tax policy and articulated clear budget goals. Those goals remained intact for eleven years, during which
Mellon served as the treasury secretary under three presidents. First and foremost, he said, the nation should balance its budget and reduce its debt, a goal he described as “the fundamental policy of the Government since its beginning.” Second, he called for a tax system that would produce sufficient revenue to pay for spending, eliminate the burden on those least able to pay, and remove “those influences which might retard the continued steady development of business.”
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He referred to this approach as “scientific taxation.”

In contrast to some twenty-first-century Republicans, Mellon strongly defended the graduated personal income tax. The pragmatic tycoon found it “incredible” that “men of moderate incomes” paid income taxes on their salaries, while tax-exempt investments allowed “a man with an income of $1,000,000 a year to pay not one cent to the support of his Government.”
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Mellon’s advocacy of corporate taxation and progressive personal income taxation ensured the survival of Kitchin’s tax system.

A M
ODERN
F
EDERAL
B
UDGET

Charles Dawes and his colleague, fellow army general Herbert Lord, first implemented the modern federal budget process. Before 1921 no law authorized the president to propose an annual budget. Traditional budget practices such as clear accounting and “pay as you go” budget planning had allowed a well-informed elite, largely within Congress, to manage budgets within the limitations of the nation’s unwritten fiscal constitution. Powerful House and Senate leaders helped confine spending to the level of estimated revenues. Continuity was provided by long-serving senators such as John Sherman, Justin Morrill, and Nelson Aldrich. The scale and complexity of budgets for World War I exposed the flaws of that old, informal system.

Chambers of commerce, editorial writers, and academic experts championed budget reform. The report of Taft’s Commission on Economy and Efficiency, entitled “The Need for a National Budget,” urged “that the executive branch submit [an annual] statement to the Legislature which would be its account of stewardship as well as its proposals for the future.”
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Many in Congress remained wary of shifting budget power to the White House, which some likened to an attempt to impose the British political system on the United States. In 1912 Congress had ignored the recommendations of the Taft Commission, eliminated funding for the
commission, and objected to the submission of a detailed presidential budget. Former members of the commission obtained private funding to continue their work, giving rise to the first think tank, known today as the Brookings Institution. Its budget experts, Frederick Cleveland and Arthur Willoughby, stressed the benefit of incorporating all spending and revenues into a consistent plan.

The reliance on personal and corporate income taxation also accelerated momentum toward budget reform. After a bitter internal struggle, the House consolidated spending power in a thirty-five-member Appropriations Committee.
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The House resolution noted that “people took little interest in appropriations” funded with import taxes but that the burden of income taxes centered more political attention on “the problems of economy [i.e., spending] as reflected in the appropriations made by Congress.”
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Two years later the Senate vested its Appropriations Committee with similar power.

The Budget and Accounting Act of 1921 established the Bureau of the Budget within the executive branch and mandated the submission of a presidential budget early in each calendar year. President Wilson vetoed similar legislation based on a constitutional objection to an unrelated provision, and Congress passed it again after the 1920 election. President Harding signed the bill shortly after his inauguration in 1921 and made Dawes the new budget director.

Dawes commanded respect from politicians in both parties. Even an important twenty-first-century political strategist, Karl Rove, would study Dawes’s brilliant management of McKinley’s campaigns in 1896 and 1900. Dawes’s network of friends included William Jennings Bryan, war hero General John “Black Jack” Pershing, and many of the nation’s leading bankers and businessmen. General Dawes, while a consummate insider, had become a public celebrity after his outburst at a congressional hearing on the cost of supplies ordered during World War I. Dawes lost patience with congressional second-guessing: “Hell’n Maria! We weren’t trying to keep a set of books, we were trying to win the war! . . . I’d have paid horse prices for sheep if the sheep could have hauled artillery.”
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In August 1921 Budget Director “Hell’n Maria” Dawes inaugurated modern budget process at a meeting attended by President Harding, Vice President Coolidge, all cabinet secretaries, the senior military brass, and the top twelve hundred senior managers in the federal government. Following a pep talk by the president, Dawes urged all executive branch
leaders to root out savings. He asked those committed to the task to rise from their seats. Everyone stood.

The Budget Bureau standardized accounting, purchasing, logistics, inventory, and other business systems across the federal government. The bureau’s deputy director, General Herbert Lord, was cut from the same no-nonsense cloth as Dawes. Lord had served as chief staff member of the Ways and Means Committee before a long army career culminating in his service as finance director of the War Department. Dawes and Lord, sometimes joined by Secretary Mellon, summoned cabinet members and senior military officers to answer detailed questions on their budgets. In 1921 they quickly racked up $305 million in savings, almost a tenth of the total amount Congress had appropriated for the entire year.
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Only the Navy Department failed to identify savings, though Dawes and other federal officials managed to reduce demand for naval spending by negotiating international treaties that limited the size of naval forces. From 1922 to 1929, the United States authorized the construction of only 11 naval vessels, compared to 125 for Japan and 74 for Great Britain.
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