Wednesday, August 27, 2014

What About Those Kreuger & Toll Gold Debentures?

Chapter 17 of Mellon's Millions by Harvey O'Conner (New York, NY: Blue Ribbon Books, 1933)

Exile in England


 CHARLEY DAWES was impatient with the unending formalities, the flunkeyism, the polite palaver of the Court of St. James'. Dukes and duchesses found his efforts at drollery not amusing. Out of his own pocket he spent thousands of dollars to hire, among others, leading Broadway comedians to spill liquor down the necks of the British nobility, and their only response was annoyance. Charley was fed up. He longed to end his exile, to be back in the rough fray of American politics and finance, to be talking business with the hog butchers of Chicago, the lamb butchers of Wall Street. He quit cold on January 8, 1932.

To the White House, his resignation was heaven-sent. At last a post was open that was not beneath the dignity of the Secretary of the Treasury. He was sticking tenaciously to the Treasury, Hoover discovered, in lieu of anything else to do. Return to Pittsburgh he would not. There was emptiness, a barren waste of idle steel mills, of dead machinery and of men who were better dead.

There had been hints and snubs sufficient to indicate that he was no longer needed in the Administration. But Pittsburgh training was not calculated to produce sensitivity. Or perhaps if he were embarrassing the President, the Secretary got some satisfaction from that negative achievement.

The delicate task of inducing Mellon to transfer the seat of his activities from the Exchequer to the London Embassy was entrusted to Dave Reed, whose affection for the Pittsburgh banker was balanced by his solicitude for the Administration, soon to face a trying Presidential election. He had a difficult job.

Mellon did not care to be budged from the acceptable routine or Washington, to be precipitated into the social whirl of diplomatic life in London. More important, he regarded Reed's suggestion as Hoover's capitulation before cheap and demagogic politicians. How despicable the man's attitude! When Mellon had faced far more serious attacks, the imperturbable Coolidge had ignored them, or risen to the occasion with a stinging message to Congress. But this President cowered before a Texarkana Congressman and an unstable California Senator.

There was nothing left but to accept the London post, Mellon could see. Otherwise he might be sacrificed on the Patman-Johnson altar. On February 2, 1932, Dave Reed was able to report success to the White House. Most important problems of unusual gravity awaited his coming to London, the Secretary had been told. Only a public servant with his acumen could grapple with those problems. He agreed. The White House lost not a moment. The announcement said:
"The critical situation facing all countries in their international relations, the manifold economic and other problems demanding wise solution in our national interests calls for experience and judgment of the highest order. The importance to our country of the sound determination of these world-wide difficulties needs no emphasis.

"I have decided therefore to call upon one of our wisest and most experienced public servants to accept a position which will enable him after many years of distinguished public service at home to render equal service to his country in the foreign field.

"I have asked Mr. Mellon to undertake the Ambassadorship to Great Britain. I am happy to say he has now expressed his willingness to serve."
The issue of the Secretary's acceptance had been so doubtful up to the last minute that the State Department was not given opportunity to inquire of the British Government if the appointment were acceptable. That however was a mere formality. The Secretary, wealthy and distinguished, soothingly conventional, was doubly welcome.

The impatient Mills was almost immediately vested with the Secretary's robes, marking the satisfaction of desires which had been poorly concealed since he announced himself for Hoover before the 1928 convention. The new Secretary, also wealthy estimates of his possessions ran up toward $100,000,000 --brought into the Treasury the open and unabashed Wall Street leadership from which Harding had shrunk in naming a Pittsburgh banker.

Whatever the mixed emotions of Pittsburghers might be, the Pittsburgh newspapers, loyal to the local Croesus, were indignant over the unceremonious dismissal of Mellon. The Sun-Telegraph's political editor wrote that "the effort of President Hoover to camouflage the split between the White House and Secretary of the Treasury A. W. Mellon has failed completely. Mr. Mellon's effort to cooperate in this political deception, his sense of party loyalty stronger than his personal feelings and disgust with the trend of affairs in Washington, has proved equally futile. Mr. Mellon accepted appointment as Ambassador to Great Britain as an alternative to a complete severance of his participation in public life and a return to his private business affairs in Pittsburgh. The episode," he concluded, "has created a tremendous stir in Pittsburgh among Mr. Mellon's associates in finance and will have widespread repercussions in Pennsylvania politics. It is positively known that many financial leaders here affiliated with the Mellon enterprises feel that the former Secretary has been shabbily treated by the President. They are highly resentful, and political sentiment in this group, never warm toward Mr. Hoover, has cooled perceptibly in the past two days."

The Washington correspondent for the Pittsburgh Press wrote of Mellon that "now there are few to do him homage. President Hoover also has concluded that Secretary Mellon should have retired sooner, because on the eve of his campaign for reelection Hoover finds another job for him. Hoover has left the impression that whereas Mellon was an asset to him four years ago, he will be a liability this year. Many in Washington feel today that Mellon's passing is a tragedy--a tragedy of a broken and disillusioned man."

The New York Times was polite. "The list of our Ministers and Ambassadors there [in London] is starred with brilliant names," that journal remarked. "It is difficult to think of Mr. Mellon as easily taking his place in that distinguished company. He is not a literary man like Lowell. He is not a speaker like Choate. He is not a great lawyer like Phelps. But, after all, he has a distinction of his own, a great reputation which he has honestly won ... "

"If Mr. Mellon," commented the Times' financial editor, "had suddenly decided in 1927, 1928 or 1929, to give up the portfolio of Secretary of the Treasury, the Stock Exchange would have been jarred to its foundations, it was remarked by persons who recalled the sharp reactions that were once produced by mere rumors that he might resign. The news . . . of his impending transfer to the Court of St. James's caused not even a ripple in the stock market--a fact that did not escape the attention of Wall Street. Obviously, it was pointed out, the market's sensibilities have been dulled and, furthermore, the idols of yesterday are no longer worshiped as in the halcyon days."

The former Secretary slipped quietly out of Washington to take a vacation in Georgia, leaving few behind to mourn, save perhaps Congressman Patman, who had been cheated of his quarry. The fiery Texan asserted that Mellon's transfer to London had "saved the Republican Party from a scandalous exposure that would have rocked the pillars of our Government." The appointment he regarded as a "presidential pardon." The Teapot Dome scandal was a "molehill compared with the Mellon-acquired Barco concession in Colombia." "Mr. Mellon," he summed up, "has violated more laws, caused more human suffering and illegally acquired more property to satisfy his personal greed than any other person on earth without fear of punishment and with the sanction and approval of three chief executives of a civilized nation." The nation paid scant attention to Patman and seemed glad to forget about the alleged scandals, without bothering to inquire into details.

The House judiciary committee took advantage of Mellon's confirmation to withdraw gracefully from the impeachment proceedings which Patman demanded. It was impossible to impeach a Secretary who had resigned, and idle to investigate him. Nevertheless for two heated hours the committee wrangled over an insurgent effort to insert in the resolution a statement that Mellon had held office illegally. The final vote was 17 to 4.

Senator Norris took a parting shot at his old political enemy. "Poor old Andy," he said. "Our Ambassadors, when you take their social activities away from them, are only stool pigeons. One of these bright page boys, taking away their social perquisites, could perform the duties equally as well as the greatest Secretary of the Treasury since Alexander Hamilton.
"I understand Ambassador Dawes left his knee-breeches over there in London. Picture Andy, on his diminutive pipe stems in Dawes' knee breeches in the presence of aristocracy. It does seem that the President has not treated Mr. Mellon with the respect due one of such long service."
The new ambassador was not without a quip, flecked with bitterness, when he was sworn in. "This isn't a marriage ceremony," he said, "it's a divorce." He accepted his new position with as much grace as his philosophic nature permitted. He was an old man now, a pawn in the hands of politicians, too
symbolic of might to be tossed aside, too well disciplined in upholding the established order to revolt, too old to reenter the hurly-burly of trade and finance in Pittsburgh, too disinterested in life to care to.

London and Paris speculated endlessly. Mellon's earlier statement that the British war debt to the United States should perhaps be scaled down in view of the decline of the pound had roused hopefulness. His intimate acquaintanceship with problems of international finance was another good point. His custom for many years before becoming Secretary of spending the summers in England had given him a sentimental attachment to the land, the political writers believed. They attached to him a vast power. As a multi-millionaire, he gave orders to the American politicians, his whim was law and his word could reduce or wipe out the debt.

Why, the man and his family were worth $1,600,000,000! A French paper cut the fortune into bricks of gold and found there were 160,000 bricks worth 1,000,000 francs each. Three thousand bricks would build a house, and the Mellon fortune in golden bricks would construct 52 such houses of gold.
Magnifique!

But when the reporters clustered about the envoy in the Ambassador's room at 14 Prince's Gate, overlooking Grosvenor Gardens, they were disappointed if they expected the biggest story of the year--reduction in the debt to America--to break there. "They say, Mr. Mellon," ventured one, "that your appointment to London has a special significance in view of the European debt situation."

The Ambassador's deft reply was worthy of his position. "Who says this?" he asked blandly. The question died on the lips of its propounder.

While the populace in London gaped in awe at tales of the imperial fortune of the new Ambassador, the American press titillated the fancies of its readers with the consideration, from every angle, of the engrossing problem, would Mellon wear knee breeches? War debts faded into secondary importance. At first he was inclined to be good-natured about inquiries. Later, under the provocation of repeated questions, he became annoyed about the attention paid an "unimportant matter." Breeches won. Would the Embassy serve liquor? the curious American public next demanded to know. It would. The new envoy had never been ranked with the prohibitionists.

And the social question. Ailsa, now the 29-year-old Mrs. D. K. E. Bruce, once again shone in the bright lights of the social columns. The "Dollar Princess," herself presented first to the Court, in turn introduced 21 American women culled from a mass of hundreds. The Ambassador, on presenting his credentials to the King, was tendered the unusual honor of being invited to stay for luncheon at Windsor. Later there were dinners with the Prince of Wales and other dignitaries. Socially at least, the son of an Ulster immigrant could aspire no higher.

Andrew W. Mellon was not the "broken and disillusioned" old man he was pictured when he left Washington. The Mellon fiber was tougher than that; a graceless dismissal was disgusting but it did not break his spirit. As for disillusionment, the family made it a point to cherish no illusions, so there were none to be shattered.

The Ambassador's fall from the heights was well cushioned. He was not a vain or overly ambitious man. Praise and scorn were subject to the same discount in the hard Mellon philosophy. At the height of his prestige he had been able to jest at the Alexander Hamilton comparisons and now, shunted to one side by Hoover, he could smile bitterly at the unseemly haste in which he had been pitched into the Court of St. James'. A man of Hoover's caliber could not wound the financier deeply; he had only contempt for the fretting and petulant figure who paced his study in the White House, wrestling with ogres of panic.

The tragedy of Andrew Mellon ran deeper than that. It was the tragedy of a man who had come to the end of his world, and now looked forth into a void space which harbored no warmth for an old man's declining years, no assurance that the "wen doing" of his grandparents would march on to new, victories and high triumphs. All about him lay the wreckage caused by the impact of modern technique upon ancient principles and prejudices. The one an irresistible force, the other an immovable body: in the crash both had been pitiably shattered. The triumphs of science in enriching the world counted for naught to starving millions who benefited not at all from the embarrassing abundance of food and goods; the stem old principles of rugged individualism, free competition, dog-eat-dog, were palpably anachronistic but the owners of machinery could devise no other to suit the facts of private ownership.

The world seemed crazily out of joint. The Mellon banks enjoined the virtue of thrift, while Secretary Mellon urged free spending to set the wheels going again. In one breath, he counseled that hard work would pull the nation through, and then closed his mills and factories so that none could work. Wages were to be maintained, he advised, but costs of production in Mellon industries must be cut. Government must get out of business, but his Government lent billions to banks and railroads. There must be stringent federal economy, he insisted, but it was found necessary to appropriate millions to keep people from rioting for bread and shaking the pillars of the social order.

The Mellon philosophy tottered. In its cherished individualism, every money-eager man was to have equality of opportunity in amassing wealth; but an ambitious Haskell or Uihlein was beaten or bribed from breaking Aluminum's monopoly. The Government was to keep its hands strictly out of business; but it must aid oil concessionaires in Mexico, Venezuela, Colombia and Iraq, even to the point of armed intervention. Honesty is the best policy, Judge Mellon had said. So his son had sent Union Trust tellers to prison for defalcations, while he himself maintained intimate relations with the Magees, the Flinns, the Quays and Penroses. Prudent investment was the very bulwark of independence; but hundreds of customers of Union Trust and Mellon National Bank bought Kreuger & Toll debentures at the solicitation of those institutions.

     Nowhere was the break-up of the old order of values more, painfully evident than in international relations. Tariffs were the keystone of Pennsylvania's industrial supremacy; now they were held partly responsible for the slow paralysis which gripped international trade. A true son of judge Mellon, the new Ambassador was insistent that intergovernmental war debts must be paid, in part at least. Yet these very payments were blamed for the stagnation of world commerce, and finally they bogged down under the contradictions they inspired. And if Governments could practically repudiate debts owed each other, why could not individuals adopt the same easy code of morals? It was a mortal blow at the basis of the Mellon fortune.

The new Ambassador had plenty of opportunity to study these contradictions in his system. He had wrestled with the vexatious problem of war debts before, as head of the War Debts Commission. His assistant, Garrard Winston, and a corps of Treasury and State Department officials had worked out the terms for debt settlements with Britain, France, Italy and the smaller debtors. After they had finished their work Mellon found himself under two fires. On one side the cancellationists, international bankers, traders and academicians echoed the European cry of Uncle Shylock. On the other the Hearst newspapers and Senators Hiram Johnson and James A. Reed of Missouri asserted that American taxpayers were being burdened to pay debts the clever Europeans had evaded.

It all depended on how you calculated the rate of interest. At 5 per cent, the amount agreed upon at the time the loans were made to Europe, 60 per cent of the French war debt had been canceled; 80 per cent of the Italian; and 30 per cent of the British. Figured at 4.25 per cent, the amount it cost the United States Government to raise the money through Liberty Bond issues, the French cancellation was 53 per cent; the Italian 75 per cent; the British 20 per cent. But at 3 per cent, Mellon's estimate of interest rates during the next 62 years of debt collection, Italian cancellation covered but 36 per cent of her debt; French 35 per cent; and Britain was actually paying 4.4 per cent more than her actual borrowings, with interest.

In answer to the cancellationists, Mellon said that the pre-armistice debts of France, Italy and Belgium had virtually been wiped out. He had little patience with the argument that the loans were really contributions to a common cause in the emergency of war. It was clearly stated in the bond that they were to be repaid, he pointed out. If it were true that American money had been used instead of American blood, at least, he urged, the post-armistice borrowings of the Allies must be repaid. As for the allegation that Uncle Sam was rich and Europe was poor, he retorted that a creditor is never popular, but a debtor without access to credit is in an unenviable position. He sympathized with Europe but felt that "recognition of their external obligations, and undertaking bravely to meet them within their capacity, is a moral force of great service to permanent prosperity of the world."

The controversies in which Secretary Mellon had been embroiled six years earlier in regard to the British war debt settlement gave some piquancy to his appointment as Ambassador in 1932. He had stated then that the British post-armistice loans were largely to bolster the Indian rupee and to meet obligations in the United States to buy food. Winston Churchill and Philip Snowden, alternate guardians of the British Exchequer, arose to give the lie direct. Every penny borrowed was for war purposes and the U. S. Treasury had so certified, retorted Churchill. Snowden assailed the "richest country in the world which entered the war last," and declared it would be paid for the whole of the war, even at the cost of mulcting $320,000,000 a year from Europe. Mellon, arriving in Cherbourg a bit later, said that his statement on the British debt had been for domestic consumption only.

Professors at Columbia and Princeton entered the lists, protesting that world trade and world recovery were being imperiled by war debts. Mellon answered their strictures about loss of transoceanic good will with a statement that "affection is not a purchasable commodity, neither in international relations any more than in private life." Of that he was well qualified to speak. He told the professors that England would receive more in debt payments from her Allies than she would pay the United States. Chancellor Churchill dispatched a denial to Secretary Kellogg. Kellogg replied that the new  controversy was purely domestic. The professors found Mellon a difficult antagonist; if his statements left them confused between conflicting interpretations that America had been generous in cancellation, or had stuck doggedly to the principle of recognition of debts, he had no further explanation to offer. The Times was obliged to confess that Mellon had tried to discourage discussion of the war debt issue, but had actually provoked it by confusing figures and shifting grounds. In view of the unfortunate echoes from London every time he spoke, the State Department apparently counseled that silence was golden.

The golden silence continued when he crossed the ocean as envoy. It was believed in the capital that the Administration had sent up a trial balloon when the Washington Post announced, in an inspired story, that Ambassador Mellon would find adjustment of the war debt question his most immediate and pressing problem. The response in Congress was so sharp that the President, facing a desperate campaign for reelection, decided not to broach the subject at all, even going to the length of barring the war debts question from the agenda of an international economic conference, called to set the shattered world on the road to recovery.

Tenacious in his convictions, the new Ambassador would not admit, before the Pilgrims Society of Great Britain, that his system of production was doomed. He maintained his faith in "capitalism, or whatever name may be applied to the system." We have had depressions before and have always recovered, to press on toward new heights, he said. Yet be seemed to contradict himself by asserting that the crisis beginning in 1929 was different from preceding smash-ups.

"Part of our difficulty," he told the Anglo-Americans, "arises because we look on the present industrial economic crisis as merely a sporadic illness of the body politic due to conditions in some particular country or section of the world which can be cured by application of some magic formula. Greater difficulty arises because we who are left over from the last century continue to look on the last decade as merely a prolongation of all that has gone before. We insist upon trying to make life flow in the same channels as before the war whereas the years since the war ended are in reality the beginning of a new era, not the end of the old."

It was an intriguing idea, but unfortunately the Ambassador did not expand its significance or point the path to the new era. He reverted to the explanation that industrial crises were caused by war, that deflation must open the way for recovery. "We still have much to learn," be conceded, "in the maintenance of a stabler equilibrium in production and consumption and the better distribution of labor so we shall not always have the painful spectacle of men willing to work but unable to exchange their services for the food and clothing they need which the world now produces in such abundance." But the financial-industrial genius of Union Trust, Aluminum, Gulf Oil and Standard Steel Car offered no indication that any course but reliance on immutable economic laws would help any. "Just now," he concluded, "all of us are hoping for signs of improving conditions as evidence that the world will soon be on the mend."

The events following his address to the Pilgrims did not suggest that Mellon's hopes were securely based. Bank failures and insolvencies, receiverships and financial scandals followed each other in the United States with monotonous regularity. European correspondents in New York, gloating at the strange course of events which had plunged the one-time Eldorado into an abyss of despair, picked up the most tempting morsels of news and cabled at length. In Washington, their brothers were able to tell a story of a deficit that daily mounted by millions, of an unhappy Treasury Department unable to forecast from one week to the next what any given tax would bring in, of a Congress which raced in circles in an effort to pin the increased tax burdens on the most desirable victim, from the political viewpoint. These malicious cables, had they merely tended to amuse the victims of "Uncle Shylock," would have caused no concern in Washington or Wall Street. Unfortunately, they, and the events they portrayed, shook the confidence of Europe in America, caused American securities to be dumped on the market, caused gold to flow out of Wall Street, and most alarming of all, tended to undermine that majestic symbol of solidity--the United States dollar.

Hoover, hardly less panicky than the business classes he served, appealed to the Ambassador to reassure the City. He responded ably at a luncheon given May 6, 1932, in his honor by the Lord Mayor at the Mansion House. His hundred auditors represented the top ranks of British finance and industry. "Whenever I come to the City," he told them, "and find myself once more in the congenial, familiar surroundings of the business world, my new, unaccustomed role of Ambassador seems to leave me and, reverting to type, I think and talk again as a business man with the outlook and anxieties which weigh so heavily just now on all those charged with carrying forward the business of the world. And it is as a former business man and banker, therefore, that I would like to say a word here, so close to the heart of the City, about conditions in my own country and the progress of events there in recent months."

Reporters, he reminded his audience, gave highlights on foreign affairs that were apt to mislead the unwary. Britain, if the cables were to be credited, had tottered on the brink in the autumn of 1931 when it went off gold and faced the need for a National Government. He, though, never doubted England's capacity. just so in America. The commotion in Congress did not betray an unwillingness to balance the budget, but merely an earnest inspection of the various ways to do it. If many banks were failing, that was confined to "smaller, weaker institutions." Organized labor, the farmers and every section of the populace, he added, had accepted wage cuts.

"A great patriotic American," he concluded, "who lived much in England and loved this country, once said to a compatriot, 'Never sell America short.' I would reiterate now, what Mr. Morgan said then, and would apply it to England no less than to my own country. None of us has any means of knowing when and how we shall emerge from the valley of depression in which the world is now traveling. But I do know that, as in the past, the day will come when we shall find ourselves on a more solid economic foundation and the onward march of progress will be resumed."

Despite the Times' plaudits for "this exhibition of cheerful optimism over our institutions," matters mended not at all, and on May 31 the Ambassador was obliged to make another effort to calm European fears about America going off the gold standard. Before the English-speaking Union he asked Britain to remember that "America is a young country in outlook as well as in years. Many of our faults are the faults of youth, but we have also the energy and under ordinary circumstances the boundless optimism that goes with youth, and a belief in our capacity to achieve that which we set out to do. Today, like other nations, America is bewildered in the face of forces which have overwhelmed the world. We have found that the machine civilization which has been evolved in recent years cannot be made to function with ever-increasing speed, and that new inventions and over-production have necessitated a period of slowing down until the world adjusts itself to the conditions that have arisen since the war.

"At such a time it is well to remind ourselves that the principles upon which our English-speaking civilization was founded have not changed, and that, being true to those principles, we should weather this storm as we have weathered our other storms before."

Such words apparently offered little palpable evidence to indicate that the men who owned the machinery which had broken down knew how to repair the damage or set the wheels in motion. Nevertheless they had a comforting, sedative effect on those who listened and read, and so perhaps served an humble purpose. Said one English editor, after listening intently: "It was like trying to catch the whisperings of a ghost, and when you caught what he had said, he had said nothing particular." Commented another: "In an almost inaudible voice he carefully read platitudes to the assembled company."

The crisis deepened.

The eminence of his position and the might of his millions raised to a higher tragic level the spare shrunken form of Andrew Mellon as he wandered through the economic blizzard hugging to his breast his cherished beliefs in the best of all possible social systems. In much the same words he used before the Pilgrims (for Mellon believed in economizing on speeches, with the result that favorite snatches of his composition were heard over and over) he told the International Chamber of Commerce of his faith.

"I do not believe," he said, "in any quick or spectacular remedies for the ills from which the world is suffering, nor do I share the belief that there is anything fundamentally wrong with the social system under which we have achieved, in this and other industrialized countries, a degree of economic well-being unprecedented in the history of the world. Capitalism, or whatever name may be applied to the system which has been evolved in adapting individual initiative to the machine age, has its defects, of course, and may be, as has been suggested, still in its infancy, but there is no disputing the fact that it has produced an abundance of food and clothing and all the necessities of life, so that our basic problem is not one involving a basic inability to produce goods needed to satisfy human wants. We still have much to learn in the maintenance of production on an even keel and the achievement of a process of orderly and broad distribution of products and services. These defects in the present system we shall overcome as we find some way to achieve greater equilibrium between production and consumption, and a better distribution of labor, so that we shall not always have the painful spectacle of men willing to work but unable to find a market for the only commodity which they can exchange for food and clothing which they need and which the world can produce in such abundance.

"We shall succeed in time in working out our economic salvation in accordance with the special needs of our own people, and the social and industrial system which has been built up. But it will be done in the future as in the past by individual initiative, and not by the surrendering of business and industry to the Government or to any board or group of men temporarily entrusted with overhead authority. Conditions today are neither so critical nor so unprecedented as to justify a lack of faith in our capacity for dealing with them in our accustomed way." The assembled international bankers applauded appreciatively.

"Our present experience," he continued, "indicates that the machine cannot be made to function at full speed at all times. Some day, perhaps, we shall have mastered our economic machine so as to have it under better control." In conclusion he confessed that "I have no means of knowing when or how we shall emerge from the valley in which we are now traveling." But he was sure that eventually "the onward march would be resumed." Undaunted by the avalanche of disaster that gathered force in the early. months of 1933, the Ambassador, in his farewell address to the Pilgrims on February 21 reiterated his confidence in the scheme of things. "The economic system in America," he gravely assured his listeners, "is in no danger of breaking down, but on the contrary has such inherent strength that it continues to function efficiently in the face of the greatest maladjustment the world has ever seen. There is no lack of production and the processes of distribution continue to operate as usual, notwithstanding unemployment and reduced buying power." It was an extraordinary statement, in face of the want of 50,000,000 Americans, and the imminent collapse of the banking structure, but the Mellons had faced economic crises in America for more than a hundred years and had come forth from each greatly refreshed in fortune and confidence.

It cannot be said that the Secretary-Ambassador enlightened his listeners by presenting new ideas to them or indeed any concepts not hallowed by time. Adam Smith's economics and Herbert Spencer's sociology were good enough for Thomas Mellon and they were good enough for his son. He dabbled little in the fields of pure speculation that had occupied his father's active mind in his declining years. Being a practical man, he was interested not in theories but in deeds. Confronted in 1924 by "political quackery" in his opponents' taxation proposals, he called to mind, in rebuttal, Italy's experiences. That country, he warned in his main speech of the 1924 campaign, had been threatened with the same evils after the war. Socialism became a power. There were strikes. There was unemployment. Workers seized factories. "A strong hand has since come in to reestablish the Italian Government upon sound principles and Government by party and not by bargaining," he said. "Steps have been taken to abandon Government operation of the railroads and to cut taxes, and the budget this year will be practically balanced." Two years later he had not changed his opinion. "Mussolini," he said, "is making a new nation out of Italy. He is one of the world's most vigorous personalities. Many of his measures are unique indeed, but they are effective."

Confronted by that other experiment in new forms of government, Soviet Russia, Mellon lost his patience. His opinion of Russia, unlike that of Italy, was not based on personal observation. Warning of the evils of taxation in the higher brackets, he declared that "in Russia the experiment [of Socialism] has brought destruction, final and complete. There is no trade, no industry, no agriculture, no religion--a return to barbarism," he explained. "The millennium was promised to the Russian peasant; he has received tyranny, starvation and death." Curiously enough, within a few years of this observation, his Koppers Company was supervising--in the land of final and complete destruction--the erection of the largest coke and gas plant in all Europe; his Massachusetts utilities were accused in Congress of importing Soviet coal; his Canadian aluminum company was bartering aluminum wire for Soviet oil; and he himself was obliged as Secretary to embargo the importation of Soviet matches as likely to injure the American industry.

Bolshevism was no danger in Germany, he felt sure, because it was "incompatible with the German temperament." The doles in England, he reported, militated against the unemployed voluntarily going to work. Worse, it had played a part in strikes, he had been told, because strikers receiving the dole found that a more agreeable way of making a living than working honestly.

If working men would save, a large part of the so-called labor problem would disappear, Mellon believed. By thrift they could accumulate enough to climb out of the mills and factories and assure themselves a modest living and a competence against indigence in old age. Congratulating a trade union bank on its second anniversary--it went under in 1931--he wrote: "Institutions such as the Federation Bank of New York bear reassuring testimony that the average man and woman is learning the necessity of saving and accumulating capital if they would get the comforts of life for themselves and their families."

He expanded these ideas in an address before the National Electric Light Association. "Both labor and capital," Mellon asserted, "are beginning to realize that they have common interests in building up great industries which are sources of wealth for all, and that in America with the opportunities it offers and the constant transition from poverty to wealth, there is no Place for class antagonisms or class warfare. Labor in this country, unlike labor in some of the European countries, long ago learned that no man can lift himself by his bootstraps, that industry cannot pay high wages even under the threats of strikes unless that industry is prosperous. Labor as well as capital must think in constant terms and must act in harmony with and not in antagonism to those great economic laws which work so inexorably whether we like them or not. Labor in America is not only maintaining a high standard of living but it is also banking a part of its wages, as evidenced by the steady growth of savings deposits. It is organizing  its own banks and buying shares in corporations in which it works, and in this way workers are acquiring a real partnership in the business in which they are employed."

While Mellon's servants packed up the choice bits of furniture and art treasures which were to grace the Embassy building in London given the United States Government by J. Pierpont Morgan, his successor in the Treasury wrestled with fiscal problems still unsolved. The Greatest Secretary since Hamilton had achieved another distinction, that of leaving the greatest peace time deficit in the history of the country. Ogden Mills estimated it at nearly $2,500,000,000 for 1931-32, and for 1932-33 at somewhat under $2,000,000,000. The deficit for the year ending June -31, 1931, was $902,000,000 against Mellon's estimate of a $30,000,000 surplus.

What followed now was the bitterest blow of all. Mellon had not been away from the Treasury four months when all the results of his ten-year struggle for easier burdens on wealth had been wiped out. In one stroke, Congress, searching desperately to balance the budget, jerked up rates to the levels which existed when the Pittsburgh banker first went to Washington. Gone was the 20 per cent maximum surtax on incomes of $100,000 and more for which he had fought with all his prestige and resourcefulness from 1921 to 1926. In its place was imposed a 55 per cent levy on incomes above $1,000,000. The inheritance tax was lifted from 25 to 45 per cent. The corporation tax, which had been pared down to 12 per cent, went up to 13.75 per cent and an added impost was piled on consolidated returns, to make it 14.5 per cent.

The bare millionaire with an income of $50,000 a year now would pay $8,600 a year, against the Mellon Plan levy of $4,588,75. The plutocrat with his $1,000,000 yearly income, would Pay $571,100 to the Treasury, against a former $240,768.75

Nor could a man give away his fortune, scatheless of Government tax, as in the halcyon days of Mellon rule. The Government now insisted on $140,000 from a $1,000,000 gift and $3,333,333 of a $10,000,000 gift.

The immediate exactions of the law did not worry the financier so much as its implications. Fortunately the Mellons would not have to pay much of a tax in these hard times. But there was always a lag in Congressional action; once the country emerged from the "valley," it might take another few years' fight by another sturdy champion of fiscal normalcy to restore the easier rates.

By December, 1931, Mellon saw the inevitability of the tax rise and agreed that the surtax maximum would have to go up to 40 per cent, and the corporation tax to 12.5 per cent. After he quit office however it became apparent that even the doubling of the surtax was not enough. In common with other Administration leaders, Mellon favored the sales tax rather than increased income taxes. The superiority of the sales tax was immediately apparent: people were still buying food and clothing, and some could still afford the necessary luxuries of the machine age. Such a tax was certain to return substantial income. Its psychological effects would be even better. People would realize that they were paying directly for Governmental expenditures and would demand a drastic curtailment in general social expenditures. That would curb extravagance and a too open-handed dispensing of federal charity which hither-to the populace supposed was coming from the pockets of the rich. It was uncertain however whether such a general tax would react favorably upon the electorate in the coming 1932 Presidential election, and Mellon made no overt recommendation.

While the Mellon Plan of taxation was being discarded overnight, the Mellon political machine creaked on, rebuffed by Pittsburgh voters but still maintaining control of the Pennsylvania legislature by virtue of alliance with Joe Grundy's Manufacturers Association. The defeat late in 1931 of Joe Armstrong and James J. Coyne, the Mellon candidates for county commissioner, plumbed the depths of the Mellons' fall from popular favor in their own home city. A few months later Mayor Charley Kline, Mellon henchman, was convicted of graft and saved from a six-month sentence in prison only by grace of the court, which heeded physicians' counsel. He was ousted from office and fined $5,000.

The Mellon machine made a quick comeback. Coyne, a state senator, acknowledged leader of the Mellon forces in western Pennsylvania, dissolved the Kline apparatus and took charge of the city. In the state legislative session called in the desperate winter of 1932-33, the Mellon-Grundy machine scored brilliant victories in defeating old age pension, minimum wage and child labor bills demanded by widespread public agitation. When Roosevelt's election roused the Pittsburgh Democratic party from its somnolence, it was discovered that the local Democratic leader and the engineer of the Mellon machine were political bedfellows. Postmaster-General Farley, advising his cohorts in the Iron City, exhorted them to assert their independence of entangling alliances. The cynical, however, maintained confidence in the ability of the Mellon machine to cope with the resurrected local opposition party through adroit manipulation of its leaders, long content with crumbs from the machine's generous table.

Among the commonalty of Pittsburgh, the Mellon name had never excited that glow of local pride which an outsider might have expected. Perhaps, as the Secretary remarked in the field of international affairs, a creditor is never popular; certainly in the course of sixty years a family of money lenders can arouse its fun share of distrust and animosity in a city dependent upon its local dei Medici for ready cash.

A variety of reasons conspired to raise the mob against its magnificos. Perhaps the failure of the Bank of Pittsburgh aroused the liveliest resentment, uniting those of high and low degree, outside the Mellon hierarchy, into a solid ring of bitter criticism against the family.

The Bank of Pittsburgh was the pride of the city's better classes, a token of Pittsburgh's solidity, a tie that bound the great industrial center at the head of the Ohio with its early days when it was little more than a trading post on the western frontier. Established in 1810 it was the oldest bank west of the Alleghenies. The building which it occupied in 1831 was the first bank building to be erected in the United States outside New York and Philadelphia. In a glow of patriotic pride, the Pittsburgh Chamber of Commerce in 1931 asserted that "it is the rare and most enviable distinction of the Bank of Pittsburgh that among other banks of the country, it is one of the very few which never suspended specie payments. In the devastation of the panics of 1837 and 18574 it not only excited astonishment of banks all over the country by maintaining regular dividends, but met every obligation with dollar for dollar in coin." When T. Mellon & Sons suspended payments in 1873, the Bank of Pittsburgh was doing business as usual.

Its president in 1931 was Harrison Nesbit. By some he was considered an aggressive banker who was pushing the Mellons hard by his liberal credit policy. Others held him to be a plunger. In any event the catastrophes of 1931, complicated by boom time realty purchases in downtown Pittsburgh, shoved his bank into an insolvent position.

The shoguns of finance in the Iron City, the Mellons and the Hillmans, considered the plight of their city's oldest bank. It was unthinkable that it should be allowed to stagger to ruin. The collapse of the Bank of Pittsburgh would bring crashing down about it a score of smaller banks which deposited with it. Examiners for the two banking chains surveyed the institution's assets and submitted offers for its consolidation with theirs. The Hillman interests finally withdrew when it seemed that the Mellons were the more eager.

Richard B. Mellon, W. L. Mellon and H. C. McEldowney conducted the negotiations. True, there would be some loss involved, but the good will of the many thousands of depositors in the Bank of Pittsburgh and the dozen or more little banks which clustered about it was a tangible thing, to be appraised in dollars and cents and in the Mellon family's prestige. An agreement was made to protect the insolvent bank's depositors within the shelter of the Mellon financial structure. Only A. W. Mellon's approval was needed now to complete the deal.

The Secretary turned thumbs down. The bank was not a good investment. And anyway, its depositors would have to turn to the Mellon National Bank. "We'll get their money anyway," was a paraphrase of the Secretary's logic.

The Bank of Pittsburgh was allowed to fail. Within a month a score of smaller banks closed their doors. Tens of thousands of Pittsburghers, most of them workers and small business people, found their savings and reserve funds tied up in the bitterest winter in the city's memory.

In one regard Andrew Mellon was right. The Mellon National Bank had to hire extra clerks and open extra windows to take care of new accounts. Terror-stricken people took their savings out of still solvent banks to entrust them with the institution whose proprietor was Secretary of the Treasury.

Fury swept through the ranks of Pittsburgh business and industrial leaders. President Crawford of the McKeesport Tinplate Company, a few days after the failure of the Bank of Pittsburgh, switched his company's huge account from the Mellons to the Hillmans, and others followed. When the bank statements were filed at the end of 1931, it was found that the Mellon National Bank's deposits -- despite the influx of small accounts -- had dropped from $181,000,000 to $153,000,000. On the other hand, the Hillmans' First National Bank had held its deposits practically intact in that trying period.

Opposition bankers, finding the Mellon charm broken, became openly critical of the workings of the National Credit Corporation in Pittsburgh. President Chaplin of the Colonial Trust Company, in the Hillman orbit, spoke bitterly of the Mellon control of the federal agency which had been erected hastily by Hoover and the Treasury to save certain banks. A. E. Braun, president of the Farmers Deposit National Bank, generally regarded as a Mellon bank, was director for the Pittsburgh area, and with two Mellon bankers comprised a majority on the board of five members. Pittsburgh banks had subscribed $3,300,000 to the National Credit Corporation, only to see the Mellon-controlled board send much of it to the Pacific Coast while banks languished and expired at home. President Chaplin was fearful that the new Reconstruction Finance Corporation would work no better in the Pittsburgh area if the ruthlessly deflationary Mellon policy were to be followed. In the winter of 1932 Pittsburgh depositors suffered a second major shock when the Diamond and the Monongahela, old-established banks, went under.

Whatever Richard B. Mellon may have thought of the wisdom of his brother's course in the Bank of Pittsburgh debacle, it was safe to assume that the Secretary himself was unperturbed, as usual. The weak and the failures would always hate the strong and the successful. In trying times like these each man and each institution must stand on its own legs. The strong owed little to the weak in such an emergency; indeed it was the result of immutable economic laws that the strong became stronger after such cataclysms.

When Union Trust in 1929 joined the banking syndicate which sold to American investors $50,000,000 in Kreuger & Toll debentures, it added no luster to the name of the most distinguished financier of his time. Old judge Mellon, had he known that his sons' bank was peddling a pig in a poke to trusting investors, would most certainly have marched out of his grave to give them a lesson in a banker's responsibility to his clients.

Times had changed though since judge Mellon confessed that his inability to meet his obligations in 1873 was the most humiliating experience in his life. So far as the public knew, neither Andrew Mellon nor his brother felt the slightest compunction about Union Trust having sold over its counter at 98 debentures which later were quoted at 1/32 on the New York Stock Exchange. In any event Union Trust did not bother to apologize to investors for its carelessness in helping Ivar Kreuger swindle American investors out of $250,000,000.

The banking syndicate which passed off the so-called Secured Gold Debentures of Kreuger & Toll lacked nothing in reputability. Its members were Lee, Higginson & Company, Guaranty Company, National City Company, Brown Brothers & Company, Dillon, Read & Company and Union Trust Company of Pittsburgh. Securities worth $60,000,000 were pledged for the loan. It was provided however that other securities could be substituted. It was astonishing that financial gentlemen of such justly high rating as the partners of Lee, Higginson and the proprietors of Union Trust, together with their legal advisers, could have permitted such an extraordinary choice of eligible substitute securities. Even the German Forced Loan of 1922--worth $5 on the million--was acceptable. Kreuger, hard-pressed, took advantage of this feature and substituted $22,000,000 in Jugoslav and $23,848,000 in Hungarian Cooperative Society issues, along with similar treasures, for the original solid Belgian, French and Prussian securities.

At the bottom of the advertisement in the Pittsburgh newspapers inviting investors to share in Union Trust's offering of these precious debentures appeared, in small type, the following words: "The statements contained in this advertisement while not guaranteed, are based upon information and advice which we believe accurate and reliable."

After Ivar Kreuger turned his pistol on himself, it was found that very few of his statements were either accurate or reliable. The hard-headed American bankers who passed his securities along to the investing public had never bothered to inquire. Their gullibility was amazing. Kreuger had told them that his Swedish bank would resent foreign accountants prying into its books. The American bankers agreed that such inquisitiveness would be sheer impertinence.

Guardians of the people's faith in investment bankers were properly shocked. Bertie C. Forbes, financial columnist for the Hearst papers, wrote: "Any crook who issues spurious money is sent to jail for a long term of years. But any Tom, Dick or Harry can issue spurious bonds or stocks without fear of punishment. . . . They do these things better in Britain. There security buyers are protected by law. There the issuers of prospectuses must swear that every fact and figure is strictly true. If events prove that any factor figure was not true, the offenders are slapped into prison."

Forbes was not specific, and no one ventured to suggest that the Mellons be held personally responsible for their small type assurances to investors. Indeed had it not been specifically stated that their information about Kreuger & Toll and its debentures was "not guaranteed"?

Union Trust, in its own investments, was more prudent. When in conjunction with National City, Bankers Trust and Continental Illinois, it lent $4,000,000 to another Kreuger creation, the International Match Company, it very wisely insisted on cold security of 350,000 shares of Diamond Match Company stock, for which nothing else could be substituted. When International Match was thrown into receivership, Union Trust and its associates proceeded to sell the pledged stock in satisfaction of their loan. It was noted, too, that when the list of principal holders of Kreuger & Toll debentures was made public, the name of Union Trust was absent. It was a tribute to the business judgment of the Mellons that their bank declined to share in the feast which it spread for Pittsburgh investors.

Apparently it required no superhuman penetration to ascertain the real status of Ivar Kreuger's ventures. As far back as 1929 Maehler's Bank in Amsterdam had been requested to lend the match king 20,000,000 kroner. The Dutch bankers investigated, turned thumbs down, and quietly disposed of whatever Kreuger holdings they already had. In America however the billion-dollar promoter hobnobbed with the elite of Wall Street and was the honored guest of Herbert Hoover until within a few weeks of his death.

The possibility that Union Trust and its fellow syndicate members might have unpleasantness ahead was seen when Bainbridge Colby and Samuel Untermyer formed an independent protective committee for Kreuger & Toll debentures holders. "Our Counsel," they said, "advise that if Kreuger & Toll debentures were purchased in reliance upon material representations which on investigation are found to have been false, a purchaser on discovering the falsity thereof may rescind or cancel his purchase and recover back the purchase price paid by him." According to judicial decisions, it was not even necessary to prove that the bankers knew their representations to be false when they made them. The simple fact that the goods were not as represented was held sufficient to void the contract. Such an action was begun by an International Match debenture holder against Lee, Higginson & Company and Guaranty Company in New York.

Kreuger & Toll debentures were merely one of a list of choice offerings laid before the Pittsburgh investors by the Mellon banks. There was also stock in the Alleghany Corporation, a Morgan tidbit, sold at 24 and quoted three years later at .375. Or Lone Star Gas, sold at 98.75, quoted at 7.625.

Not even the securities of Mellon corporations, in which the Pittsburgh banks specialized, escaped the deflation. Those who bought Aluminum stock in 1925 at 97.5 saw its market value shrink to 22 in 1932. Koppers Gas & Coke issues, sold at 96, withered to half that market value. Solvay American Investors Corporation declined from 100 its sales price, to nearly half. The 1929 issue of $20,000,000 in Pittsburgh Coal bonds, sold at 100, was quoted in 1932 at 68.

Sunday, August 24, 2014

"After us the deluge"—Apt Theme for Mellon Years at Treasury

Chapter 18 from Mellon's Millions by Harvey O'Conner (New York, N.Y.: Blue Ribbon Books ©1933, pages 362-368)

The Fortune Goes Marching On

IF his years in public office seemed fruitless after Congress had torn down the Mellon Plan of taxation and the voters, in 1932, had repudiated his theory of business-in-government, they at least rescued from obscurity the processes by which Andrew Mellon had quietly reared the nation's largest
fortune.

In one way, the Mellon fortune was unique. It embraced the widest diversity in the methods of accumulating wealth that acquisitive art had yet attained. The Rockefellers based their millions on petroleum, the Fords on automobiles, the Du Ponts on explosives and chemicals, the Vanderbilts on railroads, and the Morgans on finance. The Mellons ran nearly the whole gamut. Segments of their billions represented gains from real estate, money lending, steel, railroad equipment, oil, coal and its myriad by-products, aluminum, carborundum, utilities.

Andrew Mellon's distinction was that he greeted eagerly yet cautiously each opportunity placed before the head of the banking house of T. Mellon & Sons. He supervised minutely the growth of infant enterprises, selected with uncanny precision those able subordinates to whom he entrusted the management of his corporations, insulated himself from humanity so that his cold, amoral spirit could not be swayed by those warm considerations that halted many on the march to millions.

He entered the business world from the finest training school in America, that kept by Judge Mellon. From the first he was armed with power, the power of his father's millions. He was born to command, to use with dexterity the tools by which entrepreneurs manipulated natural resources, labor power, the
needs of consumers.

Before the banker who controlled a reservoir of capital in the center of the nation's heavy industrial district came an endless procession of opportunities. Necessitous men with ideas, others with unique access to natural resources, laid their potential wealth at his feet in return for his financing. Charles M. Hall and his aluminum process, Colonel Guffey and the Lucas gusher, Doctor Koppers and his by-product oven, formed the tripod on which the Mellons' industrial empire was to rest.

Andrew Mellon neglected few of the techniques by which money could be made. Basic to all in his scheme was the use of money to make money. Union Trust stood at the very center of the world he ruled. The first few thousands wrung by Thomas Mellon from mechanics' liens, notes and mortgages grew in seventy-five years to hundreds of millions, were hired out to eager borrowers, and secured by underlying mortgages on choice property and industries.

The keystone to his industrial fortune was the use of monopoly, the restriction of output, the raising of prices to artificial levels, the tying up of processes by patents. Andrew Mellon disliked vulgar competition with others, preferred to corner a raw material or process and force consumers to bargain with him for access to their requirements. Aluminum's profits of $100,000,000 in the six years from 1926 to 1931 testified to his success. Gulf Oil with profits of $175,000,000 between 1925 and 1930 justified his price and output alliance with Standard Oil. Koppers grew to such lusty vigor under the Government's favoring patent laws that later none other could compete.

Where monopoly was impossible, the Mellons speculated discreetly. Their early millions arose from the soil of Pittsburgh. They foresaw the growth of the city toward its present suburbs, cannily gained large tracts of land, and exacted their price when the pressure of population forced home-seekers to
the Mellon realty offices. Mellon traction lines guided the direction of growth. Mellon lumber and coal firms reaped a second harvest.

The manufacture and manipulation of stocks opened a new avenue to wealth for the proprietors of Union Trust. Their first triumphs, when the corporate age bloomed early in the Twentieth Century, were Monongahela River Coal & Coke and Pittsburgh Coal, sadly over-capitalized firms which were doomed from the start to cheat the hopes of investors who placed their faith and funds in them.

Later adventures of the House of Mellon far outran its earlier efforts: the apex was participation in the syndicate which floated Kreuger & Toll debentures. The only worth in this worthless security was the names of the eminent firms, including Union Trust, which sponsored it. Error in such a matter could have been remedied by full and prompt reimbursement of aggrieved investors. Judge Mellon would have insisted on that, his sons, like the other sponsors, made no such move.

The public need for gas and electricity was not overlooked. Not only were prices charged consumers which represented a generous profit—even the Mayor of New York was obliged to denounce rates charged by a Mellon company—but these profits were made the base for a dizzy structure of holding companies, in the best Insull-Byllesby-Mitchell manner. Quotations ranging from 2.875 to 8.75 on Eastern Gas & Fuel Associates common in the first half of 1932 betrayed the hazards which confronted those who bought utilities' stock.

If monopoly and speculation were basic ingredients in the Mellon millions, marriage played its modest share. Sarah Jane Negley's contribution to the incipient fortune firmly rooted Thomas Mellon in East Liberty and its promising realty business. By advantageous marriages in realty and iron and
steel families, later Mellons followed the Founder's example.

Underlying all these techniques of acquisition was the simple and obvious fact that as an employer Andrew Mellon bought labor cheap and sold its products dear. In the Pittsburgh region, noteworthy in fat America for its destitution and misery, the Mellons became a billionaire family. The explanation lay in part in the miserable towns in which his steel, coal and aluminum workers lived, in the poverty of their lives, in the glaring inequalities of opportunity between the children of Andrew Mellon and those of his workers.

If native labor was too expensive, the Mellons and their fellows used thousands of Southern and Eastern European workers, imported to do America's dirty work. If these in turn rebelled, the Mellons imported hordes of Negroes from the South to work their coal mines and steel mills.

The engine of state power stood at the Mellons' command, not merely to wring petroleum concessions from semi-colonial governments, to bless the acquisition of monopoly privileges and to shift tax burdens, but for the everyday protection of the family's property. A formidable army in the
Pittsburgh district alone—state troopers, city police, coal and iron police, deputy sheriffs, spies—was hired to guarantee the Mellons and fellow employers against the success of movements aimed at better wages and living conditions.

Not merely police, but the laws too stood sternly in the way of radical workers who sought to substitute new ideas for the old in social relations. When workers, goaded to desperation by the hopelessness of their lot—as Judge Mellon had so fearfully predicted—advocated the drastic substitution of capitalism by socialism, the state of Pennsylvania was alert to imprison them in the name of the Flynn anti-sedition law.

The Mellon fortune weighed heavily in the political, social and cultural life of America. It was felt preeminently in Pittsburgh and western Pennsylvania. Linked with Frick, U. S. Steel and the Pennsylvania Railroad, it controlled Pennsylvania from the 1880s. The Keystone State became the patrimony of the Mellons and their allies, as it once had been of the Penns'. And if Pennsylvania's political life became synonymous throughout the nation with cynical corruption, that was but one aspect of the operation of social principles upon which the Mellon fortune was reared.

Pittsburgh, the Mellons' home town, was under their unchallenged dominion for decades. What city surpassed it in municipal sloth and corruption, in ramshackle housing for workers, in spiritless environment? Endowed by nature with a site on magnificent hills, where the historic Allegheny and
Monongahela meet to form the Ohio, Pittsburgh seemed to have thrown away indifferently the opportunity to build a notable, even splendid center. The shores of the rivers were fouled with the debris of a disheveled individualism. The Golden Triangle was golden only in the eyes of the Mellons
and other realty owners; actually it was a maze of narrow, traffic-choked streets, cluttered with smoke-grimed monstrosities of the late Nineteenth Century, unadorned in any part by a park, save for an acre or so of unkempt land at the Point. Old Judge Mellon disapproved of such municipal
extravagances as parks. Back of the steel mills huddled drab miles of dejected frame structures.

All this mattered little to the city's masters. Dirt and grime are inseparable from steel mills; vice, misery and poverty are problems of the individual; municipal slovenliness is the price paid politicians for their services.

        Such were the standards which Andrew Mellon brought with him in 1921 to Washington, after fifty years of "well doing" in his native city. Twelve years later the more conscientious were astounded to read of evasion of the nation's tax laws by money eager of the highest rank. A former
Under-Secretary of the Treasury, right hand man to A. W. Mellon, testified unhesitatingly in federal court that he had advised Charles E. Mitchell on income tax evasions. Any artful subterfuge, if devious reasoning could construe it as legal, was countenanced by a "liberalized" Bureau of Internal
Revenue. The entire apparatus of Government had become permeated with the morality of the businessmen; the processes by which a Mellon or a Morgan made millions had become the highest ethic. By such standards, indeed, Pittsburgh was the very flower of American civilization, for had it not produced the mightiest Midas in the land?

There was no disputing the success of Mellon's sleek and efficient corporations, lubricated so exquisitely that their proprietor might have died an unknown billionaire had he not decorated his life by public service. His public life was more difficult to appraise. Many felt that because the Mellon
Plan, the keystone of his achievements in the Treasury, was wiped out at one stroke in 1932, his services in behalf of the dominant classes in America had been nullified.

Such an estimation failed of the full truth. The Mellon Plan of taxation which he sponsored saved for the wealthy billions of dollars. Thus entrenched, the stronger were able to ride the more securely through the crisis, tightening their hold on the industrial life of the nation. If the Mellon Plan and the
wild speculative era it encouraged plunged millions of workers and farmers deeper into misery and wiped out a section of the middle class, it consolidated the power of the men at the top. Gulf Oil picking up choice bits of petroleum properties for a song in 1931-32 was merely part of that picture.

The wealthy also looked hopefully across the abyss of the collapse to better days when it would be necessary to return to "normalcy" in public finance. Once again the familiar arguments would be heard that excessive taxation was drying up the sources of industrial investment, preventing the full swing of business enterprise, blocking the chances for employment of tens of thousands in new factories. Then, they fondly hoped, Secretary Mellon's hard fight in the years 1921-26 would bear luscious fruit in a more rapid return to lower taxes for the higher brackets.

Although Mellon's main function in the Treasury was to lend the weight of the authority he had gained in finance and industry to the reduction of taxes on the upper claws, his admirers pointed to his other achievements in reducing the public debt, refunding a portion of it at lower interest rates, and settling the war debt question. The refunding operations however would hardly have taxed the ingenuity of any experienced banker, given the favorable money market existing at the time.

If the reduction of the public debt by $3,000,000,000 during his first ten years of office was a laudable achievement, what was to be said of the staggering deficit of nearly $4,000,000,000 accumulated in his last years? Nor could it be urged that Mellon's part in the reparations and war debt
settlements added to his stature. He applauded both the Dawes and Young Plans, which, after they served their transitory purpose, tumbled flat. He solemnly went through the hocus-pocus of binding three generations of Europeans to pay the United States $22,000,000,000 within sixty-two years.
European diplomats signed the settlements with tongues in cheek, but it was plain that Secretary Mellon regarded the farce seriously and looked upon debts incurred by the erstwhile Allies in a joint war against a common enemy in much the same light as a loan by Union Trust to a hard-pressed coal
company in his Pittsburgh bailiwick.

Even the Saturday Evening Post, whose plaudits of the Secretary had tested the limits of language in the halcyon days, conceded in 1932 that "no hasty or sweeping statement can be made as to how great a man Mr. Mellon is. . . . We may admit that Mr. Mellon was not necessarily the financial genius which he was once advertised to be by his loving admirers."

The eminent financier, for example, had an excellent opportunity as Secretary of the Treasury to straighten out the banking laws, and restore public confidence both in the banks and in the copybook maxims on thrift and saving so beloved of Thomas Mellon. Actually, during his term of office, 9,300 banks failed, against 2,900 in the years 1904-1920, and the entire banking structure collapsed in 1933.

Indeed, when an attempt was made to appraise his years in the Treasury, the motto of the French Bourbons, "After us the deluge," came to mind.

Once a system of economic enterprise based on the philosophy of rugged individualism and the practice of monopoly should begin functioning again, there was promise that the Mellon fortune, immensely fortified during the critical years, would again stride boldly forward. The Mellon corporations, with the passing of Thomas Mellon's sons, would be run by hired men in the interests of a motley group of descendants whose claim to a division of the imperial dividends was apparently to be justified only by the lucky accident of birth.

None showed the amazing executive ability of Andrew Mellon, nor even any consuming desire to manage the family's wealth. A nation was to pay tribute for the privilege of using aluminum, oil, coal's by-products, merely that a score of descendants of vigorous, thrifty old judge Mellon might enjoy more or less useful leisure, and that the unconsumable portion of the earnings might be reinvested to spread still further the ever-widening scope of the Mellons' millions.

Unless, indeed, the Deluge should descend on both the Mellons, and their millions.

Friday, August 22, 2014

The "bad smell of oil" from Colombia and Venezuela—1930

Chapter 11 (pages 185-206) of Mellon's Millions by Harvey O'Conner (New York, N.Y.: Blue Ribbon Books ©1933)


Petroleum Diplomacy

0IL is an indifferent lubricant for international relations. The dynamite that wrecked competitors' derricks and opened gaping wounds in pipe lines, the money that bought tractable legislators and officials of independent companies, the intangible but none the less real rewards that swayed Senators and judges—all the tried and tested technique of domestic industrial warfare was duplicated when the Empire of Oil broke through United States boundaries to establish its dominion in the Gulf and Caribbean regions. The story was one of bandit armies retained by American and British oil lords, of revolutions and counter-revolutions financed at so much per revolution, of itching palms of Latin American generals and politicos, crossed with American gold, of the State Department called in to aid the designs of Standard, Gulf, Sinclair, Doheny.

Old Judge Mellon, contemptuous of Washington, scornful of Government interference in private business, would have been amazed to know that the State Department did not consider it undignified to throw the prestige and armed force of the American Government behind his sons' investments in Indo-Latin countries. Not that the Patriarch of East Liberty would have failed to adjust himself to this new extension of the State's power. After all there was little difference, in principle, between the Sheriff of Allegheny County [Pennsylvania] using governmental power to execute judgment against a Pittsburgh debtor of Thomas Mellon, and the President of the United States using the threat of armed force against Mexicans forgetful of sacred contracts signed with subordinates of Andrew Mellon.

At the turn of the century, when the Mellons were busy rocking the cradles of Union Steel, Crucible Steel, Pittsburgh Coal and a dozen other infant combines, an international wildcatter was studying tell-tale pools of oil on the surface of marshes near Tampico, Mexico. He was Edward L. Doheny, who was to develop the technique of counter-revolution and brigandage-by-request, who was to deal in an easy financial way with an American Cabinet officer, as if he were merely a Mexican Cabinet officer. His Potrero del Llano broke the record of the Mellons' Lucas gusher on Spindletop; his Cerro Azul shot 200,000 barrels a day at the sky.

The fabulous production of Mexican wells—excited United States operators talked of a monster gusher that spewed forth a million barrels a day—caused the welkin to ring in Washington with demands for a protective tariff. Among the independents present was George S. Davison, Gulf Oil executive and "assistant to W. L. Mellon in whatever position he held." Davison however was not noisily demonstrative at the conference called to appeal for protection to the sponsors of the Payne-Aldrich tariff. For even then the Mellons were debating invasion of Mexico.

Opportunists in their philosophy, the Mellons were no blind devotees to protectivism. As born Pittsburghers they were convinced of course that America's industrial supremacy stemmed in part from the Republican tariff on steel. Similarly they were convinced that an adequate duty was needed to shield Aluminum and its workers from the menace of European pauper labor. But once they were ensconced as important operators in Mexico's Golden Lane in 1912 any tariff on oil would become burdensome. So the independents continued to clamor for legislative dikes to stem the inrush of Mexican oil, and in vain.

The Mellons entered Mexico the year after Doheny and Standard agents had financed the overthrow of Dictator Diaz, if testimony before the Senate foreign relations committee in 1913 is to be credited. The struggle between Standard and the British Mexican Eagle (Pearson) interests sounded for all the world like a skirmish between Standard and an enemy on United States soil in the eighties and nineties. Mexico of course gave scope to certain Indo-Latin flourishes embellishing the colder Nordic ferocity of Rockefeller's rise to power. Hired bands of brigands—north of the Rio Grande they are called gangsters—destroyed Pearson's pipe lines and set his wells on fire, but the Britisher held on doggedly despite the strafing. The decisive stroke in Standard technique was to finance Madero against the Pearson-dominated Diaz when the North Mexican iron and steel magnate showed promising strength of his own.

Mexican Gulf Oil played a minor role in the turbulent history of Mexico's social revolution. More lucrative fields for Mellon money and talents were found closer to home, what with aluminum, by-product gas plants, coal, gun carriages, structural steel and oil distillates to be sold in the effort to anchor democracy in stable world moorings. Patriotically Mexican Gulf refused to pay taxes to the Government of the pro-British Huerta who murdered Madero, and Doheny could testify in 1919 that "every American corporation doing business in Mexico extended sympathy or aid, or both—and we extended both—to Carranza."

Doctrines abhorrent to the Medici of Smithfield Street gained prevalence in Mexico in those bloody years. An egalitarianism compounded of French and Russian revolutionary ideas was imbedded in the Constitution of 1917. Principally the American oil companies objected to its proclamation that the sub-soil and its wealth belonged to the people of Mexico. The heresy was too staggering to need refutation. A purification by blood, or at the very least an independent Republic of North Mexico, based on sounder concepts of individual initiative and its reward, would safeguard the lands of Hearst, the copper of Guggenheim, the oil of Doheny, Standard and the Mellons.

At this juncture Harding succeeded Wilson and a new Cabinet grappled with the Mexican problem. Among those who counseled were Charles Evans Hughes, Secretary of State, who was to resign within a few years to represent Standard Oil in his private capacity, Andrew W. Mellon, heavy investor in the Tampico oil regions, and Albert B. Fall, who advised during his last term as Senator that "a police force consisting of the naval and military forces of our Government" be sent into Mexico.

Mexican Gulf Oil and other American companies furnished fuel for the controversy which broke out between Secretary Hughes and General Obregon. They refused to abide by Mexican governmental decrees, refused to pay taxes, fought the new Mexican labor unions. At Tampico the Yankee petroleros shut down their works in protest against the Mexican export tax and thousands of employees were turned out into the streets; the press associations wired alarmist reports of "impending disorder and rioting."

At home controversy raged in press and forum on the advisability of using force to bring the Mexicans into conformity with international law in their treatment of concessions and leases. The New York World dubbed Hughes "Secretary of Oil." Secretary Fall eventually left the Cabinet because of his association with Doheny, who had grown careless in his relations with office-holders from too long familiarity with the generals and politicos of Tampico. A sector of public opinion which was beginning to regard Secretary Mellon as too involved in business and finance to exercise that cool impartiality expected of a public officer, asserted that he dominated the Cabinet's Mexican policy.

Stirred by the La Follette-Walsh discoveries concerning the ethics of American oil men and Cabinet officers in the Teapot Dome inquiry, the Senate asked Secretary Kellogg at the height of the Mexican-American tension whether he had any information on the holdings of Messrs. Sinclair, Doheny, and
Mellon in Mexican oil and their attitude toward the Mexican oil laws. Secretary Kellogg, who was well informed about "bolshevist hegemony" plots emanating from Mexico City and threatening the Panama Canal, informed President Coolidge that he knew nothing of his fellow Cabinet officer's
interests in Mexico, or of Doheny's and Sinclair's.

Despite recognition by Washington, the Obregon-Calles regime clung stubbornly to its doctrine of nationalization of oil resources. Luis N. Morones, Secretary of Labor, Industry and Commerce in 1925, canceled 29 Mexican Gulf Oil permits to drill, on the ground that they had not been acquired in the manner prescribed by law. Gulf retorted that it bad bought its permits in good faith in the accepted manner, and would not seek their confirmation or rejection under a law which the American State Department did not recognize.

President Davison of Mexican Gulf engaged in an angry debate with Secretary Morones. His company had acquired the oil land in question under titles antedating May 1, 1917, the date of Mexico's troublesome Constitution. The Mexican Government's oil agency proceeded to drill wells on the railroad right of way next to the Mellon property with the evident purpose, Davison said, of tapping oil rightfully belonging to Mexican Gulf. Thereupon he ordered wells sunk on the Gulf property to safeguard its oil. Morones fined the Mellon company 40,000 pesos, the limit under the law.

The unending quarrel wore on the nerves of American leaders of opinion: they now urged acceptance of President Calles' offer to submit the whole question to arbitration. Ambassador Sheffield, militant defender of the petroleros, abandoned the Embassy building in Mexico City which stood, curiously enough, on land donated by E. L. Doheny. Dwight Morrow succeeded him and a branch of the National City Bank was opened in Mexico's capital.

History did not wait for a neat solution of the Mexican land question by experts in international law weighing the rights and wrongs involved. It swept the center of gravity in the oil world to the south by the opening of immense new fields around Lake Maracaibo in Venezuela. Dutch-Shell, Standard and Mellon rushed to the Caribbean.

President Calles was acutely aware of the shift, observing his dwindling revenues from oil taxes. Standard, Sinclair, and Gulf could take or leave Mexican oil. He extended the olive branch.

Just as he and Ambassador Morrow were reaching an amicable settlement of the Mexican oil controversy, Venezuela, in 1928, topped Mexican oil production. Unquestionably the deadlock down in Mexico's Golden Lane, the narrow arc of her petroleum riches, led American entrepreneurs to rejoice in the possibilities of Maracaibo. In 1917 Royal Dutch-Shell took out 120,000 barrels. Standard of Indiana, through Pan-American Petroleum, was negotiating with Dictator Gomez in 1922 for more favorable oil legislation. The law drawn up by Deterding and Stewart executives was approved by Gomez almost without change, and Mellon executives immediately became interested in the affairs of such an admirably managed country.

Under the Gomez scheme, no Bolshevist ideas tear at the vested rights of private property, no Queretaro constitutions upend established titles, no Borahs, La Follettes or Walshes interrupt the even progress of government by executive order. The dictator had achieved continuity in office since 1908 by an astonishing resourcefulness that paled the efforts of Diaz in Mexico and Machado in Cuba.

Gomez' methods shocked those of tender sensibilities. The hideous cruelties of his regime, documented by the International Committee for Political Prisoners, are reminiscent of the Middle Ages. Within recent years, 5,000 political prisoners—many of them high school students—have crowded Venezuelan jails. In Rotunda prison those who challenge the dictator's authority lie shackled with iron bars riveted to their ankles. Five hundred students of the University of Caracas were condemned to chain gangs on Gomez' justly celebrated highways. The crimes of these offenders range from holding public meetings opposing the dictatorship, to attempts at armed overthrow. "Venezuela," states Harry Elmer Barnes, the historian, "unquestionably presents the worst case of forced labor in America today.... Political prisoners are tortured in ways to make the medieval inquisition seem a picnic by comparison. . . . Overzealous apostles of freedom are hung up with meat hooks through their jaws."

Thousands of Venezuelans have fled their native land. With surprising unanimity, they give the same reason for the dictator's quarter century reign. British and American oil interests, they say, are upholding and financing the dictatorship in exchange for favorable oil legislation and stability. Certain it is that the American State Department, despite expostulations in Congress, has never protested the violation of human rights in Venezuela as it has property rights in Mexico.

Another story is told in trade periodicals representing the major oil interests in the United States. They find no words vigorous enough to praise the constructive leader of the Venezuelan nation whose balanced budget and efficient army, whose experimental farms and thousand miles of paved highways are civilizing a backward country. The modest levies he imposes upon foreign petroleum companies—about $15,000,000 a year—rouse no complaint They represent about a third of the government's revenues.

Little of the $15,000,000 is spent on education. The ruling classes and the Church, states the Encyclopedia Britannica, have taken little interest in the education of the Indians and the mestizos, who comprise the underlying population. Expenditures on education for 1924-25 were less than $1,000,000, mostly for the upper white stratum, and $2,150,000 by 1930. The chief drain on governmental revenues is maintenance of two-year compulsory military service, although the country is protected by natural barriers of mountains on the Colombian border, and jungles separate it from Brazil and the Guianas.

Even so, the foreign petroleros take no chances on the eighty-year-old dictator, whose death might dissolve the dictatorship and whose overthrow is not, in the light of Indo-Latin history, beyond the bounds of possibility. Their ace in the hole is President Vincenzio Perez Soto of the Federal State
of Zulia, which comprises most of the valuable concessions of the Lake Maracaibo area. The basin is protected from the rest of Venezuela by mountain ranges, with access from Caracas, the capital, only by water. The oil interests feel confident that when the inevitable happens, Perez Soto will
not object to assuming the responsibility of ruling an autonomous Maracaiban state, until the rest of Venezuela returns to stability. In the meantime they trust not too much either to Gomez or Perez Soto, but keep their costly refineries on the near-by Dutch islands of Aruba and Curacao, or send the
crude oil directly to Port Arthur [Texas].

After the passage of the favorable laws of 1922, the Mellons paid more than $800,000 in cash, plus one-third of their production, to Maracaibo Oil, the concessionaire in charge of the Maracaibo basin, in return for rights to drill in the "marine zone," a strip 3,300 feet wide extending under the water
around the entire shore of the lake. Standard Oil of Indiana controls the lake bed proper and Dutch-Shell and Standard of New Jersey the dry shore.

Mellon wells in Lake Maracaibo would astonish the parched wildcatter of the Gulf Southwest. Derricks are built out over the lake and pipe line docks often reach out 3,000 feet to permit shallow-draft tankers to take on oil. Camps are guarded by bloodhounds and wolfhounds against the Motilone Indians,who swoop down for hatchets, machetes, knives and nails.

Production of Venezuelan Gulf Oil rose steadily to 30,000,000 barrels in 1929, nearly a fourth of Gulf's total. It was valued at upward of $20,000,000. Shallow lake tankers carry their burden to the Peninsula of Paraguana, where the oil is pumped into deep sea tankers for transport to Gulf refineries at Port Arthur, Marcus Hook and Staten Island.

The flood that poured into the United States from the Rockefeller and Mellon wells in Venezuela threatened to drown the small American producers, who cried for an embargo on Venezuelan oil. They could not hope to compete, their statisticians told Congressional committees, against oil produced by labor paid 20 cents a day in a country whose Government was not obliged to levy taxes for the support of general education and other social services for which the independents were taxed in Texas, Oklahoma and elsewhere.

The panic of 1929 deepened their woes, as markets shrank in the spreading paralysis of industry and commerce. Oil prices broke. From well above $1 a barrel, they sank to 75 cents, 50 cents, and in some areas oil was sold for less than it cost to transport the water needed to make steam and cool pumps. The Little Fellows, lacking heavy reserves, were unequal to the strain. Bitterly cursing the Rockefellers' and Mellons' Venezuelan oil, many went under.

Their appeals for help to the framers of the Smoot-Hawley Tariff in 1930 fell across considerations of America's imperial destiny whose force could hardly be appreciated by inland dwellers. "Oil is as necessary as blood in the battles of tomorrow," said Premier Clemenceau, appealing for American
petroleum in 1917. If the Mellon family, by paternal injunction, was reluctant to offer its blood, it was more than willing to develop immense reservoirs of oil, whether in Texas, Oklahoma, Mexico or Venezuela. The helpfulness of the State Department in assisting American oil interests abroad was explained by considerations of a larger patriotism.

It was the earlier contention of geologists that the petroleum resources of the United States were sharply limited; estimates by the U. S. Geological Survey in 1908, 1915 and 1921, all that predicted early exhaustion. It was imperative, they argued, at the American Empire refresh its oil supplies, to
assure its independence in industry and in world conflict. Lake Maracaibo, from that point of view, was as much a part of the United States as the East Texas oil fields.

Early in 1931, the Little Fellows' tariff plea unanswered, they were in Washington demanding an embargo. Cut off Standard and Gulf's Venezuelan imports, they demanded, and the market would right itself. There was no over-production of oil in this country. Actually, United States fields, from
1918 to 1929, had produced 600,000,000 barrels less than demand.

Secretary Mellon, as usual, was involved in the controversy.

The Mid-Continent Royalty Owners Association asserted from Tulsa that he had used his influence as a Cabinet member against enactment of a tariff.

In the meantime the Federal Tariff Commission had completed a study of comparative costs of Venezuelan, Mid-Continent, and Gulf field oil, as directed by Congress. Maracaibo oil could be produced and shipped to Atlantic seaboard ports, the Commission found, for less than the mere cost of transporting Mid-Continent oil from Gulf ports to the Atlantic seaboard.

The independents and small producers gasped for life. Oil state governors tried "pro-rating" production. "Alfalfa Bill" Murray called out the troops. Independents protested vehemently that these measures cut down their production while Venezuelan oil continued to pour into the country. In a
report to Governor Woodring of Kansas, J. Edward Jones, oil expert, expressed their views.

"There is nothing abstract," he wrote, "about the existence of monopoly in 'oil' and its control of the industry is so powerful, albeit so subtly expressed as to enable it ruthlessly to regulate the industry to the unfair, merciless and illegal elimination of its competitors and to its own selfish advantages. Furthermore, through its propaganda machinery, it molds public opinion in a manner creating a complete misunderstanding of the petroleum situation and influences the judgment and acts of unknowing and unwise public officials to a point where they fall a tool to the interests of monopoly as against the welfare of the people whom they are supposed to serve."

To eliminate the independent refiners and marketers, Jones reported, the monopoly, i.e., Standard, Gulf, Texas, had cut off their crude oil supply and undersold them. "To cut off the supply, the majors sponsored a system of artificial curtailment and proration under the guise of conservation. . . .
The help of the Federal Oil Conservation Board was solicited on the false plea that 'over-production' constituted 'waste.'  This plea, nevertheless, alarmed the Federal Oil Conservation Board and, backed by the major refiners and marketers and the American Petroleum Institute, the Board immediately sponsored a 'conservation movement.' "

By curtailment the majors blocked the independent refiners from access to sufficient oil, and then lowered the price of crude to a point where there was no profit in refining except to those with access to the very cheapest oil—Venezuelan. "Thus the major companies through curtailment and pro-ration, while gradually eliminating the independent refiner and marketer, have been forcing the independent producer into bankruptcy and ruin. . . . This has been done under the false idealistic theory of so-called 'conservation' to a point where the oil monopoly is more influential than that existing in any other industry." President Wirt Franklin of the Independent Petroleum Association, sustained Jones' conclusions.

In the Congressional confusion attending the difficult feat of balancing the budget in 1932, the independents forced a 21-cents a barrel "excise" on imported crude oil. The excise won by a narrow vote of 43 to 37 in the Senate, due to trading support from coal, copper and lumber state Senators.
That the new levies would do little to dam the flood of incoming oil was indicated by the Treasury's estimate of $6,000,000 revenue from all four imposts.

The Little Fellows could not realize that Venezuelan oil, as viewed from the towers of Wall Street, was no more "foreign" than theirs. While they were wailing, Gulf Oil Corporation was preparing to spend millions in Colombia so that the torrent of "foreign" oil tumbling into the United States market
might be doubled.

When a grateful nation conferred on General Virgilio de Barco 1,500,000 unsurveyed acres in the Colombian mountains for his victory over a rebel army, its Congress would have been astonished to know that twenty-five years later this gift would furnish a classic example of "dollar diplomacy."
Pittsburgh oil magnates, wandering British colonels, international banking houses, American ministers at Bogota, the American Secretary of State and sundry Senators were to play their parts in a strange drama of finance and diplomacy which cleft Colombia in twain and elevated to its Presidency a person whose exalted Hispanic phraseology was sprinkled with the aphorisms dear to Coolidge, Mellon and Hoover.

The prize sought for and won was valued by an Assistant Secretary of State at $300,000,000 to $2,000,000,000, but to General de Barco in 1905 it was merely a dreary waste of precipitous mountains and narrow valleys in the northern part of the Department of Norte de Santander. Inquisitive American oil prospectors guessed otherwise. It lay along the Venezuelan border, not far from the oil lands of the Maracaibo basin. In 1917 General de Barco sold out to the Carib Syndicate in which Henry L. Doherty of Cities Service held 75 per cent interest and J. P. Morgan & Company 25 per cent.

Colombia has been described as the greatest reservoir of oil south of the Rio Grande, not even excepting Maracaibo. Standard Oil of New Jersey has backed that estimate by investing $30,000,000 in the Carare district near the Magdalena River. Two obstacles however prevented the Doherty company from exploiting its Santander concession. Tens of millions must be spent on development and pipe lines before a barrel of petroleum could be pumped into a tanker. And Colombia, swayed by social revolutionary ideas prevalent in Mexico and Russia, was inhospitable to concession-hunters. Scornful American business journalists declared Colombia stood in danger of "Mexicanization."

The immediate issue, as in Mexico, was the validity of titles. Colombia has "the most involved titles of any oil country in the world." That was due partly to the unsurveyed wilderness in a land cut in two by the Andean range and by a marsh and jungle-bounded river. Merchandise which ascended the
Magdalena to Bogota, the capital, was transshipped eight times from the Caribbean wharf to the merchant's warehouse.

To validate the Barco. concession and develop its riches would require pertinacity, deep financial reserves, access to diplomatic pressure. Standard Oil was busy with its own concession. Only one other American petroleum corporation fulfilled the specifications.

The Mellons paid Doherty $1,500,000 on January 5, 1926, for a concession which the Colombian Government was preparing to cancel. Colombia claimed that the concessionaires had failed to carry on the development work  which was called for. On February 2 the concession was formally extinguished. Undismayed, Gulf Oil made its third and final payment to Doherty, and Carib Syndicate shares leaped from 4.25 on the New York Stock Exchange to 14.875.

The spectacle of a nation's gift to a military hero being hawked about by North American petroleum lords offended many Colombians and formed the decisive issue in the campaign which elected Dr. Miguel Abadia Mendez to the Presidency in 1926. "Mexicantization" then reached its highest point. Back of the anti-Yankee sentiment were fifty years of bitter experience. American troops had frequently been landed on the Isthmus of Panama and in 1886 President Nunez warned that "our Panama Canal will be snatched away from us by the Yankees. . . . This nation knows better than any other that the word 'right' has no significance if it is not backed by cannons, rapid-fire guns and ironclads."

The method by which Panama proclaimed its right to self-determination seemed to justify his suspicions. On November 3, 1903, nine U.S. war vessels lay in Panama City and Colon harbors awaiting a revolution scheduled for that day by Bunau-Vairilla, French canal promoter, the American State Department and a handful of Panama politicos. At 3:40 P.m. the State Department cabled its consuls at Colon and Panama: "Uprising on Isthmus reported. Keep Department promptly and fully informed." At 8:15 came the reply from the consul at Panama: "No uprising yet." The State Department's tension relaxed at 9:50 when it was reported that the tardy revolution had been consummated.

The French Canal Company and Bunau-Varilla got $40,000,000; the Panama politicians $10,000,000; the Colombian garrison at Panama $100,000. The Bogota government was told by Secretary Hay not to land troops in their revolting state for fear that it "would precipitate civil war and disturb for
an indefinite period the free transit we are pledged to protect."

Colombia shook with a rage that helplessness distilled into morbid hatred. Martially, the country was beneath the Marines' contempt, but it was annoying to have anti-Yankee propaganda spreading over Latin-America from Bogota at a time when American financiers and entrepreneurs roamed the two continents for bargains and investments. The British oil interests also capitalized anti-Yankee sentiment in seeking oil concessions. Finally the American Government paid $25,000,000 to Colombia amid charges of corruption between Standard Oil and Colombian officials which caused the resignation of President Fidel Suarez. But Standard got its concession.

The Standard Oil scandal was comparable to the Teapot Dome affair in the Republic to the north, but its effect was different.

A militant Congress was swept into power, the Cabinet which had agreed to reconsider the cancellation of the Mellon lease was reprimanded, and new legislation was passed. The emergency oil act required companies to present documentary proof of title within six months and royalties ranged from 8 to 16 per cent, the highest in the world. Standard and Gulf termed unconstitutional and confiscatory the new law and its regulatory decree, which became effective January 28, 1928. Colombia retorted that she was trying to bring order out of the chaos of concessions and that all companies would be dealt with fairly.

The Rockefeller and Mellon firms acted promptly. Francis B. Loomis, former State Department official who helped Roosevelt with the Panama affair in 1903, was retained to present their case to the State Department and President Coolidge. On February 19, 1928, Loomis declared his clients were fighting for American rights. He pointed to Colonel H. I. F. Yates, agent of the British Government's Anglo-Persian Oil Company, who was allegedly seeking a concession near the Panama border.

Five days after Loomis' opening blast, Secretary of State Kellogg instructed Minister Samuel H. Piles to ask Bogota to, suspend the new petroleum legislation until the Colombian Supreme Court had passed on it. The Colombian press was indignant. Colombia is not Nicaragua, it fumed. Allen W. Dulles, former State Department official, now joined Loomis in behalf of the Mellon-Morgan syndicate.

Carlos Uribe, Colombian minister of foreign affairs, asked Minister Piles if the concession he spoke of belonged to the Compania Colombiana de Petroleos, the Colombian company organized by the Mellon and Morgan interests to hold the Barco concession. If so, he declared, "the Secretary of State of the United States has committed an error in initiating this intervention in respect to an affair which, since it deals with the judicial relations between the Government and a national entity, pertains exclusively to the tribunals of the country." Minister Piles replied that 95 per cent of the
Compania Colombiana de Petroleos stock was owned by United States citizens.

On August 4, 1928, President Abadia Mendez reiterated his intention not to withdraw the cancellation of the Barco concession. The concessionaires, he claimed, had not developed their lands in accordance with terms of the grant, or if they had done so, had failed to pay the Government its royalties, in the period between 1923 and 1926. The previous ground for cancellation was based on non-exploitation prior to 1918.

Washington, in a sharp note, expressed its "profound surprise" at the shifted reasons for cancellation and asked thirty days for Gulf Oil to present its objections.

The Colombian Congress boiled over. The whole painful subject of North American-Colombian relations for the last half century was reviewed and the United States pictured as a devouring Giant from the North ready to extinguish Colombia's sovereignty. Secretary Kellogg was charged with an
extravagant solicitude on behalf of his brother Cabinet member, Andrew W. Mellon. Students paraded in approval of Bogota's "rejecting American intervention." At this juncture, on September 22, 1928, Secretary Kellogg demanded a precise answer from Colombia to his note of August asking for thirty days for the Mellon company to file its objections. The explosive and entirely non- diplomatic answer given by the Colombian Congress must have provided subject matter for animated conversation when the American Cabinet met at the White House. Unfortunately for the historian, the comments of Secretaries Mellon, Kellogg and Hoover were not recorded. In any event on September 29, 1928, the Finance and Investment Division of the Bureau of Foreign and Domestic Commerce published Special Circular Number 305, which warned bankers that further investments in Colombian bonds would probably not be safe. In effect a financial embargo had been declared on Bogota: the broad stream of American loans dwindled down to a mere trickle, then dried up.

Although Jefferson Caffery, new minister to Bogota, continued representations, the issue died down. There were no more notes. Andrew Mellon was prepared to wait. His Venezuelan fields were just coming into production while new fields in Oklahoma and Texas were keeping his executives busy. In the meantime Colombia could see how a financial embargo worked.

When he arrived in Washington, Dr. Enrique Olaya Herrera carried with him the prejudices and suspicions concerning the Colossus of the North current in his country. The bias of the new Colombian minister stumbled against what he found to be agreeable evidence of North American energy, achievement, progress.

There was much to be said for the Yankees, he found, and much to be learned by the indolent whites of the Colombian plateau. Dr. Olaya was obliged to admit to himself that Colombia would advance faster if she accepted the help offered by friendly Wall Street bankers.

Back in his native land, discontent arose as prosperity receded and the election of 1930 approached. The world-wide depression and the financial embargo were being felt by Antioquia coffee Planters and Magdalena banana growers; the paralyzing effect of the oil controversy had suspended the
employment of thousands of laborers in Santander and North Santander. It was time for a change.

Dr. Olaya heard the call. He accepted the presidential nomination, hurried home, and stirred Colombia as it had never been stirred in a century of electoral lethargy. Stumping the country by airplane in three weeks, he brought to his candidacy all those props of the enterprising Yankees — publicity men, radio speeches, newspaper handouts, pictures galore. Journalists camped on his trail, the New York papers admiringly recounted his sensational drive. On February 9, 1930, he was elected by a plurality of 121,000, a thumping victory for a country which limits its voters to
substantial and literate property holders.

President-elect Olaya, business-like, surveyed the needs of his country and found them financial. Business-like, he turned to Wall Street. Hardly were the votes counted when the National City Bank received an appeal from the Colombian finance minister to send down a representative. Vice President Victor Schoepperle of the National City Company was dispatched in February, 1930.

The President-elect was off for New York and Washington a few months after his election. In May, 1930, he asked Schoepperle to visit him in Washington to discuss the Colombian financial situation. We need money, he reminded the banker. Vice President Schoepperle shook his head sadly. Yours is a
magnificent country, he said, but it has not been favored with good administration in recent years. "I do not think that the National City Bank would be interested," he said, "in any participation in Colombian financial affairs."

Olaya Herrera was visibly depressed. He implored the banker to suggest a program of a constructive nature. A week later Schoepperle had relented enough to inform the new President that perhaps a syndicate of bankers might help Colombia if a "constructive financial and political program" were
formulated.

The eager Colombian and the shy banker were on the point of contact. Plans for a $20,000,000 credit shaped up, based largely on National City's confidence that "Colombia was to have an administration under Doctor Olaya such as it had not enjoyed for decades." Back of the credit was the promise
that the new Administration would float a $6,000,000 internal loan, would balance the budget, fix a debt limit and turn the national railways over to an autonomous corporation.

To aid Olaya, the State Department assigned H. Freeman Matthews, assistant chief of the Latin-American division, and Jefferson Caffrey, American minister to Colombia. They helped him engage Dr. Edwin W. Kemmerer of Princeton to head a financial commission to reorganize the Colombia fiscal system. George Rublee, petroleum lawyer who had been adviser to Ambassador Morrow in straightening out the Mexican oil law tangle, was retained to advise the Colombian Government on petroleum legislation.

By April, 1931, Rublee had prepared a new petroleum code for Colombia, which President Olaya and his Cabinet presented to Congress with their approval. Olaya's arguments were:
1.    The bill will end the long litigation which has paralyzed the development of Colombia's oil regions.

2.    The delay has caused international repercussions and diplomatic correspondence with adverse comment in the United States and European financial papers. The new bill is evidence of Colombia's desire to settle her difficulties with foreign capital and to repair her international reputation.

3.    Passage of the bill will help the country's finances, for "considering their financial power, the concessionaires might cooperate in financing Colombia" as well as in developing her oil resources.
4.    The proposed pipe line to the Caribbean would open communications with  isolated regions.
5.    The industrial development and colonization of the uninhabited frontier regions will assure Colombian sovereignty.
6.    The psychological factor attending the bill's passage will restore confidence in Colombia abroad.
Returned to the United States, Rublee, although not a diplomatic representative, dropped in at the State Department April 10 to report that the new Colombian petroleum bill was fair to the Colombian Government and to the oil companies. Reports that Texas Oil [Texaco] and Sinclair regarded the new
legislation as partial to the Mellons and were considering retiring from Colombia he declared must be an error.

Back in Colombia the national Legislature, which had little precise knowledge of President Olaya Herrera's National City Bank conversations, was reluctant to rush through the new oil bill. On April 28, 1931, President Olaya regretfully informed the Minister of Industries that the Gulf Oil measure was of sufficient importance to justify the heavy expense of keeping Congress in session until it was passed. On May 3, the Olaya majority forced the Senate into permanent session, after a month of debate. On May 21, the House petroleum committee submitted majority and minority reports. Opposition Deputies accused Olaya of being the Colombian representative of Gulf Oil, United Fruit and the National City Bank. On June 10 the President and his Cabinet visited the House to emphasize that continued litigation with foreign firms must end.

On June 18 the Government bill was passed. Superseding the Barco concession, it provided a fifty-year concession for the Mellon company. The debate preceding the vote was described as having aroused more intense feeling than any other subject in a generation, eclipsing in interest even the controversy over the $25,000,000 treaty settling the Panama dispute. The victory was a triumph for the former Colombian minister to Washington, for George Rublee, for Herbert Stabler, former chief of the State Department's Latin-American division, now South American adviser to the Gulf Oil Corporation.

The new concession provided that prospecting crews must be sent immediately into the new 500,000-acre concession. Seventy-five per cent of the employees must be Colombians. The pipe line estimated to cost $25,000,000 was to be built across Colombian soil to the Caribbean instead of to nearby Lake Maracaibo. Colombia was to be paid $25,000 a year until the Government's oil royalty of 10 per cent of gross production exceeded that figure.

On June 20, 1931, President Olaya signed the bill.

On June 30, the National City Company after several weeks' delay, granted Colombia the last $4,000,000 on its $20,000,000, credit.

To Senator Johnson the evidence brought out before the Senate Finance Committee, investigating the sale of foreign bonds or securities in the United States, proved "how inextricably connected were the executive and legislative action at Bogota, Colombia, concerning the Barco concession, and
the payment of the balance of the loan promised by the National City Bank." The New Republic which claimed familiarity with the ordinary course of "dollar diplomacy," was surprised that "an American Secretary of State had used his high office to persuade the National City Bank of New York to grant an unsound bank credit to the government of Colombia as a means of obtaining one of the world's largest oil concessions for a company controlled by the interests of Mr. Mellon, our Secretary of the Treasury."

It was President Olaya himself who let the cat out of the bag. In an excess of frankness, understandable in a hard-pressed politician anxious to show the folks back home what a big figure he cut in New York and Washington, Dr. Olaya told of a dinner in his honor in Washington. As the President-elect of Colombia, he was feted by the Secretary of State and had occasion to meet the Secretary of the Treasury, he informed the Bogota press. Mr. Mellon had told him that if he would arrange his domestic Petroleum difficulties, Colombia would find its credit situation much better.

A New York Times dispatch of the same date from Bogota summarized the interview in these words: "The President reiterated his confidence in eventual benefits of the Gulf Oil concession and recalled Secretary of the Treasury Mellon's advice to him to settle the petroleum problem to hasten
Colombia's recovery."

Dr. Olaya's indiscretion with the Bogota press caused an international affair. Both Olaya and Mellon rushed to the newspapers with explanations that there was no connection between the ratification of the Mellon-Morgan concession and the granting, ten days later, of the final $4,000,000 credit
by the National City Company. Their explanations only added to public incredulity, for the two principals solemnly asserted that although they had discussed both Colombian oil and finances, they had not touched on Mellon's Gulf Oil Corporation nor the National City Company's financial advances.

President Olaya himself was over-sensitive. The New York Times, editorializing on the incident, had occasion to refer to the "bad smell of oil" in the U. S. Senate when the $25,000,000 Panama balm was voted to Colombia. President Olaya cabled: "The editorial writer in the New York Times
is wholly without justification in using the term 'bad smell' in referring to the banking credit of $20,000,000 which I negotiated with the bankers of New York. There could have been no clearer or cleaner transaction than that into which I entered with two of the most powerful and respectable banking institutions in the United States." The Times commented drily: "It seemed to us so obvious that no offense to Colombia whatever was intended that it is hard to understand how any could have been taken."

Vice President Schoepperle of the National City Company, when queried by Senator Johnson, revealed the single-mindedness of Wall Street bankers in their Latin-American dealings. He didn't care a "damn" about Mellon's Gulf Oil Concession. Despite his trip to Colombia in 1930, he knew nothing of the Gulf Oil concession—the country's paramount political issue. Although George Rublee, President Olaya's special adviser on petroleum legislation, visited him several times after returning from Colombia, there had been no mention of the Gulf Oil concession. Rublee had talked only of Olaya's urgent request that the National City advance the final $4,000,000 credit. The banker protested that the text of the loan agreement between Olaya and National City must be kept secret, at Olaya's insistent demand. H. Freeman Matthews, called to the witness chair by Senator Johnson, said he had been made chief of the Latin-American division of the State Department in November, 1930, following three years of service in Bogota. On May 12, Matthews related, the American legation cabled Washington that President Olaya was impatient at the failure of National City to grant the final $4,000,000. The President, according to the cable, emphasized that he had done everything the Americans wanted, and still the money was not forthcoming. Secretary of State Stimson telephoned the bankers' attorneys May 16, and Matthews later conferred with Schoepperle.

On June 19, the day after the Colombian Chamber had passed the Gulf Oil bill, Minister Caffrey cabled from Bogota that Olaya was specially insistent on action on the National City loan, in view of the favorable action on the Mellon-Morgan concession. Caffrey previously had written the State Department that "if the President can secure the passage of a favorable off bill the bankers will be in an excellent position."

    Matthews' testimony revealed, incidentally, the easy transfer of talent between Washington and Wall Street. Garrard Winston, former chief aide to Secretary Mellon, now was counsel for National City. Allen Dulles, former Under Secretary of State, was now representing Morgan's Carib
Development Syndicate, part owner of the Mellon concession. Herbert Stabler, former chief of the State Department's Latin-American Division, was now on the payroll of Gulf Oil as South American adviser.

Oil Attorney Rublee was disturbed by the conclusions drawn from the testimony on the Gulf Concession and the National City loan before the Senate Finance Committee. "I never heard the remotest suggestion of any connection between the two transactions, and it never occurred to me that anyone could suppose there was a connection until the innuendoes in the recent Senate investigation were thrown out." He was deeply concerned by the fear that Colombia, which "had grown more and more friendly to the United States," might suffer a revulsion of feeling now.

Lawrence Dennis, who had served as a Latin-American officer of the State Department and as a representative of New York banking interests, replied to Rublee:
"The facts appear to be somewhat as follows: First, early in 1931 the American State Department made a grave departure from its traditional policy by acting as an intermediary for the transmission of messages between the oil interests [Gulf] in the United States and their representative in Bogota, who was negotiating for the concession. Many people still feel that the function of diplomacy is to protect acquired rights against arbitrary denials of justice and not to intervene in the negotiations of concession seekers. Needless to say, the cables and mails between the United States and Colombia were adequate in 1931 for the transmission of confidential messages between Mr. Rublee, representing the concession seekers, and his principals in this country.
"Second, on or about May 16, 1931, our Minister to Colombia cabled the State Department that President Olaya was greatly disturbed because the National City Company was withholding final payment of an advance on a bank credit, the grounds being what the State Department officials called 'technicalities' having to do with an alleged failure of the Colombian Government to balance its budget as had been agreed. President Olaya could not understand why the money was being held back, as his Government had complied with every requirement of the bankers, as well as ratifying the Barco concession and passing the desired oil legislation.
"On the receipt of this communication, Mr. Stimson instructed the assistant Chief of the Latin-American division, Mr. Freeman Matthews, to proceed to New York to 'lay before the bankers the point of view of the President of Colombia.' Colombia, of course, has in Washington an Envoy Extraordinary and Minister Plenipotentiary as well as a Consul General in New York—presumably to handle Colombian business in this country.
"It seems evident, as Mr. Rublee states, that these were two unconnected pieces of business; but it also seems evident that the Department of State acted improperly in connection with both. It seems clear, also, that a quid pro quo was asked by President Olaya. and given by Mr. Stimson. It is Mr. Stimson's privilege to put his own interpretation on his acts. It is the privilege of the American people, judging these acts, to take cognizance of circumstances and to reason from cause to effect. The fact that Mr. Stimson refused to reveal to the American people the telegram from President Olaya as well as the correspondence with our Legation at Bogota does not lend support to the Secretary of State's contention."
It was extraordinary. Every test of logic and plausibility pointed to certain conclusions—and those conclusions were invariably wrong. There was no connection between the Gulf Oil concession, Mellon's double position as its chief owner and Secretary of the Treasury, J. P. Morgan & Company's quarter interest in the concession, and the National City loan to Colombia. There was no link between granting the enormously valuable Barco concession to the Mellon-Morgan syndicate and the release of the final installment of the National City loan. Messrs. Mellon and Olaya had discussed Colombian oil and neither had mentioned the Barco concession, the real issue that interested them both. The American State Department did not know officially of the Mellons' stake in the Barco concession. A National City official, traveling several thousand miles to acquaint himself with a strange country, had never discussed its most troublesome political and economic issue—oil.

To those who had followed Andrew Mellon's career it did not seem so fantastic. If in the course of a longish conversation with President Olaya over oil and finance, he had not brought up the subject of the Gulf Oil concession, that was typical of his aloofness from immediate problems. They
remembered when James B. Duke, G. G. Allen and Arthur V. Davis dropped down from New York to chat with the Secretary all evening concerning the perpetual motion of waterfalls. There had been no mention on that occasion of Duke's Quebec Aluminum Company nor of activities calculated to undermine the Mellons' aluminum monopoly, nor of the purchase by the Mellon company of Duke's water power.