The 1937 recession happened during the post-World War II recovery period. The recovery began in 1933 and reached a pinnacle during WWII. The 1937 recession existed in the shadow of the Great Depression until the 2008 financial crisis reignited interest in mid-recovery contractions. The recent recession’s resemblance to the Great Depression has spurred interest in the period “Within the Depression, there is a recession.” Policymakers hope to learn from this historical occurrence in order to prevent it from happening again.
According to the National Bureau of Economic Research, the 1937 recession, which ran from May 1937 to June 1938, was America’s third-worst in the twentieth century, trailing only the 1920 and 1929 recessions. The severity of the 1937 recession is revealed by a few statistics: The real GDP declined by 10%. Unemployment, which had been steadily declining since 1933, reached 20%. Finally, industrial production dropped by 32%. (Bordo and Haubrich 2012).
According to the literature on the issue, a contraction in the money supply caused by Federal Reserve and Treasury Department policies, as well as contractionary fiscal policies, were likely causes of the recession. To avoid an uprising in 1936, “To absorb banks’ excess reserves (money above the amount banks were required to maintain as a fraction of customers’ deposits) during “harmful credit expansion,” Fed regulators boosted reserve requirement ratios (Federal Reserve Bank of St. Louis 1936). In 1933, excess reserves averaged around $500 million. They grew from $859 million in December 1933 to nearly $3.3 billion in December 1935, which is remarkable (Roose 1954).
Why did banks maintain such significant amounts of reserves, one could wonder? The Atlanta Fed responded to this question in a paper published in 2010. (Dwyer 2010). Uncertainty, which was linked to bank runs from 1929 to 1933 and the resulting economic troubles, most likely explains a portion of the rise in surplus reserves. Friedman and Schwartz (1963) agree that after the 1929 catastrophe, banks boosted their preference for reserves. Low interest rates also contributed to the high amount of surplus reserves, and may well have been a more major factor in their growth. The reason for this is that holding significant amounts of non-interest-earning reserves is less expensive than incurring the fixed cost of adjusting when short-term rates are low.
In late June 1936, the Treasury decided to sterilize gold inflows in order to reduce excess reserves, which complimented the Fed’s contractionary stance. Gold inflows and monetary expansion were separated by the sterilizing policy. This strategy abruptly halted what had been a rapid monetary expansion by preventing gold inflows from becoming part of the monetary base. According to Friedman and Schwartz (1963, 544), “The combined impact of higher reserve requirements and, perhaps more importantly, the Treasury’s gold-sterilization program slowed the rate of increase in the monetary stock and eventually turned it into a decrease.” The purpose of this little essay is to point out that there is continuous disagreement regarding which policy has had the greatest contractionary effect.
Fiscal policy hasn’t improved matters much. The Social Security payroll tax was implemented in 1937, on top of the Revenue Act of 1935-mandated tax increase. Changes in the net effect of government spending have been cited as a contributing factor to both the recession and the resurgence of 193738. Marriner Eccles, for example, said in 1939 that the “Too quick withdrawal of the government’s stimulus…combined with other significant reasons… accelerated deflation in the fall of 1937, which persisted until the government’s current expenditure program began last summer” (Federal Reserve Bank of St. Louis 1939). The fact that this position is shared by high-ranking officials adds to the need of examining government budgetary policy.
After the Fed lowered reserve requirements, the Treasury stopped sterilizing gold inflows and desterilized all gold that had been sterilized since December 1936, and the Roosevelt administration pursued expansionary fiscal policies, the recession ended. From 1938 to 1942, the rebound was spectacular: Gold inflows from Europe and a substantial defense buildup spurred a 49 percent increase in output.
In terms of recovering from the recent financial crisis, the 1937 incident serves as a model “A cautionary tale,” observed economist Christina Romer, regarding the dangers of withdrawing economic aid too soon: A return to economic deterioration, if not outright panic, is possible. In 2012, Chicago Fed President Charles Evans had a similar viewpoint: “Policymakers have a natural temptation to reduce accommodation too soon, before the actual rate of interest has fallen to low enough levels. In 1937, the Fed made a similar error by prematurely withdrawing accommodation.” In short, the 1937 recession serves as a cautionary tale.
Quizlet: What Caused the Roosevelt Recession in 1937?
In June 1937, federal spending was reduced to suit Roosevelt’s long-held conviction in a balanced budget. He hoped that by this time, the economy had recovered sufficiently to fill in the voids left by government cuts. Cutbacks, on the other hand, resulted in the so-called Roosevelt Recession.
What triggered the Roosevelt Recession of 1937-38?
Many economists have previously made comparisons between the years 19291932 and 20072009, as well as the present recovery period to the years 19331939. It was just a matter of time before they started drawing parallels between the 1937 recession and a possible “double dip” now.
A reduction in deficit spending and an increase in bank reserve requirements by part of the Federal Reserve preceded the 1937 recession. It is also known as “Roosevelt’s recession” because it is a superb example of how a reduction in government spending combined with tight monetary policy may lead to economic devastation. So goes the official story.
The real takeaways from Roosevelt’s Depression are rather different. Excessive government regulation and loose monetary policy were to blame for the 19371938 slump, not rigid fiscal and monetary policy. We must dispel the myth that the market will fail without deficit spending and easy credit.
The official narrative describes a period of recovery following Franklin Delano Roosevelt’s election to the presidency. He took over from the penny-pinching Herbert Hoover, who erroneously believed in the free market’s ability to right itself. Roosevelt began pouring money into public-works projects, social-insurance programs, and other forms of government assistance almost immediately. Despite the fact that the government accumulated a large amount of debt, the economy recovered at a fair rate between 1933 and 1936, averting permanent poverty and suffering.
Roosevelt made the decision to balance the budget and dramatically reduce deficit spending in 1937. The Federal Reserve increased reserve ratio requirements for member banks almost simultaneously, causing the monetary base to decline. The economy has sunk back into a slump. The economy was not strong enough to support itself, and tight fiscal and monetary policy caused a volatile market to sway in the face of an otherwise stable recovery period.
The official history is summarized by Christina Romer, Barack Obama’s current head of economic advisors:
In the four years following Franklin D. Roosevelt’s inauguration in 1933, the economy recovered at a breakneck pace. Annual real GDP growth was over 9% on average. Unemployment has decreased from 25% to 14%. With the exception of the Second World War, the United States has never seen such persistent, rapid development.
However, in 193738, a second severe downturn halted expansion, with unemployment rising to 19 percent…. The main reason of the second recession was an unlucky, and mostly unintentional, shift to contractionary fiscal and monetary policies. The deficit was decreased by nearly 2.5 percent of GDP, putting severe downward pressure on the economy.
Official history is frequently proven to be incorrect. This is not an aberration in the history of the Great Depression. The notions that Herbert Hoover was a lax president and that Franklin D. Roosevelt’s New Deal opened the way for recovery have been debunked elsewhere. Only the myths of 1937 will be discussed in this section.
What happened at the end of the Great Depression?
A frequent misconception is that World War II’s massive spending ended the Great Depression. However, World War II entrenched the steep drop in living standards brought on by the Great Depression. Contrary to the interpretation of Keynesian so-called economists, the Depression was actually ended, and prosperity was restored, by sharp reductions in expenditure, taxation, and regulation at the close of World War II.
True, at the commencement of World War II, unemployment was on the decline.
However, sending millions of young American men to fight and die in the war left a statistical imprint.
As demonstrated after the war, there are better approaches to minimize unemployment.
Is there a distinction between a recession and a depression?
A recession is a negative trend in the business cycle marked by a reduction in production and employment. As a result of this downward trend in household income and spending, many businesses and people are deferring big investments or purchases.
A depression is a strong downswing in the business cycle (much more severe than a downward trend) marked by severely reduced industrial production, widespread unemployment, a considerable decline or suspension of construction growth, and significant cutbacks in international commerce and capital movements. Aside from the severity and impacts of each, another distinction between a recession and a depression is that recessions can be geographically confined (limited to a single country), but depressions (such as the Great Depression of the 1930s) can occur throughout numerous countries.
Now that the differences between a recession and a depression have been established, we can all return to our old habits of cracking awful jokes and blaming them on individuals who most likely never said them.
What happened in the first 100 days of FDR’s presidency?
On March 4, 1933, when Franklin D. Roosevelt was sworn in as the 32nd president of the United States, the first 100 days of his presidency began. “I am prepared under my constitutional duty to recommend the steps that a stricken nation in the middle of a devastated globe may necessitate,” he said in his inaugural address, signaling his desire to move with unprecedented haste to solve the nation’s challenges. Getting Americans back to work, protecting their investments and restoring prosperity, offering relief for the sick and aged, and reviving industry and agriculture were all top concerns for Roosevelt at the start of his presidency.
He immediately called a three-month (almost 100-day) special session of the United States Congress, during which he presented and quickly enacted a series of 15 significant laws aimed at combating the impacts of the Great Depression. During his first 100 days in office, President Roosevelt also approved 76 laws, many of which were aimed at rebuilding the US economy through different public works programs. Many other presidents made critical decisions within their first 100 days after Roosevelt’s three terms in office (and just under three months of a fourth).
June 11, 1933 marked the 100th day of his presidency. Roosevelt originated the phrase “first 100 days” in a radio address on July 24, 1933. “We all sought a little calm thought to review and synthesize in a mental image the pressing events of the hundred days which had been committed to the starting of the wheels of the New Deal,” he began, looking back. Since then, the first 100 days of a president’s term have taken on symbolic significance, with the period serving as a barometer for a president’s early success.
What was one of the New Deal’s long-term consequences?
Conservation became a persistent component of the political agenda after the New Deal. As government workers practiced soil conservation, erected dams to prevent flooding, and reclaimed the Great Plains grasslands, New Deal projects changed the face of the country.
Quizlet: What is Keynesian Economics?
Keynesian economics is a type of economics developed by John Maynard Keynes a type of demand-side economics that urges the government to intervene in the market to raise or lower demand and output. Economics on the demand side. the concept that government expenditure and tax cuts boost demand in the economy.
Is the Great Depression considered an epoch?
The Great Depression, which lasted from 1929 to 1939, was the worst economic downturn in the history of the industrialized world. It all started after the October 1929 stock market crash, which plunged Wall Street into a frenzy and wiped out millions of investors.
Why did the Great Depression finally come to an end in 1939?
What was the final straw that brought the Great Depression to an end? That is possibly the most important question in economic history. If we can answer that, we will have a greater understanding of what causes and cures economic stagnation.
The Great Depression was the country’s worst economic downturn. Unemployment was always in double digits from 1931 until 1940. More over one in five Americans could not find job in April 1939, nearly ten years after the crisis began.
On the surface, World War II appears to bring the Great Depression to an end. More over 12 million Americans served in the military during the war, with a similar number working in defense-related jobs. Those war jobs appeared to have provided employment for the 17 million unemployed in 1939. As a result, most historians credit tremendous military spending as the catalyst for the Great Depression’s end.
Some economists, particularly Robert Higgs, have sensibly questioned this conclusion. Let’s be honest. The significance of world peace is called into question if the solution for economic recovery is to put tens of millions of people in defense plants or military marches, then have them build or drop bombs on our enemies overseas. Building tanks and feeding soldiers, while critical to win the war, became a crippling financial burden. We simply exchanged debt for joblessness. The national debt increased from $49 billion in 1941 to about $260 billion in 1945 as a result of the costs of World War II. To put it another way, the conflict had just postponed the problem of recovery.
Even President Roosevelt and his New Dealers saw that spending on the war was not the best option; they feared that after Hitler and Hirohito surrendered, the Great Depression would return, with higher unemployment than ever. FDR’s staff, on the other hand, was adamant about federal expenditure, which, as I explain in New Deal or Raw Deal?, had exacerbated the roots of the Great Depression in the 1930s.
Because winning the war came first, FDR had paused many of his New Deal projects during the war, allowing Congress to abolish the WPA, the CCC, the NYA, and others. When it became clear that the Allies would win in 1944, he and his New Dealers promised a second bill of rights to prepare the country for his New Deal resurrection. The right to “sufficient medical care,” a “good house,” and a “useful and remunerative work” were all included in the President’s bundle of new entitlements. These rights put obligations on other Americans to pay taxes for eyeglasses, “good” houses, and “useful” jobs (unlike free speech and religion), but FDR believed his second charter of rights was a step forward in thinking from what the Founders had envisioned.
Due to Roosevelt’s death in the final year of the war, he was unable to announce his New Deal resurrection. Most of the new measures, however, were supported by President Harry Truman. In the months following the war’s end, Truman delivered big speeches for a full employment bill, which would provide jobs and expenditure if individuals were unable to find work in the private sector. He also advocated a federal housing scheme and a national health-care program.
However, 1946 was not the same as 1933. FDR’s New Deal received substantial Democratic majorities in Congress and widespread public support in 1933, but stagnation and unemployment persisted. Truman, on the other hand, had only a slim Democratic majorityand no majority at all if the more conservative southern Democrats were excluded. Furthermore, the failure of FDR’s New Deal left fewer Americans hoping for a repeat performance.
In sum, Truman’s New Deal resurgence was stymied by Republicans and southern Democrats. They emasculated his bills at times and simply murdered them at others.