Recession of 1937-1938

The recession of 1937-38, also known as the “Roosevelt Recession,” was a sharp downturn of the economy following some recovery from the depths of the Great Depression. Caused largely by a turn to tighter fiscal and monetary policies in 1937, the recession of 1937-38 had important political as well as economic consequences.

Although the New Deal programs and spending of President Franklin D. Roosevelt’s first term did not bring full recovery from the depression, they did contribute to economic improvement. Between 1933 and 1937, unemployment fell from about 25 percent to 14 percent of the labor force, while the gross national product (GNP) rose by an average of nearly 16 percent annually, and national income by about 21 percent annually. Measured in constant 1929 dollars to correct for the falling price levels of the depression, the GNP actually exceeded 1929 levels by 1937. Those gains constitute one of the most impressive peacetime expansions ever, although that was largely because economic indexes had fallen so far by 1933. In 1937, the economy still languished well below full-production, full-employment prosperity.

Roosevelt and Secretary of the Treasury Henry Morgenthau, Jr., thought that the improving economy provided a chance to reduce the budget deficits incurred during the first term, a priority of both men. The administration therefore slashed spending—the Works Progress Administration was cut sharply, removing more than a million people from its rolls—at the same time that new payroll taxes under the Social Security Act took money from consumers. Worried like Roosevelt and others in the administration about inflation, the Federal Reserve Board imposed tighter monetary policy by raising reserve requirements for banks, and the Treasury Department “sterilized” incoming gold by putting it in inactive accounts instead of using it to increase the money supply. In addition, New Deal labor and taxation policies from 1935 to 1937 had the effect of further worrying and alienating business and thus inhibiting private investment.

In the late summer and fall of 1937, the economy abruptly turned down; indeed, indexes dropped faster (though not farther nor for as long) than at the outset of the Great Depression. The Dow Jones industrial stock average sank from 190 to 115 in three months; steel production fell off by 75 percent; corporate profits plummeted by 80 percent; and unemployment shot up some 25 percent, to nearly 10 million, in the winter. By the spring of 1938, payrolls and industrial production were down by more than one-third, and the Dow Jones was off by nearly 50 percent. Unemployment for 1938 was 19 percent of the labor force.

The new economic collapse led to a serious reconsideration of economic policy within the administration. Mor-genthau continued to urge balanced budgets to restore economic health and confidence, while Postmaster General (and Democratic National Committee chairman) James A. Farley and others recommended moderating regulation, tax, and other polices that disturbed business and impeded investment and production. Advocates of antimonopoly policy, led by Leon Henderson, maintained that economic concentration had led to restrictions on production and to higher prices, resulting in reduced investment, production, employment, and income. They argued for stepping up antitrust policy. Others, led by Marriner Eccles and Harry L. Hopkins, advocated returning to the deficit spending that had evidently produced the 1933-37 expansion. The antimonopoly and spending approaches were not mutually exclusive, for Henderson was among the New Dealers converted by 1938 to Keynesianism, the idea that government deficit spending could compensate for inadequate private spending and stimulate the economy.

In mid-April 1938, Roosevelt announced an emergency increase in RELIEE spending, and then at the end of the month requested that Congress form a special committee to look into economic concentration. In June, Congress established the Temporary National Economic Committee (TNEC). As the economy began to expand again, especially with the beginning of heavy spending for World War II, Keynesian ideas reoriented liberalism toward seeking full-production, full-employment prosperity by means of government compensatory spending—a change in the liberal agenda that was central to what some scholars have called the Third New Deal of Roosevelt’s second and third terms. Meanwhile, antimonopoly efforts faded.

But the recession had political implications beyond the reorientation of the New Deal and liberalism. It weakened Roosevelt’s popularity and power, emboldened conservative critics, and contributed to the formation of the conservative coalition in Congress that would henceforth thwart significant expansion of the New Deal and roll back some New Deal reforms when it could. The recession of 1937-38 was thus in several ways one of the most important episodes in Roosevelt’s eventful second term.

See also eiscal policy.

Further reading: Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York: Knopf, 1995); Dean L. May, From New Deal to New Economics: The American Liberal Response to the Recession of 1937 (New York: Garland, 1981); Kenneth D. Roose, The Economics of Recession and Revival: An Interpretation of1937-38 (New Haven, Conn.: Yale University Press, 1954).