Financial & Economic Crisis

Recession of 1937 in the USA

The Recession of 1937 was a sharp economic downturn in the United States in 1937-38. It was part of the Great Depression in the United States, and had serious political results, and helped strengthen the new Conservative Coalition led by Senators Robert A. Taft and Richard B. Russell. Economic historians have not agreed on the causes, but many of the causes show that because the New Deal involved spending money from the Federal budget, President Roosevelt had to end New Deal spending, and thus programs, as a result.

 

In 1937 the American economy took an unexpected nosedive, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. The Roosevelt administration reacted by launching a rhetorical campaign against monopoly power, which was cast as the cause of the depression, and by appointing Thurman Arnold to act; Arnold's effectiveness ended once World War II began and corporate energies had to be directed to winning the war.

The administration's other response to the 1937 deepening of the Great Depression had more tangible results. Ignoring the pleas of the Treasury Department, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power. Business-oriented observers explained the recession and recovery in very different terms from the Keynesians. They argued that the New Deal had been very hostile to business expansion in 1935–37, had encouraged massive strikes which had a negative impact on major industries such as automobiles, and had threatened massive antitrust legal attacks on big corporations. All those threats diminished sharply after 1938. For example, the antitrust efforts fizzled out without major cases. The CIO and AFL unions started battling each other more than with the corporations, and tax policy became more favourable to long-term growth, according to this argument.

On the other hand, according to economist Robert Higgs, significant GDP growth resumed only in 1946 when looking only at the supply of consumer goods. To Keynesians, the war economy showed just how large the fiscal stimulus was required to end the downturn of the Depression, which led, at the time, to fears that as soon as America demobilized, it would return to Depression conditions, and industrial output would fall to pre-war levels. This Keynesian prediction however failed to take into account massive savings and pent-up consumer demand, along with the ending of the restrictive wartime regulations in most consumer industries, and the cutting of high tax rates starting in 1946. In any case, government spending and changing regulations being tightened first and then loosened appear to have contributed to the recovery with consumer and producer behaviour changed.

Background

By 1936, all the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high. In 1937, the American economy took an unexpected downturn, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. In two months, unemployment rose from 5 million to over 9 million, reaching almost 12 million in early 1938. Manufacturing output fell off by 40% from the 1937 peak; it was back to 1934 levels. Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15% lower than it had been at the peak in 1937. In most sectors hourly earnings continued to rise throughout the recession, which partly compensated for the reduction in the number of hours worked. As unemployment rose, consumers' expenditures declined, leading to further cutbacks in production.

Response

The Roosevelt Administration reacted by launching a rhetorical campaign against monopoly power, which was cast as the cause of the depression, and appointing Thurman Arnold to act; Arnold was not effective, and the attack ended once World War II began and corporate energies had to be directed to winning the war.
The Administration's main response to the 1937 recession was a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power. Business-oriented observers explained the recession and recovery in very different terms from the Keynesians. They argued the New Deal had been hostile to business expansion during 1935–1937 and had encouraged massive strikes.

Recovery

Things started to get better in mid-1938 although employment did not regain the 1937 level until the war boom began in late 1940. Productivity steadily increased, and output in 1940 was well above the levels of both 1929 and 1937. Personal income in 1939 was almost at 1919 levels in aggregate, but not per capita. The farm population had fallen by 5%, but farm output was up 19%, so the remaining farmers were better off than the average farmer in 1939.

By 1937 employment in private sector factories recovered to the level of the late 1920s but did not grow much bigger until the war came and manufacturing employment leaped from 11 million in 1940 to 18 million in 1943.

 

 
This article uses material from the Wikipedia article "Recession of 1937"

 

 

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