What Caused the Recession of 1937?

The Recession of 1937, often seen as a recession within the Great Depression, stands out as a critical event in economic history. But, What caused the recession of 1937?

It offers a window into the complexities of economic recovery and the impacts of policy decisions. This article explores the causes, responses, and lessons from this pivotal downturn.

In the midst of an unsteady recovery from the Great Depression, the United States economy faced another significant setback. The Recession of 1937, also known as the “Roosevelt Recession,” lasted approximately 13 months, from May 1937 to June 1938. 

This period was marked by a sharp decline in economic activity. Understanding what caused the recession of 1937 helps economists and policymakers anticipate and mitigate future crises.

Background

The Great Depression began with the stock market crash of 1929 and extended through the early 1930s, characterized by widespread bank failures, high unemployment, and significant economic contraction. 

President Franklin D. Roosevelt’s New Deal brought about relief, reform, and recovery efforts. By 1937, these policies had started to bear fruit, ushering in a period of reduced unemployment and improved economic conditions. However, this recovery was short-lived.

What Caused The Recession of 1937?

The Recession of 1937 was more than a mere economic slump; it was a dramatic reversal of the recovery gains made since the Great Depression’s peak. 

Industrial production fell nearly 30 percent, unemployment jumped from 14 percent to 19 percent, and GDP declined sharply. This downturn forced many to reconsider the progress and stability of the American economy in the 1930s.

Key Factors Leading to the Recession

Several key factors contributed to the downturn of 1937. Each played a role in stifling the delicate recovery from the earlier depression.

Reduction in Government Spending

The federal government curtailed spending to decrease the deficit, which led to reduced investment in public projects and social programs. This shift had a multiplier effect, quickly rippling through various economic sectors and reducing demand.

Tightening of Monetary Policy

The Federal Reserve’s decision to double the reserve requirements for banks in three stages was another contributing factor. Intended to curb stock market speculation, this policy inadvertently restricted the money supply, leading to a credit crunch.

Decrease in Consumer Spending

High unemployment rates persisted, and consumer fear remained widespread. Uncertainties regarding job security and income led Americans to save rather than spend, further contracting the already vulnerable economy.

The Undistributed Profits Tax

Implemented in 1936, the Undistributed Profits Tax imposed taxes on companies’ retained earnings. This deterred businesses from investment and expansion, which had previously been a key driver in the recovery.

International Trade Issues

Global economic conditions and trade policies also influenced the recession. While the Reciprocal Trade Agreements Act aimed at increasing American exports, international markets were still recovering from the depression, limiting the effectiveness of trade agreements.

Critical Analysis of Policy Decisions

A close examination of the New Deal policies prior to the recession reveals both commendable intentions and miscalculations. 

While some policies had provided relief and spurred recovery, others, such as the hasty fiscal and monetary contractions, appear to have been precipitous, contributing to the severe downturn.

The Recession’s Impact

The impacts of the recession were multifaceted, affecting employment rates, industrial production, and the livelihoods of millions. 

The tangible consequences of rising unemployment and a declining GDP were juxtaposed with the intangible effects of eroding public confidence.

The Response to the Recession

The Roosevelt administration responded by reversing some of its previous policies, boosting federal spending, and relaxing monetary policy. 

By 1938, these adjustments started to foster economic improvement, laying the groundwork for more robust growth in the following years.

Lessons Learned

The Recession of 1937 serves as a testament to the importance of fiscal and monetary stability, particularly during periods of economic recovery. It has driven discussions around how governments should balance budgetary concerns against the need to stimulate growth.

Frequently Asked Questions

What were the main signs that a recession was beginning in 1937?

The main signs of the recession beginning in 1937 included a sharp decline in industrial production, a significant rise in unemployment from 14% to 19%, and a decrease in consumer spending.

How did the 1937 recession affect the overall length and severity of the Great Depression?

The 1937 recession deepened the economic difficulties of the Great Depression, delaying full recovery. It temporarily reversed the improvements made under New Deal policies, extending the depression’s impact into the late 1930s.

What specific New Deal policies contributed to both the recovery from the Great Depression and the subsequent recession of 1937?

Specific New Deal policies that contributed to recovery and then to the recession include the National Industrial Recovery Act (NIRA), which initially boosted economic activity, and the tightening of monetary policy along with reductions in federal spending, which contributed to the 1937 downturn.

How did World War II ultimately impact the recovery from the 1937 recession?

World War II dramatically increased industrial production and employment as part of the war effort, effectively ending the Great Depression and the lingering effects of the 1937 recession by significantly boosting economic demand.

Are there parallels between the recession of 1937 and any economic downturns in the 21st century?

Yes, there are parallels, such as the 2008 financial crisis, where tightening credit conditions, falling industrial production, and reduced consumer spending echoed the earlier recession, although the causes and policy responses varied.

How could the recession of 1937 have been avoided, according to economic historians?

According to economic historians, the recession of 1937 could have been avoided with more gradual adjustments in fiscal and monetary policies, avoiding the sharp pullback in government spending and the sudden tightening of monetary policy that contributed to the downturn.

Conclusion

By dissecting the causes, aftermath, and responses to the Recession of 1937, we gain valuable insights into the intersection of economic policy and market realities. Reflecting on this history not only provides perspective but also informs current financial and monetary approaches.

The 1937 recession remains a pivotal event for scholars and policymakers alike, underscoring the significance of informed and prudent economic decision-making.