Recession of 1937

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In the six months between August 1937 and January 1938 the U.S. economy dropped as sharply as it had during the thirteen months following the stock market crash of 1929. From the peak in March 1937 to the trough in April 1938, stock prices fell 58 percent, employment 28 percent, and payrolls and industrial production 43 percent.

The recession came in the middle of Franklin D. Roosevelt's second term, after an extended period of slow but evident recovery. The president and his advisors understood clearly that the recession's implications for domestic politics and international ideological struggles were potentially of enormous consequence. The New Dealers had carefully constructed their public image as happy days depression busters and pointedly contrasted that with their image of Hoover and the Republicans as the party of gloom and depression. Now it appeared that the Roosevelt administration had its own depression.

Moreover, the apparent economic vitality of the new totalitarian regimes of both the left and right in Europe and Asia cast the recession as a threat not only to New Deal political survival, but to the survival in the world of liberalism itself. It became vital for the United States to demonstrate that liberal capitalism could achieve economic recovery, not only for the economic well-being of its own citizens, but to counter the threats of fascism and communism around the world, a struggle that was highlighted at the time by the civil war in Spain. Faced with the gravest crisis of his administration thus far, Roosevelt seemed immobilized as policy advisors bickered over possible ways to reverse the downturn.

Economic conditions early in 1937 had brought Marriner S. Eccles, chairman of the Federal Reserve Board, and Henry Morgenthau, Jr., the secretary of the treasury, into momentary agreement on federal fiscal and monetary policy. The inflow of newlyinstituted Social Security taxes, together with the ending of veterans' bonus payments, had given the appearance of a sharply improved budgetary situation, occasioning a fear of inflationary pressures. The Federal Reserve Board responded by raising reserve requirements and supporting the Department of the Treasury's advocacy of a cutback in federal expenditures to help achieve a balanced budget for 1938.

These policies choked the frail recovery and by August the economy was showing signs of recession. At that point the policy recommendations of Eccles and Morgenthau began to diverge sharply. Since coming to Washington in 1934, Eccles had advocated federal expenditures as the most effective means of stimulating the economy during depression. When the 1937 downturn began, he backed quickly away from the monetary and fiscal constraint he had advocated earlier in the year, and he urged the president to resume spending. Morgenthau had long seen himself as the conscience of his friend and mentor Roosevelt, particularly in matters of fiscal integrity. Morgenthau had advocated balancing the budget early in 1937 as a counter to inflation and a happy consequence of recovery, but, unlike Eccles, his policy recommendations did not change when the economy began to falter. Indeed, they became even more rigid.

Morgenthau's contacts in the financial world had persuaded him that New Deal policies had been discouraging investment and inhibiting full recovery. He believed investors had lost confidence in the administration because year after year Roosevelt had failed to deliver the balanced budget he had promised since his first campaign for the presidency in 1932. The best thing the president could do to counter the recession, Morgenthau believed, would be to boost business confidence by making a firm commitment to a balanced budget.

These opposing perspectives defined the struggle that continued through the winter of 1937 to 1938. Morgenthau had ready access to the president through their regular Monday luncheons. Early in the recession Roosevelt seemed to be leaning toward Morgenthau's point of view. Eccles, head of an independent regulatory commission, was not part of the White House inner circle, and he made his argument for increased spending through associates with better access to the president, including especially Harry L. Hopkins, a close friend of the president and head of the Federal Emergency Relief Administration since 1933 and the Works Progress Administration since 1935. Eccles corresponded with Hopkins during the latter's surgery and convalescence at the Mayo Clinic that winter. Eccles also maintained regular contact with Hopkins's assistants, Aubrey Williams and Leon Henderson, and with Beardsley Ruml, a former Macy's executive whom Eccles had appointed director of the New York Federal Reserve Bank.

As the depression deepened, the President was shaken by the German takeover of Austria on March 12, 1938, an event, ominous in itself, that precipitated another slide in stock prices. On March 22, Roosevelt left Washington for his traditional retreat at Warm Springs, Georgia. Morgenthau took a vacation to Sea Island, Georgia, at the same time. Hopkins, now recuperated, arranged meetings with the president at Warm Springs, where, armed with memos from Aubrey Williams, Leon Henderson, and Beardsley Ruml, he urged Roosevelt to endorse renewed spending. Hopkins did so not as an expedient response to the recession, but because he saw renewed spending as the foundation for a new direction in government policy where "national intervention to stimulate consumption" would provide purchasing power, making it possible for not just the privileged few but for the "whole culture" to express itself "through actions of individual consumers." Such a policy, Hopkins and others argued, would lead to an increase in public purchasing power, a demand for consumer products, the opening and expansion of production and distribution facilities to meet that demand, jobs to staff those revived industries, and eventually "the abolition of poverty in America."

The argument, well designed to appeal to Roosevelt, was effective. Despite Morgenthau's threats to resign, the president on April 14 announced to Congress and that evening to the public (in his first fireside chat since the previous October) a major new spending program and a request that the Federal Reserve Board reduce reserve requirements. Roosevelt's announcement, which relied heavily on the memos Hopkins and his aides had presented to him at Warm Springs, assured Americans that "dictatorships do not grow out of strong and successful governments, but out of weak and helpless ones." He pointed out that federal expenditures "acted as a trigger to set off private activity." The cost of the new spending program would be minimal, he argued, compared to the enormous loss in national income caused by the recession.

By mid-summer 1938 the economic decline had been halted and recovery was back on track. Although the causes of the "Roosevelt recession" and the subsequent recovery are still debated among economists, there can be no doubt that the recession crisis marked a major turning point in New Deal ideology. The rise of dictatorships in Europe and Asia made adherence to American liberal values a necessary concomitant of a recovery program. A compensatory monetary and fiscal policy fit the bill perfectly, avoiding direct intervention in economic decision-making at the grassroots level and employing only long-accepted macroeconomic instruments of fiscal and economic policy. Though the level of public investment needed to bring about full recovery was well beyond what Roosevelt and his advisors imagined, and would not be implemented until the war, a new credo for American liberalism had been formulated.



Blum, John Morton. From the Morgenthau Diaries, 3 vols. 1959–1967.

May, Dean L. From New Deal to New Economics: The American Liberal Response to the Recession of 1937. 1981.

Roose, Kenneth D. The Economics of Recession and Revival: An Interpretation of 1937–38. 1954.

Stein, Herbert. The Fiscal Revolution in America. 1969.

Dean L. May