Featured Article: Roosevelt's Recession: A Historical and Econometric Examination of the Roots of the 1937 Recession
Having been witness to the unprecedented number of bank failures that took place only months earlier, banks strengthened their reserves at the onset of the second crisis. With more urgency than before, banks shored up their reserves by liquidating assets, while depositors converted deposits to currency. Between February and August 1931, total commercial bank deposits declined at a value greater than the total decline experienced in the eighteen months before February. From August 1931 to January 1932, 1,860 banks, with combined deposits of $1.45 billion, closed their doors.
In addition to the internal drain that banks faced from customer withdrawals, they also faced external pressures. In September 1931, Britain’s departure from the gold standard fueled fears that the United States would follow. In fear of American departure from the gold standard, foreign central banks and international investors started converting dollar assets to gold. The Federal Reserve, in turn, sharply increased the rediscount rate.
The events outlined above placed a large downward pressure on the money supply. According to Friedman, the decline in money supply could have been avoided if the Federal Reserve initiated large-scale purchases of government securities. In April 1932, after heavy political pressure from Congress, the Federal Reserve commenced on a $1 billion purchase of government securities. However, the financial sector looked down upon the Federal Reserve’s operations because many considered the purchases to be inflationary.
The purchases temporarily stabilized the financial system. By late 1932, conditions had improved in the banking sector. The value of currency held by the public peaked in July and declined through the end of the year, meaning that the public hoarded less cash. Total demand deposits, which had been declining for over a year, reached a minimum in July and increased until the end of 1932. Similarly, total time deposits reached their minimum in September and increased through the end of the year. The positive banking sector developments, during the latter half of 1932, broke what was a yearlong downward trend. Once again, recovery seemed to be on the horizon; however, trouble brewed.
In the last quarter of 1932, a series of banks failed in the West and Midwest. Yet again, fear flourished, and the public’s demand for currency increased; the banking crisis of 1933 was underway. The 1933 crisis was unlike those that preceded it, and its impact was felt across the entire country.
On the eve of President Roosevelt’s inauguration, Friday, March 3, thirty-two states had closed all their banks, six states had closed most of their banks, and ten states had placed restrictions on withdrawals. On the third day of his Presidency, Monday, March 6, President Roosevelt declared a nationwide banking holiday between March 6 and March 9. On March 9, the President indefinitely extended the banking holiday until otherwise declared in a subsequent proclamation; the undefined holiday lasted until March 13.
It’s important to note that President Roosevelt’s bank holiday proclamations held the power of law due to his administration’s unique interpretation of executive emergency powers. The White House more broadly interpreted the definition of national emergency outlined in the 1917 Trading with the Enemy Act. Intended for use during war, the Act failed to make war a prerequisite for the declaration of national emergency and the assumption of executive emergency powers. President Roosevelt’s use of emergency powers created a controversial precedent for future Presidents.
On March 12, on the eve of the conclusion of the final banking holiday, President Roosevelt addressed the nation in his first fireside chat and called on the country to “unite in banishing fear.” The public’s positive response to President Roosevelt’s first fireside chat was unprecedented.
The Depression-era bank runs were atypical not only due to their severity, but also due to the banking sector’s response. Unlike those crises that preceded them, the 1930’s banking crises occurred under the watch of the Federal Reserve. Prior to the establishment of the Federal Reserve in 1913, banks typically responded to such conditions by restricting the conversion of deposits into currency. Without fear of failure due to currency withdrawals, banks were able to stay open long enough to build their liquidity positions.
During the Depression, privately organized efforts to shore up the banking system were very limited because the banking sector generally assumed that it was no longer necessary to organize and adopt wide-scale conversion restrictions. Friedman contends, “the very existence of the Reserve System concerted [conversion] restriction” due the Federal Reserve’s role as lender of last resort. He believes that stronger banks had less of an incentive to utilize conversion restriction as a tool because they had a new escape mechanism that didn’t exist before 1913: discounting. This new system rested on the assumption that the Federal Reserve would actively intervene in times of crisis. However, the intervention, or lack thereof, did not necessarily contribute to recovery.
Although Friedman and Schwartz unwaveringly argue that monetary policy caused the Depression, one cannot ignore the other unwavering argument put forward by John Maynard Keynes. Keynes and his followers argue that the lack of fiscal policy leadership, in other words the lack of government stimulus spending, transformed what could have been a small economic downturn into a full-blown depression. Alive decades before Friedman, Keynes actually lived through the Depression. Rooted in the study of economic downturns, Keynes’ theories fundamentally changed macroeconomics and shaped government policy for nearly a century.
Early during the Depression, Keynes advocated for government spending to stimulate the economy. His lonely voice stood in contrast to prevailing wisdom of the time. Almost universally, economists and politicians agreed that balanced budgets were a prerequisite for recovery. Eric John Hobsbawm, a British historian of industrial capitalism, colorfully summarized the state of economic thought in the early 1930’s:
The economists… nailed their flag to the mast of Say’s Law which proved that [economic] slumps could not actually occur at all. Never did a ship founder with a captain and crew more ignorant of the reasons for its misfortune or more impotent to do anything about it.
Although Hobsawm’s was concerned with British economists and politicians, the situation in the United States, Britain’s cultural and social counterpart, mirrored Britain.
Keynes frequently contributed to magazines and newspapers that catered to the mass public. One year after the Stock Market Crash, Keynes introduced a two-part article, titled “The Great Slump of 1930,” by solemnly noting, “The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history.” Keynes understood that the events unfolding were unprecedented and inexplicable under existing economic theory. However, at the time, common wisdom viewed economic downturns as events based in morality. It was believed that long-lasting booms were the natural products of risky investor and business behavior.
Through this lens, recessions were cyclical periods that brought about needed restraint. As the Pulitzer-Prize nominated journalist Sylvia Nasar puts it, “Recessions, in this view, were regrettable but necessary correctives, like a detox program for a drunk.” This view was so commonplace that even President Roosevelt conveyed similar beliefs during his candidacy for President. In 1932, during his nomination speech at the Democratic National Convention, FDR declared that gains from the 1920’s boom were wasted frivolously:
Enormous corporate surpluses piled up-- the most stupendous in history. Where, under the spell of delirious speculation, did those surpluses go? Let us talk economics that the figures prove and that we can understand. Why, they went chiefly in two directions: first, into new and unnecessary plants which now stand stark and idle; and second, into the call-money market of Wall Street.
In the same address, FDR shared views that a contemporary reader may not expect of the President, views that would eventually spearhead the nation’s largest public works spending program; he underscored the need for continued government frugality and restraint during the Depression:
For three long years I have been going up and down this country preaching that Government - Federal and State and local - costs too much. I shall not stop that preaching. As an immediate program of action we must abolish useless offices… We must merge, we must consolidate subdivisions of Government, and, like the private citizen, give up luxuries which we can no longer afford.
Although he made a clear case for lower taxes and smaller government, FDR’s traditionalist views were somewhat offset by his call for relief at the federal level. He stated that while the “primary responsibility for relief rests with localities now… the Federal Government has always had and still has a continuing responsibility for the broader public welfare.” Even though the severity of the Depression was clear by 1932, FDR’s belief that Federal Government had a role in promoting public welfare remained controversial within segments of American society. Contributing to the country’s inability to view relief the role of Government were long-standing notions about the poor, notions that had their roots in Britain.
In industrializing eighteenth century Britain, economists, rooted in the classical assumption of perfectly free markets, faced difficulty in explaining the persistence of poverty and unemployment despite rapid industrial expansion. Various theories were put forward, but only the simplest idea gained widespread traction across British society: prolonged poverty was theoretically inexplicable, and thus, inexcusable. Continued unemployment, excluding that caused by misfortune, was assumed to be simply the byproduct of character ills. Through this lens, poverty became the domain of charity, not economics. This simplistic outlook on poverty was widely accepted due to the ease with which the idea conformed to higher-class political goals and culture. Unfortunately, the burgeoning social Darwinist movement of the mid-nineteenth century set in stone, for decades, the notion that poverty was caused by personal shortcomings. It was not until the onset of the Progressive Era that these views changed.
In the last two decades of the nineteenth century until the onset of the First World War, technological progress, newfound wealth, prolonged peace, and political activism came together and set the stage for a unique populist idealism aimed at societal reform and betterment. The developments of the Progressive Era seeded in public consciousness the idea that government can be a force for good. Without this movement as a historical backdrop, FDR’s New Deal would have likely been culturally and politically unfathomable.
During the Progressive Era, Edwin R.A. Seligman served as a key reformer in the realm of economic policy. Seligman, a founding member of the American Economic Association and the American Association of University Professors, transformed the field of economics by leading a professionalization of the discipline. He also shook the field of public finance by advocating for a move away from regressive indirect taxes to a progressive centralized tax collection system. Seligman and his reform-minded contemporaries understood that powerful ideas did not easily transform to power through the force of law; a barrier existed between economists and their theories and the political process. They realized that their role required active participation in policymaking.
The Progressive-Era economists acted on that realization, and due to their success, they set a precedent for the involvement of economists in political advocacy. In 1913, years of engagement with policymakers culminated into two historic reforms: the Income Tax (16th) Amendment and the creation of the Federal Reserve System. However, in 1914, the First World War brought to a halt the idealism and hopefulness that defined the Progressive Era. Having successfully swung through the field of public finance, the pendulum of reform now stood still for nearly a decade. It took an economic disaster for a weary and disillusioned post-war society to again develop an interest in reform.
Conservative economic policies were long considered common wisdom before the Depression, and to an extent, during the downturn. Public figures, from mainstream economists to political candidates, were expected and assumed to support balanced budgets. Straying from the wisdom of a balanced budget ensured a future of political irrelevancy. However, during the early years of economic turmoil, Keynes led a small, vocal, minority of economists that advocated for government spending programs. As his predictions were proven to be accurate, and as his theories became more reliable, Keynes’ influence quickly soared at an international level.
Months before the idea gained traction among other economists, Keynes confidently declared in December 1930 that the world faced a downturn more serious than a common recession. Recessions were then considered cyclical economic corrections that necessarily followed prolonged periods of unsustainable growth. In his December op-ed, Keynes pondered whether man was “now awakening from a pleasant dream [the 1920s boom] to face the darkness of facts? Or dropping off into a nightmare which will pass away?” Keynes, of course, had a response to the question he posed. He asserted that the gains realized during the preceding decade were not deceitful byproducts of speculation, but productive, fruitful output.
With that single assertion, Keynes discounted the traditionalist view that the downturn was a corrective mechanism. Although he flatly rejected cyclical correction as a causal factor, Keynes provided no alternative explanation for the downturn. Almost a year after the Stock Market Crash, he concluded that existing theoretical knowledge could not be adequately applied to the present glut. He noted, “Today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the workings of which we do not understand.” In one of his most famous metaphors, Keynes compared the current state of the economy to that of an automobile with an elusive technical malfunction. He wrote, the machine is “jammed as the result of a muddle. But because we have magneto trouble, we need not assume that we shall soon be back in a rumbling wagon and that motoring is over.” The wheels of commerce needed to roll once again. For that to occur, Keynes believed joint action was required from both London and Washington to restore confidence, revive enterprise, and restore prices.Continued on Next Page »
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Endnotes
- Real GDP is a measure of economic output that is adjusted for price changes at each observation year. The values in Figure 1 are in terms of 1937 dollars.
- The data was made relative to the pre-Depression peak in industrial production, which occurred in the year 1929. In other words, the data was adjusted so that the 1929 peak equals 100%.
- Barber, From New Era to New Deal, 118.
- Ibid.,195.
- Ibid., 36.
- Kindleberger, The World in Depression, 56.
- Eichengreen, "The U.S. Capital Market," in Developing Country Debt and Economic, 1:122.
- Ibid.
- Ibid., 1:124.
- Barber, From New Era to New Deal, 72.
- Ibid., 73.
- U.S. Department of Commerce Bureau of Foreign and Domestic Commerce, Statistical Abstract of the United, 279.
- According to data obtained from the BEA, GDP in 1929 was $104.6 Billion and 2014 Q2 GDP is $16,010 Billion.
- Federal Reserve Board, Tenth Annual Report of the Federal, 34.
- Friedman and Schwartz, A Monetary History of the United, 254.
- Fisher Sees Stocks Permanently High,” The New York Times, October 16, 1929.
- Friedman, Samuelson, and Wallich, "How the Slump Looks to Three Experts," Newsweek, May 25, 1970.
- The money supply refers to money available for use and circulating in the economy. Varying standardized measures of the money supply exist, from most liquid measurement of money to least liquid.
- Friedman and Schwartz, A Monetary History of the United, 300.
- Ibid., 308.
- Ibid., 310.
- Edsforth, The New Deal: America's, 43.
- Ibid., 40.
- Friedman and Schwartz, A Monetary History of the United, 313.
- Ibid., 315-317.
- Ibid., 322.
- Ibid., Table A-1, 713.
- Black, Franklin Delano Roosevelt: Champion, 269.
- Roosevelt, "Proclamation 2039 - Declaring," The American Presidency Project.
- Roosevelt, "Proclamation 2040 - Bank," The American Presidency Project.
- United States Senate Special Committee on the Termination of the National Emergency, Emergency Powers Statutes: Provisions, 4-5.
- Roosevelt, "Fireside Chat on Banking," The American Presidency Project.
- Friedman and Schwartz, A Monetary History of the United, 311.
- Ibid., 312.
- Hobsbawm, Industry and Empire: The Birth, 190.
- Say’s Law is the defunct notion that production is itself the source of demand. An individual producer is paid for their services and that payment is used to purchase other goods.
- Keynes, "The Great Slump of 1930," 402.
- Nasar, Grand Pursuit: The Story, 323.
- "131 'I Pledge You—I," in The Genesis of the New Deal, 651.
- Ibid., 652.
- Ibid., 658.
- Schumpeter, "Unemployment and the ‘State of the Poor’," inHistory of Economic Analysis.
- A concise history of Progressive-Era economic policy reform efforts, specifically that of public finance, is provided in: Ajay K. Mehrotra, "Edwin R.A. Seligman and the Beginnings of the U.S. Income Tax,"Tax Notes, November 14, 2005.
- Keynes, "The Great Slump of 1930," 402.
- Ibid.
- Keynes, "The Great Slump of 1930, II" 428.
- Smith, An Inquiry into the Nature, IV.2.9.
- Nasar, Grand Pursuit: The Story, 149.
- "Past Presidents," Office of the President.
- Nasar, Grand Pursuit: The Story, 150.
- Ibid., 151.
- Ibid.
- Fisher, "Why Has the Doctrine," 27.
- Nasar, Grand Pursuit: The Story, 283.
- Keynes, A Tract on Monetary, 187.
- Fisher, "Dollar Stabilization.," in Encyclopedia Britannica, XXX.
- Friedman and Schwartz, A Monetary History of the United, 206.
- Ibid., 226-233.
- Romer, "Spurious Volatility in Historical," 31.
- Nasar, Grand Pursuit: The Story, 301.
- Irving Fisher, "Stabilizing Price Levels," The New York Times, September 2, 1923.
- Fisher, "Our Unstable Dollar and the So-Called," 201.
- Fisher, "The Debt-Deflation Theory of Great," 342.
- Fisher, Booms and Depressions: Some, 142.
- Allen, "Irving Fisher, F. D. R., and the Great," 576.
- Ibid., 562.
- Ibid., 580-581.
- Ibid., 577.
- Ibid., 565.
- Ibid., 565.
- Fisher’s latter comment is in regards to the 17% increase in nominal wages between November 1936 and November 1937, as measured by the Bureau of Labor Statistics and the National Industrial Conference Board (Velde, "The Recession of 1937—A," 29).
- Nasar, Grand Pursuit: The Story, 319.
- Ibid., 326.
- Ibid., 324.
- Richard Kahn, "The Relation of Home Investment to Unemployment," The Economic Journal 41, no. 162 (June 1931)
- "FDR: From Budget Balancer to Keynesian,” Franklin D. Roosevelt Presidential Library and Museum, http://www.fdrlibrary.marist.edu/aboutfdr/budget.html.
- Kindleberger, The World in Depression, 262.
- An act to provide adjusted compensation for veterans of the World War, and for other purposes., H.R. 10874, 67th Cong., 2d Sess. (1922). Office of the Secretary of the Senate, Presidential Vetoes, 1789-1988, S. Doc. No. 102-12 (1992), 225.
- Ibid., 228.
- World War Adjusted Compensation Act, ch. 157, 43 Stat. 121-131 (May 19, 1924).
- "Both Coasts Threatened," The New York Times, September 3, 1935.
- "Veteran's Camp Wrecked by Storm," The New York Times, September 4, 1935.
- "Veterans Lead Fatalities,” The New York Times, September 5, 1935.
- "Link Bonus Issue to Florida Deaths," The New York Times, September 15, 1935.
- Nancy Baker, "Abel Meeropol (a.k.a. Lewis Allan): Political Commentator and Social Conscience," American Music 20, no. 1 (Spring 2002): 45.
- Hemingway, "Who Murdered the Vets?," The New Masses, September 17, 1935.
- Adjusted Compensation Payment Act, ch. 32, 49 Stat. 1099-1102 (Jan. 27, 1936).
- "Bonus Bill Becomes Law," The New York Times, January 28, 1936.
- For a detailed analysis of the Soldier’s Bonus expansionary effect, consult: Telser, "The Veterans' Bonus of 1936,"Journal of Post Keynesian Economics26, no. 2 (Winter 2003-4).
- Eggertsson and Pugsley, "The Mistake of 1937," 174.
- Roosevelt, "Annual Message to Congress, January 6, 1937,” The American Presidency Project.
- Roosevelt, "Annual Budget Message to Congress," The American Presidency Project.
- "Press Conference #357," April 2, 1937, Page 239, Press Conferences of President Franklin D. Roosevelt, 1933-1945, Franklin D. Roosevelt Presidential Library & Museum.
- Data source: Board of Governors of the Federal Reserve System (US), Industrial Production Index[INDPRO], retrieved from FRED, Federal Reserve Bank of St. Louis.
- "The Stock Market," The New York Times, October 20, 1937.
- Howard Wood, "Stocks Crash to New Lows,” Chicago Daily Tribune, October 19, 1937.
- "The Stock Market," The New York Times, October 20, 1937.
- Personal Memo, October 19, 1937, Volume 92: October 12-October 19, 1937; Page 229, The Diaries of Henry Morgenthau, Jr., Franklin D. Roosevelt Presidential Library & Museum, Hyde Park, NY.
- Transcript of Call between Morgenthau and FDR. October 19, 1937, Volume 92: October 12-October 19, 1937; Page 230, The Diaries of Henry Morgenthau, Jr., Franklin D. Roosevelt Presidential Library & Museum, Hyde Park, NY.
- Transcript of Call between Morgenthau and Burgess, October 19, 1937, Volume 92: October 12-October 19, 1937; Page 222, The Diaries of Henry Morgenthau, Jr., Franklin D. Roosevelt Presidential Library & Museum, Hyde Park, NY.
- Transcript of Phone Call between Morgenthau and FDR, October 20, 1937, Volume 93: October 20-October 31, 1937; Page 21, The Diaries of Henry Morgenthau, Jr., Franklin D. Roosevelt Presidential Library & Museum, Hyde Park, NY.
- Draft Letter to FDR, November 3, 1937, Volume 94: November 1-November 10, 1937; Page 47, The Diaries of Henry Morgenthau, Jr., Franklin D. Roosevelt Presidential Library & Museum, Hyde Park, NY.
- Roosevelt, "60 - Message to Congress," The American Presidency Project.
- Press Conference #401-1.
- Press Conference #405-5.
- Roosevelt, "Statement Summarizing the 1938," The American Presidency Project.
- Press Conferences #409-7; #415-8; #416-4.
- Press Conference #425-15.
- "A Cloud That's Dragonish,"The Times-Picayune(New Orleans, LA), January 8, 1937, 12.
- "Industry Pushes up after Holiday Lull; Steel Leads,"The Times-Picayune(New Orleans, LA), January 11, 1937, 18.
- Rodney Dutcher, "Behind the Scenes in Washington,"The Brownsville Herald(Brownsville, TX), April 2, 1937,4.
- This small, local, newspaper featured during the same week at least two in-depth articles focused on analysis of policy, not only news: "Public Funds Will Control High Prices?,"The Brownsville Herald(Brownsville, TX), April 4, 1937,1-2. "Prices,"The Brownsville Herald(Brownsville, TX), April 2, 1937,1.
- Conference to Talk Over Plans, 9/13/37, Volume 95: November 10, 1937; Page 1, Diaries of Henry Morgenthau, Jr., Franklin D. Roosevelt Presidential Library & Museum, Hyde Park, NY.
- Three Parts of Speech as Decided Upon, 10/28/37, Volume 95: November 10, 1937; Page 261, Diaries of Henry Morgenthau, Jr., Franklin D. Roosevelt Presidential Library & Museum, Hyde Park, NY.
- Shlaes,The Forgotten Man: A New History, 341-342.
- Complete Set of Speech Drafts, Volume 97: November 10, 1937; Page 149, Diaries of Henry Morgenthau, Jr., Franklin D. Roosevelt Presidential Library & Museum, Hyde Park, NY.
- Ibid., 142.
- Ibid., 143.
- Roosevelt, "Message to Congress Recommending," The American Presidency Project.
- "Document 50: February 28, 1938, Letter with attachments, To: Keynes From: Roosevelt," in FDR's Response to Recession, ed. George McJimsey, vol. 26, Documentary History of the Franklin D. Roosevelt Presidency (University Publications of America, 2005), 307.
- Ibid., 312.
- Roose, "The Recession of 1937-38," 239.
- Roose, "The Role of Net Government," 1.
- Personal Income is income received by individuals, non-profit institutions, private trust funds, and private pension funds. It is the sum of wages, labor income, rental income, interest, dividends, and transfer payments. Source: National Income and Product Statistics of the United States 1929-46, US Dept. of Commerce, 1946, p. 53-54. Net Gvt. Contribution to Income is a breakdown of measured net decreasing (taxes, etc.) and increasing expenditures (social services, etc.). Figures include local, state, and federal contributions. Source: Deficit Spending and the National Income, Henry H. Villard, 1941, Appendix I p. 323.
- Roose, "The Role of Net Government," 4.
- Ibid., 240.
- Ibid., 6.
- Ibid., 14.
- Roose, The Economics of Recession, 6.
- "Radio Address." Under the auspices of the National Radio Forum, conducted by The Washington Evening Star, broadcast over the National Broadcasting Company Network, January 23, 1939, https://fraser.stlouisfed.org/title/?id=446#!7658, accessed on February 1, 2015.
- Friedman and Schwartz, A Monetary History of the United, 493.
- Ibid., 495.
- Cole and Ohanian, "New Deal Policies and the Persistence," 783.
- Ibid., 784.
- An Act to Diminish the Causes of Labor Disputes Burdening or Obstructing Interstate and Foreign Commerce, to Create a National Labor Relations Board, and for Other Purposes., Pub. L. No. 74-198, Stat. (July 5, 1935).
- Jones & Laughlin Steel Corp. v. NLRB, 301 U.S. (1937).
- Cole and Ohanian, "New Deal Policies and the Persistence," 788.
- Velde, "The Recession of 1937—A," 30.
- Testimony Before the US Senate Committee on Banking, Housing, and Urban Affairs (2009) (statement of Lee E. Ohanian).
- Velde, "The Recession of 1937—A," 31.
- Romer, "What Ended the Great Depression?," 763.
- Overwhelmingly, the NLRA has been discounted as a contributing factor to the Recession. For a detailed review of the existing literature, specifically that related to the NLRA, consult: Papadimitriou and Hannsgen,Lessons from the New Deal: Did the New Deal Prolong or Worsen the Great Depression?
- Gauti B. Eggertsson and Benjamin Pugsley, "The Mistake of 1937: A General Equilibrium Analysis," Monetary and Economic Studies 24, nos. S-1 (December 2006): 153.
- Ibid., 151.
- Ibid., 154.
- Gauti B. Eggertsson, Great Expectations and the End of the Depression, staff report no. 234 (Federal Reserve Bank of New York, 2005). Published as "Great Expectations and the End of the Depression," American Economic Review 98, no. 4 (September 2008).
- Eggertsson and Pugsley, "The Mistake of 1937," 174.
- Franklin D. Roosevelt, "Annual Message to Congress," address, January 6, 1937, The American Presidency Project, http://www.presidency.ucsb.edu/ws/?pid=15336.
- Eggertsson and Pugsley, "The Mistake of 1937," 175, Table 3.
- Ibid., 182.
- Ibid., 180.
- "Press Conference #434," February 15, 1938, Press Conferences of President Franklin D. Roosevelt, 1933-1945, Franklin D. Roosevelt Presidential Library & Museum.
- Friedman and Schwartz, A Monetary History of the United, 496.
- Arthur F. Burns and Wesley C. Mitchell, Measuring Business Cycles, Studies in Business Cycles 2 (New York: National Bureau of Economic Research, 1946),88-89
- Roose, "The Role of Net Government," 10.
- Friedman and Schwartz, A Monetary History of the United, 517.
- Ibid., 515.
- Ibid., 518.
- Each concern listed on the memorandum is closely analyzed in A Monetary History, 523.
- Ibid., 520.
- Romer, "What Ended the Great," 758.
- Ibid.
- Ibid., 759.
- Ibid., 758.
- Romer, "Lessons from the Great Depression for Economic Recovery in 2009," speech presented at Brookings Institution, Washington D.C., March 9, 2009, 3.
- Brown, "Fiscal Policy in the 'Thirties," 863-866.
- Romer, "Lessons from the Great,” speech, 3.
- Ibid., 4.
- Velde, "The Recession of 1937—A," 34.
- Ibid., 25.
- Ibid., 26.
- Ibid.
- Cargill and Mayer, "The Effect of Changes," 417-418.
- Ibid., 430.
- Ibid., 430-431.
- January 1935 was chosen as the starting point because the economy was, by that time, in steady recovery. This allows for an analysis untarnished by the shocks that occurred early during the Depression. December 1938 was chosen as the end point in order to exclude from the analysis any possible impacts of pre-WWII German aggression, especially that caused by the Occupation of Czechoslovakia in March 1939.
- Board of Governors of the Federal Reserve System (US), Industrial Production Index [INDPRO], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/INDPRO/
- NBER, The End of the Great Depression 1939-41: Policy Contributions and Fiscal Multipliers, by Robert J. Gordon and Robert Krenn, working paper no. 16380, 2010. Robert J. Gordon and Robert Krenn, "New Gordon-Krenn quarterly and monthly data set for 1913-54" (unpublished raw data), accessed March 30, 2015, http://faculty-web.at.northwestern.edu/economics/Gordon/researchhome.html.
- NBER, The End of the Great, 43. Gordon and Krenn provide more detailed information about the process, including the monthly independent interpolators used, in their appendix. (NBER, The End of the Great, 42-54).
- Gordon and Krenn explain the transformation of government spending: “A problem arises in this series because it includes not just G but also transfer payments, which are excluded when calculating GDP. The monthly interpolator series is distorted by particularly large transfer payments in scattered quarters. To find these quarters, we calculated the monthly log change in the interpolator, after changing the data to real terms and X11 s.a. Whenever a monthly change of +40 percent or more was followed by a monthly change of approximately the same amount with a negative sign, we replaced that “bulge” observation by the average of the preceding and succeeding months. These bulges occurred and were corrected for in 4 months: 1931:12, 1934:01, 1936:06, and 1937:06.” (NBER, The End of the Great, 46.)
- The wage and manhour datasets were individually re-indexed to January 1935 prior to their transformation.
- The assumption that monetary policy may have played a role in the recession hinges on the assumption that the money supply was impacted by the increased reserve requirements. Based on the related discussion presented in the previous chapter, both assumptions are made.
- NBER macrohistory datasets utilized: Total sum of excess and required reserves held, (series 14064); Percentage of total reserves held to reserves required (series 14086).
- Velde, "The Recession of 1937—A,"24.
- Velde’s Figure 8.C highlights the remarkably stark accumulation of excess reserves by central reserve city banks. (Velde, "The Recession of 1937—A,"24.)
- The monthly GDP deflator was obtained from the Gordon and Krenn dataset. See footnote 178.
- Real money supply excluding reserves was created by subtracting deflated total reserves (series 14064) from deflated money stock (series 14144a).
- A strong case has been made for the use of bank assets, not liabilities, as the measurement of bank holdings during the 1937 period. However, to examine closely the argument as made by Friedman, and due to the lack of reliable monthly asset-side data, the more traditional liability-side measurement is used. For a detailed study of the alternative asset-side measurement, one that highlights the shortcomings of liability-side measurements, consult: Telser, "Higher Member Bank Reserve Ratios in 1936 and 1937 Did Not Cause the Relapse into Depression,"Journal of Post Keynesian Economics.
- Model 4 was cleaned by removing, step by step, the most insignificant variable lags found in Model 2.Insignificant variables were removeduntil regression was narrowed to only significant regressors.
- G% of GDP during years examined averaged 15%.
- NBER, The End of the Great, 35.
- Keynes, "Chapter 24: Concluding Notes," in The General Theory of Employment.
Appendix
Tables
Table A-1
Table A-2
Table A-3
Table A-4. Simple regression of each independent variable on GDP or industrial production.
Table A-5. Breusch-Godfrey Test Results for Table A-4 regressions.
Figures
Figure A-1. Autocorrelation plot of GDP variable.
Figure A-2. Partial autocorrelation plot of GDP variable.
Figure A-3. Scatterplot of the GDP variable against its first lag.
Figure A-4. Scatterplot of the GDP variable against its second lag.
Figure A-5 Autocorrelations of Industrial Production
Figure A-6 Partial Autocorrelations of Industrial Production
Figure A-7 Scatterplot of Model 1 Residuals Against Fitted Values
Figure A-8 Histogram of Model 1 Residuals
Figure A-9 Model 1 Residuals Plotted Over Time
Figure A-10 Autocorrelations of Model 1 Residuals
Figure A-11 Partial Autocorrelations of Model 1 Residuals
Figure A- 12. Histogram of Model 4 Residuals.
Figure A- 13. Autocorrelations of Model 4 Residuals.
Figure A- 14. Partial Autocorrelations of Model 4 Residuals.
Figure A- 15. Lineplot of Model 4 Residuals.
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APA 6th
Rafti, J. (2015). "Roosevelt's Recession: A Historical and Econometric Examination of the Roots of the 1937 Recession." Inquiries Journal/Student Pulse, 7(06). Retrieved from http://www.inquiriesjournal.com/a?id=1053
MLA
Rafti, Jonian. "Roosevelt's Recession: A Historical and Econometric Examination of the Roots of the 1937 Recession." Inquiries Journal/Student Pulse 7.06 (2015). <http://www.inquiriesjournal.com/a?id=1053>
Chicago 16th
Rafti, Jonian. 2015. Roosevelt's Recession: A Historical and Econometric Examination of the Roots of the 1937 Recession. Inquiries Journal/Student Pulse 7 (06), http://www.inquiriesjournal.com/a?id=1053
Harvard
RAFTI, J. 2015. Roosevelt's Recession: A Historical and Econometric Examination of the Roots of the 1937 Recession. Inquiries Journal/Student Pulse [Online], 7. Available: http://www.inquiriesjournal.com/a?id=1053
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