Roosevelt's Recession: A Historical and Econometric Examination of the Roots of the 1937 Recession

Concluding Analysis

To more easily examine the coefficient and beta coefficient values provided by each model, coefficients are reported in Figure 17. Beta coefficients, which consider variables standardized to have a variance of 1, provide an interesting interpretation of regression results: given a 1% increase of a dependent variable’s standard deviation, GDP’s standard deviation increases by B%. Across all the models, the beta coefficient of the government-spending variable is two to three times greater than that of the money supply variable. When the variables are compared on a common metric of standard deviations, fiscal policy seems to have had the comparatively greatest effect on GDP.

Turning to more traditional metrics, according to Model 4, the fiscal multiplier during the time period was about 1.4.190 In other words, on average over the time period considered, every dollar spent by the government had an impact on output equivalent to $1.40. These results are in line with Gordon and Krenn’s findings. In their study, they found a fiscal spending multiplier of 1.8-2.2 during the early-WWII years, a time when the American economy was ramping up for war.191 As argued by Eggertson and Pugsley, given the haphazard government messaging and the uneasiness that permeated about the future, a multiplier of 1.4 should be considered surprisingly high for 1937.

Figure 17.

From its September 1936 peak to its October 1937 low, real government spending declined by $250 million. Given the multiplier, the decrease in spending should have caused a real GDP decline of about $350 million. During the Recession, real GDP decreased by $690 million from its April 1937 peak to its May 1938 trough. This means that the contraction of government spending, when the multiplier is accounted for, caused nearly half of the GDP decline experienced during the Recession.

Had New Deal spending continued, it is likely that the Recession would have had a much-lessened impact on the economy. Both monetary and fiscal policies contributed to the 1937 Recession. Only in the context of diminished government spending was monetary policy able to have an impact great enough to lead to the Recession.

___________

Indecision, political ambition, ideological barriers, and a general lack of knowledge led to policy decisions that caused the Recession. What we learn from 1937 is that ideology must play a role subordinate to the wellbeing of society. In times of need, action, not inaction, is required.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.192– John Maynard Keynes

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Endnotes

1. 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.
2. 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%.
3. Barber, From New Era to New Deal, 118.
4. Ibid.,195.
5. Ibid., 36.
6. Kindleberger, The World in Depression, 56.
7. Eichengreen, "The U.S. Capital Market," in Developing Country Debt and Economic, 1:122.
8. Ibid.
9. Ibid., 1:124.
10. Barber, From New Era to New Deal, 72.
11. Ibid., 73.
12. U.S. Department of Commerce Bureau of Foreign and Domestic Commerce, Statistical Abstract of the United, 279.
13. According to data obtained from the BEA, GDP in 1929 was $104.6 Billion and 2014 Q2 GDP is $16,010 Billion.
14. Federal Reserve Board, Tenth Annual Report of the Federal, 34.
15. Friedman and Schwartz, A Monetary History of the United, 254.
16. Fisher Sees Stocks Permanently High,” The New York Times, October 16, 1929.
17. Friedman, Samuelson, and Wallich, "How the Slump Looks to Three Experts," Newsweek, May 25, 1970.
18. 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.
19. Friedman and Schwartz, A Monetary History of the United, 300.
20. Ibid., 308.
21. Ibid., 310.
22. Edsforth, The New Deal: America's, 43.
23. Ibid., 40.
24. Friedman and Schwartz, A Monetary History of the United, 313.
25. Ibid., 315-317.
26. Ibid., 322.
27. Ibid., Table A-1, 713.
28. Black, Franklin Delano Roosevelt: Champion, 269.
29. Roosevelt, "Proclamation 2039 - Declaring," The American Presidency Project.
30. Roosevelt, "Proclamation 2040 - Bank," The American Presidency Project.
31. United States Senate Special Committee on the Termination of the National Emergency, Emergency Powers Statutes: Provisions, 4-5.
32. Roosevelt, "Fireside Chat on Banking," The American Presidency Project.
33. Friedman and Schwartz, A Monetary History of the United, 311.
34. Ibid., 312.
35. Hobsbawm, Industry and Empire: The Birth, 190.
36. 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.
37. Keynes, "The Great Slump of 1930," 402.
38. Nasar, Grand Pursuit: The Story, 323.
39. "131 'I Pledge You—I," in The Genesis of the New Deal, 651.
40. Ibid., 652.
41. Ibid., 658.
42. Schumpeter, "Unemployment and the ‘State of the Poor’," inHistory of Economic Analysis.
43. 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.
44. Keynes, "The Great Slump of 1930," 402.
45. Ibid.
46. Keynes, "The Great Slump of 1930, II" 428.
47. Smith, An Inquiry into the Nature, IV.2.9.
48. Nasar, Grand Pursuit: The Story, 149.
49. "Past Presidents," Office of the President.
50. Nasar, Grand Pursuit: The Story, 150.
51. Ibid., 151.
52. Ibid.
53. Fisher, "Why Has the Doctrine," 27.
54. Nasar, Grand Pursuit: The Story, 283.
55. Keynes, A Tract on Monetary, 187.
56. Fisher, "Dollar Stabilization.," in Encyclopedia Britannica, XXX.
57. Friedman and Schwartz, A Monetary History of the United, 206.
58. Ibid., 226-233.
59. Romer, "Spurious Volatility in Historical," 31.
60. Nasar, Grand Pursuit: The Story, 301.
61. Irving Fisher, "Stabilizing Price Levels," The New York Times, September 2, 1923.
62. Fisher, "Our Unstable Dollar and the So-Called," 201.
63. Fisher, "The Debt-Deflation Theory of Great," 342.
64. Fisher, Booms and Depressions: Some, 142.
65. Allen, "Irving Fisher, F. D. R., and the Great," 576.
66. Ibid., 562.
67. Ibid., 580-581.
68. Ibid., 577.
69. Ibid., 565.
70. Ibid., 565.
71. 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).
72. Nasar, Grand Pursuit: The Story, 319.
73. Ibid., 326.
74. Ibid., 324.
75. Richard Kahn, "The Relation of Home Investment to Unemployment," The Economic Journal 41, no. 162 (June 1931)
76. "FDR: From Budget Balancer to Keynesian,” Franklin D. Roosevelt Presidential Library and Museum, http://www.fdrlibrary.marist.edu/aboutfdr/budget.html.
77. Kindleberger, The World in Depression, 262.
78. 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.
79. Ibid., 228.
80. World War Adjusted Compensation Act, ch. 157, 43 Stat. 121-131 (May 19, 1924).
81. "Both Coasts Threatened," The New York Times, September 3, 1935.
82. "Veteran's Camp Wrecked by Storm," The New York Times, September 4, 1935.
83. "Veterans Lead Fatalities,” The New York Times, September 5, 1935.
84. "Link Bonus Issue to Florida Deaths," The New York Times, September 15, 1935.
85. Nancy Baker, "Abel Meeropol (a.k.a. Lewis Allan): Political Commentator and Social Conscience," American Music 20, no. 1 (Spring 2002): 45.
86. Hemingway, "Who Murdered the Vets?," The New Masses, September 17, 1935.
87. Adjusted Compensation Payment Act, ch. 32, 49 Stat. 1099-1102 (Jan. 27, 1936).
88. "Bonus Bill Becomes Law," The New York Times, January 28, 1936.
89. 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).
90. Eggertsson and Pugsley, "The Mistake of 1937," 174.
91. Roosevelt, "Annual Message to Congress, January 6, 1937,” The American Presidency Project.
92. Roosevelt, "Annual Budget Message to Congress," The American Presidency Project.
93. "Press Conference #357," April 2, 1937, Page 239, Press Conferences of President Franklin D. Roosevelt, 1933-1945, Franklin D. Roosevelt Presidential Library & Museum.
94. Data source: Board of Governors of the Federal Reserve System (US), Industrial Production Index[INDPRO], retrieved from FRED, Federal Reserve Bank of St. Louis.
95. "The Stock Market," The New York Times, October 20, 1937.
96. Howard Wood, "Stocks Crash to New Lows,” Chicago Daily Tribune, October 19, 1937.
97. "The Stock Market," The New York Times, October 20, 1937.
98. 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.
99. 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.
100. 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.
101. 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.
102. 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.
103. Roosevelt, "60 - Message to Congress," The American Presidency Project.
104. Press Conference #401-1.
105. Press Conference #405-5.
106. Roosevelt, "Statement Summarizing the 1938," The American Presidency Project.
107. Press Conferences #409-7; #415-8; #416-4.
108. Press Conference #425-15.
109. "A Cloud That's Dragonish,"The Times-Picayune(New Orleans, LA), January 8, 1937, 12.
110. "Industry Pushes up after Holiday Lull; Steel Leads,"The Times-Picayune(New Orleans, LA), January 11, 1937, 18.
111. Rodney Dutcher, "Behind the Scenes in Washington,"The Brownsville Herald(Brownsville, TX), April 2, 1937,4.
112. 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.
113. 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.
114. 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.
115. Shlaes,The Forgotten Man: A New History, 341-342.
116. 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.
117. Ibid., 142.
118. Ibid., 143.
119. Roosevelt, "Message to Congress Recommending," The American Presidency Project.
120. "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.
121. Ibid., 312.
122. Roose, "The Recession of 1937-38," 239.
123. Roose, "The Role of Net Government," 1.
124. 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.
125. Roose, "The Role of Net Government," 4.
126. Ibid., 240.
127. Ibid., 6.
128. Ibid., 14.
129. Roose, The Economics of Recession, 6.
130. "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.
131. Friedman and Schwartz, A Monetary History of the United, 493.
132. Ibid., 495.
133. Cole and Ohanian, "New Deal Policies and the Persistence," 783.
134. Ibid., 784.
135. 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).
136. Jones & Laughlin Steel Corp. v. NLRB, 301 U.S. (1937).
137. Cole and Ohanian, "New Deal Policies and the Persistence," 788.
138. Velde, "The Recession of 1937—A," 30.
139. Testimony Before the US Senate Committee on Banking, Housing, and Urban Affairs (2009) (statement of Lee E. Ohanian).
140. Velde, "The Recession of 1937—A," 31.
141. Romer, "What Ended the Great Depression?," 763.
142. 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?
143. 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.
144. Ibid., 151.
145. Ibid., 154.
146. 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).
147. Eggertsson and Pugsley, "The Mistake of 1937," 174.
148. Franklin D. Roosevelt, "Annual Message to Congress," address, January 6, 1937, The American Presidency Project, http://www.presidency.ucsb.edu/ws/?pid=15336.
149. Eggertsson and Pugsley, "The Mistake of 1937," 175, Table 3.
150. Ibid., 182.
151. Ibid., 180.
152. "Press Conference #434," February 15, 1938, Press Conferences of President Franklin D. Roosevelt, 1933-1945, Franklin D. Roosevelt Presidential Library & Museum.
153. Friedman and Schwartz, A Monetary History of the United, 496.
154. 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
155. Roose, "The Role of Net Government," 10.
156. Friedman and Schwartz, A Monetary History of the United, 517.
157. Ibid., 515.
158. Ibid., 518.
159. Each concern listed on the memorandum is closely analyzed in A Monetary History, 523.
160. Ibid., 520.
161. Romer, "What Ended the Great," 758.
162. Ibid.
163. Ibid., 759.
164. Ibid., 758.
165. Romer, "Lessons from the Great Depression for Economic Recovery in 2009," speech presented at Brookings Institution, Washington D.C., March 9, 2009, 3.
166. Brown, "Fiscal Policy in the 'Thirties," 863-866.
167. Romer, "Lessons from the Great,” speech, 3.
168. Ibid., 4.
169. Velde, "The Recession of 1937—A," 34.
170. Ibid., 25.
171. Ibid., 26.
172. Ibid.
173. Cargill and Mayer, "The Effect of Changes," 417-418.
174. Ibid., 430.
175. Ibid., 430-431.
176. 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.
177. 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/
178. 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.
179. 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).
180. 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.)
181. The wage and manhour datasets were individually re-indexed to January 1935 prior to their transformation.
182. 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.
183. NBER macrohistory datasets utilized: Total sum of excess and required reserves held, (series 14064); Percentage of total reserves held to reserves required (series 14086).
184. Velde, "The Recession of 1937—A,"24.
185. 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.)
186. The monthly GDP deflator was obtained from the Gordon and Krenn dataset. See footnote 178.
187. Real money supply excluding reserves was created by subtracting deflated total reserves (series 14064) from deflated money stock (series 14144a).
188. 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.
189. 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.
190. G% of GDP during years examined averaged 15%.
191. NBER, The End of the Great, 35.
192. 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.