Bard College Bard Digital Commons Senior Projects Spring 2015 Bard Undergraduate Senior Projects Spring 2015 Roosevelt’s Recession, 1937: Lasting History and Contested Policy Jonian Rafti Bard College, [email protected] Follow this and additional works at: https://digitalcommons.bard.edu/senproj_s2015 Part of the Economic History Commons, Macroeconomics Commons, and the United States History Commons This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License. Recommended Citation Rafti, Jonian, "Roosevelt’s Recession, 1937: Lasting History and Contested Policy" (2015). Senior Projects Spring 2015. 160. https://digitalcommons.bard.edu/senproj_s2015/160 This Open Access work is protected by copyright and/or related rights. It has been provided to you by Bard College's Stevenson Library with permission from the rights-holder(s). You are free to use this work in any way that is permitted by the copyright and related rights. For other uses you need to obtain permission from the rights- holder(s) directly, unless additional rights are indicated by a Creative Commons license in the record and/or on the work itself. For more information, please contact [email protected]. Roosevelt’s Recession, 1937: Lasting History and Contested Policy Senior Project Submitted to The Division of Social Studies of Bard College by Jonian Rafti Annandale-on-Hudson, New York May 2015 Dedicated to my friends & teachers for their four years of encouragement. TABLE OF CONTENTS Introduction ................................................................................................................... 1 I. The Crash and the Depression: A Nation, Surprised ................................................ 5 II. Outcry for Double Dipping: Reactions to the New Slump .................................... 29 III. The Numbers Don’t Agree: A Review of Conflicting Studies ............................. 46 IV. Searching for a Cause: An Econometric Analysis ............................................... 71 Concluding Analysis ................................................................................................ 91 Bibliography ............................................................................................................... 94 Appendix Tables ........................................................................................................................ 103 Figures ...................................................................................................................... 107 Index of Figures ........................................................................................................ 115 1 INTRODUCTION The 1937 Recession is a lesser-known event overshadowed by the Stock Market Crash of 1929 and the Great Depression. Nonetheless, it is a subject of deep interest because it brought about an uncommonly sharp economic downturn during the depression recovery period. A study of 1937 provides the unique opportunity to examine the casual contributing role, if any, of the historically unprecedented recovery efforts enacted by President Franklin Delano Roosevelt in 1933. To set the stage, Figure 1 plots real gross domestic product (GDP) between the 1 years 1935 and 1938. During the Recession, GDP declined nearly 10%. Figure 1. Real GDP in Chained 1937 Dollars. Source: The End of the Great Depression 1939-41, by Robert J. Gordon and Robert Krenn 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 Industrial production output data allows for a more nuanced examination of the Recession’s impact. Figure 2 plots the NBER’s industrial production index, an indicator that measures the output of manufacturing, mining, and electric and gas utility production facilities. The solid grey line is a plot of the index between March 1933 and December 1940.2 The dashed line, provided for comparative purposes, plots industrial production during the 2008 Great Recession recovery period. The years 1937 and 1938 should have been defined by continued recovery from the nation’s worst economic collapse. For reasons to be explored, overly optimistic policymakers and outspoken and disagreeing economists made key mistakes leading to the Recession. Confusion, a lack of theories, and ideological barriers jointly contributed to the downturn. A comprehensive understanding of society, politics, and economic thought during the decade prior to the Recession is required to understand the unprecedented and contested factors that contributed to its onset. The policymakers at the root of these factors made decisions that brought about one of the most unique downturns in American economic history. ___________ This study begins by turning the focus away from 1937 and gazing back to the onset of the Great Depression, starting with President Herbert Hoover’s time in office. Subsequently, this study examines the state of economic thought during the Recession and the development of new theories in response to the Great Depression. Finally, the project 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 ends with a quantitative analysis that was recurrently complemented by the historical knowledge amassed. Given that the varied recovery efforts that followed the Great Depression make it difficult to isolate the causes of the 1937 Recession, the little economic literature on this topic has yet to reach a point of general consensus. While some texts contribute the downturn only to fiscal policy changes, others consider monetary policy as the only cause. This study finds both views to be valid. Only in the context of diminished government spending was monetary policy able to have an impact great enough to lead to the Recession. 4 Figure 2. Recovery Relative to Previous Peak, 1929 and 2007. Data adapted from: Board of Governors of the Federal Reserve System (US), Industrial Production Index [INDPRO] retrieved from FRED, Federal Reserve Bank of St. Louis. 5 I. THE CRASH AND THE DEPRESSION: A NATION, SURPRISED Despite having gained the label of “do-nothing President” from his opponents across the aisle, President Hoover took a surprisingly proactive approach to addressing the alarming conditions that resulted from the Stock Market Crash of 1929. Hoover’s recovery efforts served as the foundation of President Roosevelt’s New Deal. Hoover "understood the importance of stimulating aggregate demand in a depressed economy and the economic policies he pressed for were intended for that purpose.”3 However, given his political philosophy and the social climate of the time, he believed that recovery required limited government intervention; he considered monetary policy as the only tool at his disposal. Rexford Tugwell, one of the architects of the New Deal, highlights the extent to which Hoover built the foundations for recovery by saying, “The ideas embodied in the New Deal legislation were a compilation of those which had come to maturity under Hoover’s aegis… all of us owed much to Hoover, [especially] for his enlargements of knowledge, for his encouragement to scholars, for his organization of research.” Tugwell continues, “The brains trust got much of its material from the Hoover committees or from work done under their auspices”4 Hoover’s dedication to research- backed policy decisions was a trait he brought to the White House from prior posts. Before his time in the White House, Hoover served as the third Secretary of Commerce from 1921 to 1928. Although the position was considered one of the least 3 Barber, From New Era to New Deal, 118. 4 Ibid.,195. 6 prestigious cabinet posts, Hoover used his seat as a platform to advocate for issues outside of the traditional scope of his position. During his first two years as Secretary, Hoover lobbied for restrictions on foreign lending. Hoover was concerned about the rise in foreign investment because he believed that “our citizens… have had but little experience in international investment.”5 Between the years 1924 and 1929, American foreign lending totaled $6.429 billion. During that same period, total British foreign lending was only $3.3 billion.6 The surge in foreign lending was the result of the 1913 Federal Reserve Act and financial sector ingenuity. Prior to the Federal Reserve Act, national banks in the United States were prohibited from opening branches abroad. The Act ended this prohibition, and the number of bank branches in foreign countries soared from 26 in 1914 to 181 in 1920.7 The new foreign branches gave international borrowers easier access to American lenders. In addition to international expansion, the increase in foreign investment was also tied to a financial instrument first introduced in 1921: the investment trust. Like the modern mutual fund, an investment trust pooled client contributions and invested the pooled fund on behalf of the clients. The use of the investment trust as a financial instrument started in Britain, where trusts traditionally invested in foreign bonds. When the instrument made its debut in the United States, the focus on foreign bonds was 8 retained. Responding to the increases in foreign investment, Secretary Hoover ordered the 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. 7 Commerce