Recession of 1937-1938
The Event: Sharp economic downturn that was part of the Great Depression
Date: September, 1937-June, 1938
Place: United States
Significance: The recession demonstrated that the New Deal was having problems, and President Franklin D. Roosevelt blamed business for the economic downturn. His response was to attack business through the antitrust laws.
From the end of 1935 and into early 1936, President Franklin D. Roosevelt’s New Deal was experiencing serious problems. The National Recovery Administration had been ruled unconstitutional by the U.S. Supreme Court’s decision in Schechter Poultry Corp. v. United States (1935). The Agricultural Adjustment Act of 1933 was having problems with its use of scarcity economics, and eventually it would face an unfavorable court ruling. Even the relief programs, especially the Civil Works Administration (1933), were criticized, along with new innovations such as the Resettlement Administration (1935). Despite all this, however, Roosevelt ran in 1936 for reelection and won overwhelmingly against Alfred M. Landon. Businessmen generally backed Landon and even supported the Liberty League to stop Roosevelt’s reelection, all to no avail. By the beginning of 1937, Roosevelt and the business community were on a collision course.
A series of events in 1937 caused the American economy to go into a recession which, simply put, was a depression within the Great Depression. Bearing in mind that Roosevelt had a real fear of inflation, it is not surprising that price increases were somewhat disturbing to him and his advisers. As prices rose, Roosevelt cut farm subsidies and relief programs. When the Federal Reserve raised the reserve requirement, it caused the economy to falter. Other strains on the economy included business inventory increases, the implementation of Social Security taxes, and Roosevelt’s undistributed profits tax. The stock market decline in October made matters worse. It was the convergence of all these factors that brought the economy down. Industrial production dropped, national income fell, industrial stock averages plummeted nearly 50 percent, and unemployment rose.
Uncertain as to what had happened and why, Roosevelt and his advisers struggled to explain the recession. Some within the administration, such as Henry Morgenthau, Jr., thought that the lack of business confidence had contributed to the downturn and could prolong it. Others, such as Thomas Gardiner Corcoran and Benjamin V. Cohen, were not so sure. These advisers were very much against the concentration of economic power in business and wanted to break up the large corporations. Finally, still others, such as Marriner Eccles, thought that the tight money policy of the Federal Reserve had to be addressed. What really mattered is what the president thought. If actions speak louder than words, then it is clear that Roosevelt blamed business for the economic problems and agreed to launch an antitrust campaign, managed by Thurman Wesley Arnold, assistant attorney general in the Antitrust Department.
Although the antitrust campaign, which targeted price fixing and other monopolistic measures, may have caused problems for business, it was not the key to economic recovery. Rather, the Roosevelt New Deal inadvertently implemented Keynesian economics by increasing government spending to such an extent that the recession eventually ended by June, 1938.
In the end, the recession of 1937-1938 not only symbolized Roosevelt’s growing antibusiness attitude but also demonstrated his moving closer and closer to Keynesianism, although he might not have realized it at the time. The consequent antitrust campaign definitely showed that business was not warmly regarded by Roosevelt.
Davis, Kenneth. FDR: Into the Storm, 1937-1940. New York: Random House, 1993.
Reagan, Patrick. Designing a New America: The Origins of New Deal Planning, 1890-1943. Amherst: University of Massachusetts Press, 1999.
Roose, Kenneth. The Economics of Recession and Revival: An Interpretation of 1937-1938. Hamden, Conn.: Archon Books, 1969.
See also: antitrust legislation; Business cycles; New Deal programs.