The Recession of 1937–1938 was a temporary reversal of the pre-war 1933 to 1941 economic recovery from the Great Depression in the United States.
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By the spring of 1937, production, profits, and wages had regained their 1929 levels. Unemployment remained high, but it was considerably lower than the 25% rate seen in 1933. In June 1937, some of Roosevelt's advisors urged spending cuts to balance the budget. WPA rolls were drastically cut and PWA projects were slowed to a standstill.[1] The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 percent and production of durable goods fell even faster.
Unemployment jumped from 14.3% in 1937 to 19.0% in 1938.[2] Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels.[3] Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15% lower than it had been at the peak in 1937. In most sectors, hourly earnings continued to rise throughout the recession, which partly compensated for the reduction in the number of hours worked. As unemployment rose, consumers' expenditures declined, leading to further cutbacks in production.
The Roosevelt Administration reacted by launching a rhetorical campaign against monopoly power, which was cast as the cause of the depression, and appointing Thurman Arnold in the anti-trust division of the U.S. Department of Justice to act, but Arnold was not effective. In February 1938, Congress passed a new AAA bill which authorized crop loans, crop insurance against natural disasters, and large subsidies to farmers who cut back production. On April 2, Roosevelt sent a new large-scale spending program to Congress, and received $3.75 billion which was split among PWA, WPA, and various relief agencies.[4] Other appropriations raised the total to $5 billion in the spring of 1938, after which the economy recovered.
Some economists believed that banking reforms already enacted were insufficient and that further reforms were warranted. Many suggestions put forward by Chicago economists in two 1933 memoranda that came to be known as the Chicago plan, were resurrected and recirculated in a 1939 draft proposal entitled A Program for Monetary Reform.
Although the American economy recovered in mid-1938, employment did not regain the 1937 level until the United States entered World War II in late 1941. Personal income in 1939 was almost at 1919 levels in aggregate, but not per capita. The farm population had fallen 5%, but farm output was up 19% in 1939.
Employment in private sector factories regained the levels reached in 1929 and 1937, but did not exceed them until the onset of the war, and manufacturing employment leaped from 11 million in 1940 to just over 18 million in 1943. Productivity steadily increased, and output in 1942 was well above the levels of both 1929 and 1937.
Economists disagree about the causes of this downturn. Keynesian economists assign blame to cuts in federal spending and increases in taxes at the insistence of the US Treasury,[5] while monetarists, most notably Milton Friedman, assign blame to the Federal Reserve's tightening of the money supply in 1936 and 1937.[6] Johnathan Catalan, an Austrian school adherent, assigns blame to the relatively large expansion of the money supply from 1933 to 1937. He also pointed out that the money supply didn't tighten until after the recession began.[7] It is also worth mentioning that cannabis prohibition was enacted in 1937, killing off all jobs in the hemp industry, which only made a temporary comeback during the WWII "Hemp for Victory" campaign.
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