Roosevelt’s Recession, 1937: Lasting History and Contested Policy

Reviewed by Marielle Alvino

In Roosevelt’s Recession, 1937, Jonian Rafti studies the much misunderstood economic crisis which engulfed the Roosevelt administration. At the heart of his work lies the true understanding of how economic policy was enacted throughout the first half of the 20th century. He correctly situates the beginning of his discussion not in 1937 itself, but much earlier: at the onset of the Great Depression.

Influential economists at the time like Schwartz and Friedman deeply believed that the Great Depression had been caused by incorrect monetary policies. He finds that banks, by shoring up their reserves and liquidating assets, placed a large downward pressure on the money supply. This decline in money supply could have been avoided if the Federal Reserve had initiated large-scale purchases of government securities. Nevertheless, many looked down upon the Federal Reserve’s operations because they had been considered inflationary measures.  Interventionist Maynard Keynes, on the other hand, had advocated for government spending to stimulate the economy, a view which would later develop into the mainstream approach to government policy during recessions.  Much of the confusion, lack of theories, and ideological barriers, Rafti argues, would contributed to the 1937 downturn.

The author dedicates two chapters to describing the anecdotal experiences leading up to the 1937 slump. Though initially implementing a strong interventionist policy, the crisis was prolonged when many, the President included, had thought and hoped for it to be over. Unfortunately, their untimely policies extended the downturn by several more years. In Friedman and Schwartz’s words, “the most notable feature of the revival after 1933 was not its rapidity but its incompleteness.” In retrospect, economic historians today debate the development of this recession by also considering the monetarist aspect of the slump, thus begging the question: were the lingering low levels of growth due to an insufficient fiscal intervention or a contraction in the money supply?

Rafti answers this quandary thoroughly. He, for example, cogently handles the incomplete and even, imprecise economic data available at the time by posing two different models to control for the different indicators for money supply. His attention to detail pays off, and he is able to persuasively argue that it was the lack of fiscal rollout which lengthened the economic downturn.

The author’s historical account, combined with a critically-crafted econometric analysis, gives us an analytical framework with which to truly understand how economics was adopted at the beginning of the 20th century. Subsequently, the 1937 recession stands as a cautionary tale for those in the field today:  indecision, political ambition, and a general lack of knowledge are what economists influencing government policies have the responsibility to forbear. As Rafti himself concludes, “ideology must play a role subordinate to the wellbeing of society”. His study stands as exemplary empirical evidence of his message.

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