Recession of 1937–1938

The downturn was perhaps due to nothing more than the usual rhythms of the business cycle, but up until 1937, Roosevelt had claimed responsibility for the US's excellent economic performance.

[3] Business-oriented conservatives explained the recession by arguing that the New Deal had been very hostile to business expansion in 1935–1937, had threatened massive antitrust legal attacks on big corporations and by the huge strikes caused by the organizing activities of the CIO (Congress of Industrial Organizations) and the AFL (American Federation of Labor).

[6] Keynesian economists stated that the recession of 1937 was a result of a premature effort to curb government spending and balance the budget.

[9] In November 1937 Roosevelt decided that big businesses were trying to ruin the New Deal by causing another depression that voters would react against by voting Republican.

[12] Ignoring the requests of the Treasury Department and responding to the urgings of the converts to Keynesian economics and others in his Administration, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power.

[13] Roosevelt explained his program in a fireside chat in which he told the American people that it was up to the government to "create an economic upturn" by making "additions to the purchasing power of the nation".

Although the American economy began to recover in mid-1938, employment did not regain the early 1937 level until the United States entered World War II in late 1941.

Cuts in federal spending and increases in taxes at the insistence of the US Treasury caused many Americans to lose their jobs, with knock-on effects on the broader economy.

[17] In addition, the Federal Reserve's tightening of the money supply in 1936 and 1937 caused an increase in interest rates, which discouraged investment in business.

[18] Mainstream economists differ in the relative importance they assign to each of these factors: Monetarists and their successors have tended to emphasize monetary factors and the downsides of regulating the economy via fiscal policy, while Keynesian economists assign similar weight to both monetary and fiscal considerations.

New Keynesian models tend to emphasize situations (such as the zero lower bound) where monetary policy arguably loses its effectiveness.