How Did Federal Policies Influence the 1937-38 Recession?

[BWV]

the 1937-38 recession was devastating to the US economy which had been growing for several years, but had not yet recovered from the 1929-33 recession that defined the Great Depression. Interesting piece here tying it to the Fed sterilizing gold inflows:

When the dollar was re-pegged to gold at $35 per oz. in January 1934, the US essentially went back on a gold standard. Gold reserves constituted 85% of the monetary base and changes in those reserves accounted for most of the changes in the monetary base. Because the US received large gold inflows in the mid-1930s, monetary policy was expansionary. This was the primary reason for the economic recovery (Romer 1992).
But when the Roosevelt administration began to worry about the potential for higher inflation, the Treasury Department decided to sterilise all gold inflows starting in December 1936. In essence, its new gold holdings were held in an inactive account rather than with the Federal Reserve, where it would have become part of the monetary base and money supply. Thus, instead of allowing the monetary base to grow with the inflow of gold, the monetary base was essentially frozen at its existing level.

http://www.voxeu.org/index.php?q=node/6965

[URL]http://www.voxeu.org/sites/default/files/image/FromAug2011/IrwinFig1(1).gif[/URL]

A link to Doug Irwin's working paper here:

http://www.dartmouth.edu/~dirwin/1937.pdf

 

[ooprea]

I too am interested in this subject. It is wrong what the American is doing sometimes. There is a mention about the Recession in the movie Zeitgeist ( if you believe what the movie declares :D)

 

[dacruick]

I too am interested in this subject. It is wrong what the American is doing sometimes. There is a mention about the Recession in the movie Zeitgeist ( if you believe what the movie declares :D)

I've seen that Zeitgeist movie, its pretty good but the guy who made it is extremely biased. There is probably never 1 lone cause for a recession, but I would probably chalk a lot of it up to fear of debt and low confidence in the markets, which would be caused by the government being fiscally tight and raising taxes. In other words, some governments thought it to be advantageous to save money during a recession as a protective strategy. But when everybody is saving, money isn't being spent, people lose jobs and confidence, people save more, and here you have this vicious cycle.

Keynesian economics, which is cited in your link to the paper, represents the idea that the government must stimulate the economy in dire times, to encourage the flow of money and to support the country's weakening economy. A more modern example of this is the most recent recession caused by the housing bubble. The United States was in debt and funding multiple wars; they didn't have the cash reserves that they needed to stimulate the economy. Without the temporary support, the damages to the economy worsened and became harder to repair.