The changes in the net effect of government spending have been heavily emphasized as a cause of both the recession and the revival of 1937‒38. The Social Security payroll tax debuted in 1937, on top of the tax increase mandated by the Revenue Act of 1935. ![]() Friedman and Schwartz (1963, 544) maintained that “The combined impact of the rise in reserve requirements and-no less important-the Treasury gold-sterilization program first sharply reduced the rate of increase in the monetary stock and then converted it into a decline.” This brief essay is limited to noting that there is an ongoing debate about which policy played the greater contractionary role.įiscal policy hardly helped. By preventing gold inflows from becoming part of the monetary base, this policy abruptly halted what had been a strong monetary expansion. ![]() The sterilization policy severed the link between gold inflows and monetary expansion. The Fed’s contractionary policy was complemented by the Treasury’s decision, in late June 1936, to sterilize gold inflows in order to reduce excess reserves. The reason is that when short-term rates are low, it is less costly to hold large amounts of non-interest-earning reserves than to repeatedly incur the fixed cost of adjusting. ![]() Low interest rates also contributed to the high level of excess reserves and may well have been a more important reason for the increase of excess reserves. Friedman and Schwartz (1963) share the view that banks increased their preferences for reserves in the wake of the 1929 crash. Uncertainty, associated with runs on the banking system from 1929 to 1933 and the ensuing economic problems, probably explains part of the increase in excess reserves. Remarkably, they swelled from $859 million in December 1933 to over $3.3 billion in December 1935 (Roose 1954).Ī question arises: Why did banks hold such large quantities of reserves? A 2010 piece published by the Atlanta Fed answers this question (Dwyer 2010). Excess reserves averaged about $500 million in 1933. In 1936, to prevent an “injurious credit expansion,” Fed policymakers doubled reserve requirement ratios to soak up banks’ excess reserves (which is money above the amount banks were required to hold as a fraction of customers’ deposits) (Federal Reserve Bank of St. Finally, industrial production fell 32 percent (Bordo and Haubrich 2012).Īccording to the literature on the subject, the possible causes of that recession were a contraction in the money supply caused by Federal Reserve and Treasury Department policies and contractionary fiscal policies. Unemployment, which had declined considerably after 1933, hit 20 percent. A few statistics reveal the severity of the 1937 recession: Real GDP fell 10 percent. Similarities between the recent recession and the Great Depression have piqued interest in the “recession within Depression.” Policymakers are hoping to learn from this historical episode in order to avoid repeating it.Īccording to the National Bureau of Economic Research, the 1937 contraction, which lasted from May 1937 until June 1938, was America’s third-worst recession of the twentieth century, paling in comparison to the 19 downturns. The recession of 1937 lived quietly in the Great Depression’s shadow, that is, until the 2008 crisis rekindled interest in mid-recovery contractions. The recovery began in 1933 and culminated during World War II. It seems to me that you are sufficiently far-sighted that you have a responsibility to call now for a ban on housing evictions.The 1937 recession occurred during the recovery from the Great Depression. ![]() Result of the impending depression, when Constitutional policy is moving to head off such a result. I see no reason social conditions should be allowed to deteriorate as a It is one which is coming about by way of a sea change in middle class public opinion.Īmong other things, it is bound to mean an increased individually enforceable right to housing, and in effect, a ban on housing evictions. This will fundamentallyĬhange the nature of the economy. The latter means more individually enforceable rights in those facts. Parrish), to one emphasizing maintenance of important facts. Regime, derived from the 1937 case of West Coast Hotel v. In my recent book on eminent domain, I noted an emerging shift in Constitutional policy, from one granting government broad discretion with respect to important facts such as housing (this is the “scrutiny” I realize that you are not lawyers, but you will be supported in your call for a ban on housingĮvictions, by important developments in Constitutional law, developments tending toward such a ban. I read about your recent comments on the economy and I think it is time you called for a ban on housing evictions.
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