Recession Notes

Recession of 1937-38

  • FDR
    FED Chair Marinner Ecolles

  • Treasury Henry Morgenthau, Jr.

By the numbers: Unemployment

  • under hoover the unemployment rate hit a peak of 25 percent, FDR came in and brought it down around 15-20 percent

By the numbers: GDP

  • Real gdp hits a V shape with the troph in between 1932 to 1933

  • Later in 1937 a smaller dip occurs, an after affect of the great depression

By the numbers: Impact on Industirial Output

  • industrial output took a dip after FDR’s first 100 days (Saroka: “Honeymoon period”) in 1937

  • by 1935 the industrial output starts to recover then later FDR starts the new Deal

  • After the New Deal is institutited the industrial output decreases rapidly.

Factors form 1931-33

  • Britain goes off the gold standard, throwing in the towel against specultive attacks in 1931

  • US abandons gold in 1933

  • comercial banks in the US, seing the abandonenment of gold by major European banks, began demanding covertability of their deposits with the FED into gold. Comerical banks then use gold to speculate even more. US FED lends European Central banks another $150m in gold

  • FED’S gold holdings decrease by $400 million (9/31-3/33). FED was supposed to back at lesast 405 of reserves notes with gold

  • FED MUST respond to the shrinking reserves of gold by contracting the money supply (i.e., raising interest rates and tightening credit).

A different kind of FED in 1931

  • regional FED banks had different discount window polices.

Glass-Steagall Act 1933

  • Creates the FDIC

  • Seperates banking into 2 (later 3) types — with firewalls set up between them

  • Re-organizes the FED; banks must submit to regular check-ups

  • Commerical Banks: JP Morgan, etc.

  • Investment banks: Goldman Sackhs, Merrily Lynch, etc

  • Loans: 1st National Bank, etc.

  • FOMC created (retweaked in 1935)

  • Sets ONE singullar monetary policy, particularly with the discount window

FDR’s Paranoia

  • Morganthau urged FDR to cut the FY1938 budget

  • FDR thinks that businesses are accumulating too much excess reserves, called it a “capital strike”.

  • FBI investigates finds no conspiracy

  • FDR gets on soap box and thurns further left, rheotric against monopoly power

  • Secretary of the Interior Harold Ickes attacks Henry Ford and the US oligarchy formation

FDR raises reserve requirements and sterilizes gold

  • Discount rate was acctually above market rate in 1934 which rendered the discount rate useless

  • 1935 Banking Act - Congress set the range

DFR Open Market Operations unable to cope

  • By Augaust 1936, excess reserves exceded $3 billion and growing like crazy

  • CONGRESS considers a gefty tax on undistributed corporates earnings, especialluy targeted

THIS DUDE GOING TOO FAST

Morganthau’s Mouth

  • believed in balanced budgets, stable currency, and a reduction of the national debt… yet went along with FDR’s spending to a point

  • Said that after the depression the government needs to cut spending