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Wednesday, February 18, 2009

WHY DID THE NEW DEAL RECOVERY PROGRAM OF FDR SINK INTO A ONE-YEAR RECESSION IN 1937-38?

Today's First Buggy Topic

By the time Franklyn D. Roosevelt came to office in March 1933, the USA's GDP had fallen over a third from the start of the Great Depression at the end of 1929.  Unemployment had soared from under 4.0% to over 20%.  Over the next three years, FDR's New Deal programs --- especially fiscal stimuli, the end of the dollar's link to gold, and its depreciation in exchange rate markets: plus the salvaging policies for sanitizing the banking system --- reversed the fall in GDP with fast economic recovery.  Similarly, unemployment fell from 20.6% to 9.1%

Enter the buggy topic: starting in late May 1937, a big contraction of GDP and a rise in unemployment occurred.  It was a major recession within the Great Depression.  And though a fast recovery resumed a year later --- GDP growing very fast from the end of 1938 until the end of 1941 (December 8th, recall, marked our entry into WWII) --- employment growth itself lagged. 

What Happened Here and How Serious Was It? 

The answers to these two questions are the subject of prof buggy's lengthy, data-filled comments that were posted earlier today at the Marginal Revolution . . . the very good economic blog run by Professor Tyler Cowen, a flexible, open-minded libertarian economist.  Click here for the thread started by Professor Cowen's post, along with the reply of prof bug.