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The Great Depression (1929-1933) The Union Recession (1945)
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The Roosevelt Recession (1937-1938)


The Roosevelt Recession (1937-1938) was a severe economic downturn that occurred after the Great Depression, a period of significant economic decline that began in 1929 and lasted until the late 1930s. The recession was named after President Franklin D. Roosevelt, who was in office at the time. This recession happened after a period of economic recovery and growth that had started in 1933, following the beginning of the Great Depression.

Historical and Economic Context

Before the Roosevelt Recession, the United States had experienced the worst economic crisis in its history, the Great Depression. This economic downturn was characterized by a massive decline in industrial production, a collapse in the stock market, and widespread unemployment. In response to the crisis, the government, under President Roosevelt’s leadership, implemented a series of programs and policies known as the New Deal. These policies were designed to stimulate economic growth, alleviate unemployment, and restore confidence in the financial system by providing jobs, infrastructure development, and support for farmers and businesses.

The period between 1933 and 1937 saw significant economic growth and recovery in the United States, with the unemployment rate dropping from 25% to 14.3%. However, this progress was halted by the onset of the Roosevelt Recession in 1937.

Causes and Triggers

Primary Causes

The primary causes of the Roosevelt Recession included:

  1. Fiscal Policy: In 1936, the U.S. government began reducing its spending, which decreased economic demand. This spending reduction resulted from the government’s belief that the economy was on a stable recovery path and that further stimulus was unnecessary. Additionally, social security taxes were introduced in 1937, which reduced consumer spending by lowering disposable income[9].
  2. Monetary Policy: The Federal Reserve tightened its monetary policy by increasing reserve requirements for banks in 1936 and 1937, which led to reduced lending and further slowed down the economy. The Federal Reserve believed that increasing reserve requirements was necessary to curb inflationary pressures and prevent banks from taking excessive risks.
  3. Loss of Confidence: The recession led to a loss of confidence among businesses and consumers, further reducing spending and investment. This confidence decline resulted from uncertainty surrounding the government’s economic policies and overall economic outlook.


Some of the triggers that worsened the recession included:

  1. The Revenue Act of 1937 increased corporate and personal income taxes, further decreasing consumer and business spending. The government introduced these tax increases to balance the budget and reduce the deficit.
  2. Labor Strikes: Labor strikes in 1937, particularly in the automobile and steel industries, disrupted production, which had a negative impact on the economy.

Duration and Severity


The Roosevelt Recession began in May 1937 and lasted until June 1938. It was marked by a rapid decline in economic activity, followed by a slow recovery.

Economic Indicators and Statistics

The severity of the recession can be seen in various economic indicators:

  1. Unemployment Rate: The unemployment rate increased from 14.3% in 1937 to 19.0% in 1938.
  2. Industrial Production: Industrial production declined by more than 30% during the recession.
  3. Gross Domestic Product (GDP): Real GDP dropped by 4.5% in 1938. This decline in GDP demonstrated the significant impact of the recession on overall economic activity.

Government Response and Actions


The government responded to the recession by implementing new policies and measures to stimulate the economy and address the crisis.

Policies, Measures, and Stimulus Packages

Some of the government actions taken during the recession included:

  1. Reversal of Fiscal Policy: In response to the worsening economic conditions, the government increased spending on public works projects, such as the construction of highways and bridges, to create jobs and stimulate economic growth[. This shift in policy was part of the Second New Deal, which aimed to provide further relief and recovery measures for the economy.
  2. Reversal of Monetary Policy: The Federal Reserve lowered reserve requirements for banks in 1938 and increased the money supply to encourage lending and spending. This expansionary monetary policy was designed to counteract the deflationary pressures caused by the recession and promote economic growth.

Societal and Economic Impact

Impact on Different Sectors of Society

The recession affected various sectors of society, including:

  1. Workers: Unemployment increased, which led to financial hardship for many families. The rise in unemployment disproportionately affected lower-income and minority populations, exacerbating existing social and economic inequalities.
  2. Businesses: Many businesses experienced decreased demand and revenue, leading to layoffs and closures. Small businesses and those in industries heavily reliant on consumer spending, such as retail and construction, were particularly affected.

Long-term Consequences and Effects

The Roosevelt Recession had long-term consequences on the economy:

  1. Increased Government Involvement: The recession reinforced the belief in the importance of government intervention in the economy. This shift in economic thinking led to a more active role for the government in managing economic fluctuations through fiscal and monetary policies.
  2. Lessons Learned: The recession taught policymakers the importance of maintaining expansionary fiscal and monetary policies during times of economic distress. The experience of the Roosevelt Recession would later influence the government’s response to future economic crises, such as the post-World War II recessions and the 2008 financial crisis.

Financial Market Impact

Impact on Financial Markets and Investors

The recession had a negative impact on financial markets:

  1. Stock Market Decline: The stock market experienced significant losses during the recession, with the Dow Jones Industrial Average dropping by over 40%. This decline in stock prices eroded investor wealth and further contributed to the loss of confidence in the economy.
  2. Decreased Investor Confidence: The recession led to a decline in investor confidence, further reducing economic investment. This decline in investment exacerbated the economic downturn and prolonged the recovery process.

Strategies and Tactics Employed by Investors

Investors adopted various strategies to minimize their losses during the recession:

  1. Diversification: Investors diversified their portfolios to reduce risk exposure to specific sectors or companies. By spreading their investments across a range of asset classes, investors were better able to protect their wealth during the economic downturn.
  2. Defensive Investing: Investors shifted their focus towards more stable, low-risk investments such as bonds and dividend-paying stocks. These investments were less likely to suffer significant losses during the recession and provided investors with a more reliable source of income.

Recovery and Reform

Timeline and Process of Recovery

The recovery from the Roosevelt Recession began in mid-1938 and continued until World War II in 1939, which helped further boost the U.S. economy. In addition, the recovery was supported by the government’s reversal of its fiscal and monetary policies and increased spending on defense and infrastructure projects. These actions helped to restore confidence in the economy and promote growth.

Reforms and Policy Changes

In response to the recession, several policy changes and reforms were made:

  1. Expansionary Fiscal Policy: The government maintained an expansionary fiscal policy to stimulate economic growth and reduce unemployment. This policy shift contributed to the economic recovery and helped to prevent future recessions of a similar magnitude.
  2. Monetary Policy Reforms: The Federal Reserve adopted a more cautious approach to monetary policy, being more attentive to the impacts of their decisions on the economy. This approach change helped promote greater stability in financial markets and the overall economy.

The Bottom Line

The Roosevelt Recession, while overshadowed by the broader context of the Great Depression, offers valuable lessons and takeaways for managing economic crises. Key points from this episode in history include:

  1. Timely Government Intervention: The importance of timely and appropriate government response to economic downturns cannot be overstated. In the case of the Roosevelt Recession, the reversal of contractionary fiscal and monetary policies helped to mitigate the crisis and support recovery.
  2. Maintaining Expansionary Policies: Policymakers must be cautious when transitioning from expansionary policies too early during an economic recovery. For example, the premature tightening of fiscal and monetary policies in 1937 contributed to the onset of the Roosevelt Recession.
  3. Managing Investor Confidence: Restoring and maintaining investor confidence is crucial for economic recovery. As seen in the Roosevelt Recession, the loss of confidence among businesses and consumers significantly impacted the economy, and rebuilding that confidence required a combination of government actions and policy changes.
  4. Lessons for Future Crises: The Roosevelt Recession provided valuable insights for managing future economic crises, such as the importance of balancing fiscal and monetary policies and the need for a proactive government response to support recovery. These lessons have been applied in subsequent crises, helping to shape modern economic policymaking.

In conclusion, the Roosevelt Recession serves as a reminder of the importance of appropriate government intervention and the careful management of fiscal and monetary policies in times of economic distress. By understanding this recession’s causes, consequences, and lessons, policymakers and economists can better prepare for and respond to future economic challenges.


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