1937 And All That

After the dust settled on the US “debt deal” struck between President and Congress came the warnings. One recurring theme is the suggestion that the country will see a re-run of what happened in 1937. Those in the UK may not be familiar with that date, although a slowdown did follow the next year.

Despite his commitment to ending the Great Depression, Franklin Roosevelt was not at first amenable to the ideas of John Maynard Keynes, despite there being a number of reliably Keynesian staffers in his administration. And when FDR met Keynes, in 1934, the two did not convince each other.

Keynes had “supposed the President was more literate, economically speaking”. Roosevelt, for his part, concluded that Keynes was “a mathematician rather than a political economist”. Keynes advocated more borrowing and spending: FDR was more cautious. And he was unhappy about running a deficit.

So when calls came for the budget to be brought back into balance after Roosevelt won his second term, moves were made so to do. Here is what J K Galbraith, who at that time was a tutor at Winthrop House at Harvard University, where there were many early converts to Keynes’ ideas, later had to say on what happened.

“To urge that a budget deficit was a good thing in itself – the heart of the Keynesian remedy – seemed insane. Men of sound judgment were repelled. One does not overcome such caution by logic or eloquence but almost always the opposition comes to you rescue. It came galloping in those years.

In 1937, recovery from the Great Depression was slowly under way; production and prices were rising, although unemployment was still appalling. The men of sound judgment now asserted themselves. They moved to cut spending, raise taxes and bring the federal budget into balance. The few Keynesians protested; our voices were drowned out in the roars of orthodox applause.

As the budget moved toward balance, the recovery came to a halt. Presently there was a new and ghastly slump, a recession within the Depression. It was entirely as Keynes predicted. The men of sound judgment had made our case”

[The Age Of Uncertainty, pages 218 and 220]

The recurrence of that kind of event may be at the back of many minds right now in the USA and elsewhere.