Jubak: Will US Repeat Mistakes of 1937?

Fascinating piece by Jim Jubak yesterday: “Will US Repeat Mistakes of 1937?”  The argument here, and I believe he’s right, is that the current economic recovery depends on all the massive government stimulus.  If the government thinks the recession is ending and recovery is on the way and starts to remove all its stimulus, the economy could very well fall back into recession.  That’s what happened in 1937, according to Jubak:

1937 was the year, students of the Great Depression know, that everyone from the president on down got so confident that the bad times were over that they tipped the country back from recovery to depression.

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What happened?  Buoyed by the economic numbers and a landslide in the 1936 election — Franklin D. Roosevelt had defeated Republican Alf Landon of Kansas by an Electoral College vote of 523 to 8 — the Roosevelt administration declared victory over the Great Depression.

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In 1937, the Roosevelt administration and the Federal Reserve moved to reverse many of the extraordinary measures they’d taken to fight the Depression.  In 1937, the federal deficit was cut to $2.5 billion from the previous year’s $5.5 billion as Roosevelt and Congress slashed spending by 18%.  In 1938, spending dropped still further, 10% down from the level of 1937.

And the annual deficit just about vanished.  The government ran an almost-balanced budget that year with a deficit of a mere $100 million.

The Federal Reserve moved in the same direction.  After pursuing policies that had resulted in an average 11% annual increase in the money supply in the previous four years, the Fed reversed course at the beginning of 1937 and began to contract the money supply, raising reserve requirements twice, the second time in the spring.