Tuesday, August 16, 2011

Government Spending Arguments based on 1937 and 1938?

In the last couple days you may have run into media reports and pundits making the following argument: "Reducing government spending will throw us in a double dip recession just like 1937 - 1938 (recession within the depression)".

Nay, nay! It was a monetary phenomena that caused the 1937-1938 recession aka recession within a depression. The Fed increased reserve requirement several times, engaged in other policy that caused treasury yields to rise, etc., etc.. Milton Friedman has explained the case plenty of times. Friedman explains the situatation in the book A Monetary History of the United States, 1867-1960 and again in chapter three of the book Capitalism and Freedom. (1) (2)

However, the debaters are putting forth a main debate point of the reduction in spending in 1937 as being the major trigger of the recession as they point to the government spending figures in 1937 vs. 1936. The debate point is used to defend current or even further government spending during the current recession.

In Jim Powell's book FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression he addressed this very debate point. Powell clearly points to Friedman's explanation of the recession within a depression (1937- 1938) being a Fed induced recession based on monetary policy. However, Powell examines and explains that in 1936 FDR and the Democrat party purposely increased spending over the 1935 level as a campaign strategy [buy votes with spending]. They won in a land slide. Go figure!  Hence they purposely ramped up 1936 spending over 1935 spending then purposely ramped down as the election was won. Hence the debaters purposely compare 1936 with 1937 yet leave out 1935 and the "why" regarding the spike in spending in 1936. (3)

Please see the link below and you will see the actual spending numbers [1936 being clearly a spike in spending].



(1)  A Monetary History of the United States, 1867-1960, Princeton University Press, Milton Friedman , Anna Jacobson Schwartz

(2) Capitalism and Freedom, University of Chicago Press, Milton Friedman

(3) FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression, Crown Publishing Group, Jim Powell

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