The 1937-38 Recession: The Relapse Inside the Great Depression Recovery
The 1937-38 recession ran 13 months, from May 1937 to June 1938 (NBER). Industrial production fell 32.5%, unemployment rose from 11.2% to 20.0%, and real GDP was 3.3% lower in 1938 than in 1937 (BEA annual data, the only kind BEA has for the 1930s). It followed the Fed's doubling of bank reserve requirements, the Treasury's sterilisation of gold inflows and the first Social Security payroll taxes.
The recession in numbers
- NBER peak and trough
- May 1937 to June 1938, 13 months · NBER
- Expansion before
- 50 months, from the March 1933 trough · NBER
- Real GDP, calendar years
- +5.1% in 1937, -3.3% in 1938, +8.0% in 1939 · BEA NIPA Table 1.1.1
- Industrial production
- -32.5%, May 1937 to May 1938 · Federal Reserve, FRED INDPRO
- Unemployment rate
- 11.2% (May 1937) to 20.0% (June 1938) · NBER macrohistory, FRED M0892AUSM156SNBR
- Consumer prices
- -2.1%, May 1937 to June 1938 · BLS CPI, FRED CPIAUCNS
- Reserve requirements
- Doubled in three steps: Aug 1936, Mar 1937, May 1937 · Calomiris, Mason and Wheelock (2011)
- Excess reserves
- $859 million (Dec 1933) to over $3.3 billion (Dec 1935) · Federal Reserve History
- Following expansion
- 80 months, to February 1945 · NBER
A recession inside a recovery
By the spring of 1937 the US economy had been expanding for four years. NBER dates the trough of the Great Depression to March 1933, and real GDP grew 12.9% in 1936 and 5.1% in 1937 (BEA). Unemployment, on NBER's monthly historical series, had come down to 11.2% by May 1937, still high by any later standard.
NBER puts the peak in May 1937. What followed was a steep fall in output: the Federal Reserve's industrial production index fell 32.5% between May 1937 and May 1938, with most of the drop between September 1937 and January 1938. Unemployment climbed back to 20.0% by June 1938, the month NBER dates as the trough.
The policy turn of 1936 and 1937
Banks had built up large holdings of reserves above what the law required: excess reserves rose from $859 million in December 1933 to over $3.3 billion in December 1935 (Federal Reserve History). Fed officials saw those reserves as a potential risk, and the Banking Act of 1935 had expanded the Fed's authority to set reserve requirements. It doubled them, to their legal maximum, in three steps in August 1936, March 1937 and May 1937 (Calomiris, Mason and Wheelock, 2011).
The Treasury moved at the same time. In late June 1936 it decided to sterilise gold inflows, so that gold arriving from abroad no longer added to bank reserves and the money supply. Fiscal policy tightened too: the Social Security payroll tax began in 1937, on top of the tax increases in the Revenue Act of 1935 (Federal Reserve History).
Which tightening mattered?
Friedman and Schwartz, in their 1963 monetary history of the United States, linked the recession's onset to the reserve requirement increases. Later work has questioned that. Calomiris, Mason and Wheelock studied the reserve holdings of individual member banks and concluded that the higher requirements were not binding on banks' demand for reserves in 1936 and 1937, so they could not have caused a large contraction in the money multiplier. That shifts the weight onto gold sterilisation and the fiscal turn, and the debate continues.
How it ended
The Federal Reserve History essay describes the exit in three parts: the Fed rolled back reserve requirements, the Treasury stopped sterilising gold inflows and desterilised the gold it had held back since December 1936, and the Roosevelt administration turned to expansionary fiscal policy. NBER dates the trough to June 1938. Real GDP grew 8.0% in 1939 (BEA), which took it above its 1937 level, and the expansion that followed ran 80 months, to February 1945.
The episode is often cited as a warning about withdrawing support before a recovery is complete. For how its depth compares with the Great Depression that preceded it, see recession vs depression, and for every NBER date since 1854, the complete list of US recessions.
Frequently Asked Questions
When was the 1937-38 recession?
NBER dates the recession from a May 1937 peak to a June 1938 trough, 13 months. It interrupted the recovery from the Great Depression: the expansion before it had run 50 months from the March 1933 trough, and the expansion after it ran 80 months, to February 1945.
How bad was the 1937-38 recession?
Severe for its length. Industrial production fell 32.5% from May 1937 to May 1938 (Federal Reserve index, FRED INDPRO). Unemployment rose from 11.2% in May 1937 to 20.0% in June 1938 on NBER's monthly historical series. BEA publishes only annual GDP for the 1930s: real GDP was 3.3% lower in 1938 than in 1937. The Federal Reserve History essay on the episode puts the fall in real GDP at 10 percent, a peak-to-trough figure that BEA's annual data cannot show.
What caused the 1937-38 recession?
The usual account is a tightening of both monetary and fiscal policy while the recovery was still incomplete. The Federal Reserve doubled member-bank reserve requirements in three steps, in August 1936, March 1937 and May 1937. The Treasury decided in late June 1936 to sterilise gold inflows, which stopped them adding to the money supply. On the fiscal side, the Social Security payroll tax began in 1937, on top of the tax increases of the Revenue Act of 1935 (Federal Reserve History).
Did the Fed cause the 1937 recession?
Economists still disagree. Friedman and Schwartz (1963) linked the onset to the reserve requirement increases. Calomiris, Mason and Wheelock (St. Louis Fed working paper, 2011), using bank-level data, found that the doubled requirements were not binding on banks' demand for reserves in 1936 and 1937 and so could not have produced a significant contraction of the money multiplier. That leaves Treasury gold sterilisation and fiscal tightening as the other candidates.
Why is it called the Roosevelt recession?
Because it began during Franklin Roosevelt's second term, after the Fed, the Treasury and the budget had all moved toward tighter policy. It is often cited as a warning about withdrawing support before a recovery is complete.
How did the 1937-38 recession end?
According to the Federal Reserve History essay, it ended after the Fed rolled back reserve requirements, the Treasury stopped sterilising gold inflows and desterilised the gold it had held back since December 1936, and the Roosevelt administration turned to expansionary fiscal policy. NBER dates the trough to June 1938, and real GDP grew 8.0% in 1939 (BEA), above its 1937 level.
How these figures were made: NBER's monthly turning points; real GDP is BEA's calendar-year series (BEA has no quarterly GDP before 1947, so no peak-to-trough GDP change is computed); industrial production, unemployment and prices are monthly values from FRED, read in November 2026. The unemployment series is NBER's historical estimate, not a BLS survey, which began in 1940. Sources: NBER business cycle dates; BEA NIPA annual data; industrial production (FRED INDPRO); NBER unemployment rate, 1929-42 (FRED M0892AUSM156SNBR); BLS CPI (FRED CPIAUCNS); Waiwood, Recession of 1937-38, Federal Reserve History; Calomiris, Mason and Wheelock, Did Doubling Reserve Requirements Cause the Recession of 1937-1938? (St. Louis Fed WP 2011-002A).