The recession of 1937--a cautionary tale.
Velde, Francois R.
Introduction and summary
The U.S. economy is beginning to emerge from a severe economic
downturn precipitated by a financial crisis without parallel since the
Great Depression. As thoughts turn to the appropriate path of future
policy during the recovery, a number of economists have proffered the
recession that began in 1937 as a cautionary tale. That sharp but
short-lived recession took place while the U.S. economy was recovering
from the Great Depression of 1929-33. (1)
According to one interpretation, the 1937 recession was caused by
premature tightening of monetary policy and fiscal policy prompted by
inflation concerns. The lesson to be drawn is that policymakers should
err on the side of caution. An alternative explanation is that the
recession was caused by increases in labor costs due to the industrial
policies that formed part of the New Deal--the policies of social and
economic reform introduced in the 1930s by President Franklin D.
Roosevelt. If a policy lesson can be drawn from this, it might have more
to do with the dangers of interfering with market mechanisms.
The goal of this article is to present the relevant facts about the
recession of 1937 and assess the competing explanations. Although
overshadowed by its more dramatic predecessor, the recession of 1937 has
received some attention before, in particular Roose (1954) and Friedman
and Schwartz (1963). Then, as now, the competing explanations centered
on fiscal policy, that is, the impact of taxation and government
spending on the economy; monetary policy, or the management of currency
and reserves; and labor relations policy, or more broadly government
policy toward businesses.
The rest of this article is organized as follows. I first present
the salient facts about the 1937 recession. I then review the competing
explanations and finally provide a quantitative assessment of their
likely contributions to the recession. I find that monetary policy and
fiscal policy do not explain the timing of the downturn but do account
well for its severity and most of the recovery. Wages explain little of
the downturn and none of the recovery.
The recession
Before describing the salient features of the 1937 recession, I
first take up the issue of its timing. The traditional National Bureau
of Economic Research (NBER) business cycle dates put the peak of the
recession in May 1937 and the trough in June 1938. Romer (1994) argues
that there are inconsistencies in the way these dates were established
over time, devises an algorithm that closely reproduces the dates of
post-war business cycles, and applies it to the Miron and Romer (1990)
industrial production series to produce new dates. In the case of the
1937 recession, Romer identifies August 1937 as the start of the
recession. Cole and Ohanian (1999) implicitly use the same starting date
when they state that industrial production peaked in that month. i will
stick to the traditional date for several reasons. One is that Romer
(1994) directs her argument mostly at cycles before 1927, when a shift
in NBER methodology occurred. Another is that the NBER dating process
considers a broader set of series than just industrial production. Roose
(1954) lists the peaks of 40 monthly series and shows that 27 series
peaked before August. Finally, industrial production as measured by the
Board of Governors of the Federal Reserve System peaked in May 1937.
There is no controversy over the end date of the recession, set by the
NBER and Romer (1994) in June 1938.
[FIGURE 1 OMITTED]
Figure 1 plots real annual gross domestic product (GDP) per capita
(population aged 16 years and older) over the twentieth century. The
trend line follows that series' average growth rate over the
periods 1919-29 and 1947-97, and is set to coincide with the series in
1929. This is the metric by which Cole and Ohanian (2004) show that the
recovery after the Great Depression was weak, since the series does not
return to trend until 1942. The exceptional nature of the Great
Depression and the ensuing recovery is starkly evident, but the 1937
recession barely registers in the annual series. The reason is that the
recession is so short, beginning in mid-1937 and ending in mid-1938.
To get a better sense of the importance of this episode, we need to
look at higher-frequency data. The national income and product accounts
(NIPAs) are not available at the usual quarterly frequency before 1946,
however, so we have to resort to other series. Figure 2 plots a monthly
index of industrial production, which will be the main focus of my
analysis in the final section. Again, a trend line has been added,
growing at the average rate of growth for the period from January 1919
to August 1929. The severity of the 1937 recession is now apparent. In
particular, it is striking to see that the speed at which industrial
production contracted is greater than during the Great Depression. From
its peak in July 1937 to its trough in May 1938, industrial production
declined 32 percent. By comparison, it took two full years for
industrial production to fall as much from its July 1929 peak. Other
measures confirm the severity of the 1937 recession--for example,
employment fell by 22 percent and stock prices declined by over 40
percent (Carter et al., tables Cb46 and Cb53).
[FIGURE 2 OMITTED]
Another striking aspect of the 1937 recession is the recovery that
ensued. The rate of growth of industrial production was slightly higher
than that which prevailed over the period 1933-37 (22 percent per year
compared with 21 percent), and the recovery proceeded smoothly, without
the pauses and reversals that marked 1934. Had it not been for the 1937
recession, industrial production would have returned to its trend three
or four years earlier.
Although official NIPA data are not available on a quarterly basis
during that period, Balke and Gordon (1986) have estimated the
components of gross national product (GNP), using regression-based
interpolation. Although these estimates should be taken with care, I
show them in figure 3; I present the growth rates in table I for the
period of interest, with the averages for the preceding expansion as the
point of comparison. They display some interesting differences of timing
with industrial production. Nondurables consumption growth, strong in
the last three quarters of 1936, stalled in early 1937 and collapsed in
the third quarter. The various components of investment do not show such
a clear pattern until the fourth quarter of 1937, when all growth rates
turn negative, in contrast, the recovery is firm across all sectors in
the third quarter of 1938.
[FIGURE 3 OMITTED]
Fiscal policy
In the 1930s, total government was still a relatively small but
growing share of the economy: In 1929 total government consumption and
investment represented 9 percent of GDP, and by 1939 it had reached 16
percent. During the same period, the federal government grew in
importance relative to the states and local government: Federal spending
grew from 1.6 percent to 6.4 percent of GDP. (2) However, figure 4 shows
that the stance of fiscal policy at the state and local level did not
change much during the period under consideration. I will therefore
concentrate on federal finances.
Until the Great Depression, the traditional fiscal policy had been
one of balanced budgets. During the early stages of the New Deal, the
vast expansion of the federal government was financed through debt, but
by the middle of the 1930s, concerns were growing over the size of the
public debt, which had gone from 16 percent of GDP in 1929 to 40 percent
in 1936.
In 1936, there was a deliberate attempt to return to a balanced
budget. Figure 5 shows the components of federal revenues by source and
also plots expenditures. On the expenditures side, there is little to
note except a very large spike in the second quarter of 1936. This
represents the payment of bonuses to World War I veterans, which
Congress decided to accelerate that year before the November elections.
This probably boosted demand in the last three quarters of 1936 well
above its earlier levels (table 1), but it is hard to see how it could
have precipitated a recession on its own.
[FIGURE 4 OMITTED]
On the revenue side, it is apparent that revenues increased sharply
in the first quarter of 1937. There are two main factors. The most
important one is the increase in income tax revenue, which grew by 66
percent from 1936 to 1937. This was due to a significant increase in
income tax rates in the Revenue Act passed in June 1936. The rates
previously ranged from 4 percent (starting at $4,000) to 59 percent
(above $1 million). They remained unchanged for income brackets below
$50,000, but were increased above that threshold, to reach 75 percent on
the top earners. As a result, the average marginal tax rate for incomes
above $4,000 almost doubled, from 6.4 percent to 11.6 percent. (3)
The second factor, of lesser quantitative importance, is the
beginning of Social Security taxation. The Social Security tax rate was
2 percent, with half paid by the employer, and the ceiling was $3,000.
Collection began in January 1937, and represented 10.5 percent of total
federal tax receipts for the year 1937.
The undistributed profits tax
One interesting component of fiscal policy in that period was the
introduction of a tax on undistributed profits (Lent, 1948). The
motivation for the tax was not so much to raise revenue as to encourage
firms to pay out dividends. The government saw this as desirable for two
reasons. First, the accumulation of earnings by corporations allowed
some earnings to avoid income taxation. Second, it was thought that
firms did not know the best uses of the capital they were retaining and
could possibly spend it on wasteful projects. According to this view, it
would be better to send the earnings to the shareholder and flowing back
into general capital markets.
[FIGURE 5 OMITTED]
The tax was announced, without warning, by President Roosevelt in
March 1936, and enacted in the summer as part of the Revenue Act of
1936. Earnings that were not distributed as dividends were subjected to
an additional tax. Lent (1948) found that the tax generated little
revenue because most corporations, especially the large ones, simply
paid out larger dividends. Also, smaller corporations were able to use
legal mechanisms to require their shareholders to reinvest the dividends
into shares of the corporation. The firms that were the most affected
(as shown by the increase in their tax liability) were the medium-sized
corporations.
The tax, although it had little effect in terms of revenues, could
have had two effects on the economy. First, to the extent that small and
medium firms find it difficult to access credit and capital markets,
they have to rely on internal sources of funds to finance investment.
The tax would obviously increase the cost of investment for those firms.
Second, the tax was reflective of a changed political climate and
increasingly populist rhetoric coming from politicians and the Roosevelt
administration. At the same time as the tax was announced, the Roosevelt
administration was becoming increasingly vocal against "economic
royalists," alleged monopolists, and business in general. Although
the tax was widely considered a failure and was repealed in all but name
after two years, it may have played a psychological role in increasing
uncertainty about the profitability of investment. This assessment must
be tempered by the fact that, as table 1 (p. 18) shows, there was a
surge in investment in the second half of 1936, and all components of
investment do not start falling uniformly until late in 1937.
By early 1938, the severity of the recession prompted a turnaround
in fiscal policy. This was manifested in a dramatic announcement by
President Roosevelt on April 14, 1938, of a new "spend-lend"
program with a $2 billion increase in spending.
To sum up, fiscal policy became tighter in early 1937, with a brief
return to a balanced budget due to tax increases. The stance was
reversed in early 1938, shortly before the trough of the recession.
Monetary policy
Most of the recent discussions of the 1937 recession have centered
on the monetary policy carried out by the Federal Reserve System.
Because the 1930s were a period of great change for monetary policy, I
will first provide some background on this change to show that the Fed
abandoned its traditional instruments and adopted a passive attitude
during the first half of the 1930s. When policy became active again in
1935, it was through the use of a new instrument, namely, changes in
reserve requirements, coupled with actions by the U.S. Department of the
Treasury. The stance of monetary policy, like that of fiscal policy,
reversed as the 1937 recession took its toll. I will then examine in
more detail the response of the banking system to monetary policy during
the recession.
Background
The 1930s were a period of considerable change for U.S. monetary
policy. The turning point was the Gold Reserve Act, passed on January
30, 1934. It nationalized all gold in the United States, including the
gold reserve held by the Fed. It authorized the president to devalue the
dollar, which he did immediately, changing the dollar price of an ounce
of gold from $20.67 (its price since the 1830s) to $35. This implied
that the Treasury made a capital gain of 60 percent, or about $2
billion, on its newly acquired gold holdings. The proceeds were used to
create an Exchange Stabilization Fund under the sole discretionary
control of the Treasury. The existence of the fund gave the Treasury a
strong hand in its dealings with the Fed, and for the next 17 years the
Treasury dominated monetary policy.
From its foundation to the early 1930s, the Fed's balance
sheet had consisted essentially of its gold reserve, which backed the
currency (subject to a 40 percent reserve requirement) and private debt.
Monetary policy consisted of managing the portfolio of private debt,
either through discounting or, since the 1920s, through open-market
purchases and sales of private debt. The debt was short-term, either
commercial paper or bankers' acceptances, with typically 90 days or
less to maturity.
Figure 6, panels A and B show the rates at which the Fed bought
commercial paper and bankers' acceptances, compared with
open-market rates. The Fed's rate in panel A is somewhat lower than
the market rate because the latter pertains to paper of four to six
months maturity, whereas the Fed purchased shorter maturities. Both
panels in figure 6 show that, until 1932, the Fed's rate was close
to the market rate; in other words, the Fed was active in the open
market. After 1934, the Fed's rates are above market rates,
indicating that the Fed had ceased to use interest rates for the conduct
of monetary policy.
In the years that followed, the stance of monetary policy was
dictated by actions of the Treasury. This can be seen in figure 7, which
plots the sources of reserve funds--that is, the existing and potential
sources of legal tender. Treasury currency (that is, currency issued
directly by the Treasury) and Federal Reserve credit--the first two
components--played no role in the 1930s, as they remained essentially
constant. The Fed's portfolio during that period consisted of gold
certificates (issued by the Treasury in 1934 in exchange for the
Fed's gold reserve) and government bonds. Private debt had
completely disappeared. The portfolio was kept constant throughout the
period, with a few minor exceptions. The gold stock, the third
component, was the main source of variation in the monetary base.
The Treasury did not immediately monetize the capital gain it had
made on gold. The source of growth in the monetary base is to be found
elsewhere. From 1934 on, persistent gold inflows into the United States
account for the growth in the gold component. There were two reasons for
the inflows. After the devaluation of 1934, foreigners bought dollars
because they had become cheaper (and U.S. domestic prices had not
adjusted fully). Later, gold inflows continued because increasing
political instability in Europe induced long-term capital flows into the
United States.
[FIGURE 6 OMITTED]
When foreigners offered gold for sale, the Treasury issued gold
certificates and deposited them at the Fed, increasing its
account's balances. The Treasury then used the increase to pay for
the gold. Thus, gold inflows translated one for one into increases in
the monetary base. In other words, gold inflows were monetized. This
accounts for the steady increase in the monetary base.
[FIGURE 7 OMITTED]
The growth in reserves
Then, as now, the U.S. banking system comprised a variety of banks
depending on supervisory jurisdiction. Banks incorporated under federal
law were all members of the Federal Reserve System and the Federal
Deposit Insurance Corporation (FDIC). Banks incorporated under state law
could be members of the Federal Reserve System and the FDIC, the FDIC
only, or neither. Unincorporated banks could be members of the FDIC. In
June 1936, member banks represented 70 percent of all bank deposits. In
this section I focus on member banks' statistics, since they were
more frequently collected by the Federal Reserve System and were
directly affected by the System's changes in reserve requirements.
(4)
Reserves (which can take the form of currency or balances at
Federal Reserve Banks) were required by law since 1917. The quantity of
required reserves depended on the total amount of demand deposits (net
of deposits of other banks) or time deposits that a bank held, as well
as its location (see table 2). Reserves above the required amount are
excess reserves. If a bank located in a central reserve city held $1 in
excess reserves, it could potentially increase its demand deposits by an
additional $7.69.
For all member banks, reserves grew from $2,235 million in June
1933, near the trough of the Great Depression, to $6,613 million by
March 1937, on the eve of the 1937 recession, a 300 percent increase.
Demand deposits during the same period grew only from $26,564 million to
$41,114 million--a 150 percent increase. With constant reserve
requirements, this meant that excess reserves grew considerably: In
January 1934, they were estimated to be $827 million, but by March 1935,
when the Fed began to be concerned, they had reached $2,200 million, or
48 percent of total reserves. By comparison, before the banking panics
of 1931, excess reserves were typically 2 percent or 3 percent of total
reserves (Board of Governors of the Federal Reserve System, 1943).
Why did banks hold such large reserves? Friedman and Schwartz
(1963) propose a shift in banks' preferences for reserves as a
consequence of the banking panics of 1931-33. This shift took place
gradually over the period 1933-36, and subsided slowly only in the late
1930s and early 1940s as experience with the FDIC and general economic
recovery made banks more comfortable holding lower levels of reserves.
(5) In contrast, Frost (1971) has argued that banks' demand for
reserves was stable throughout the period. With fixed costs of adjusting
reserves, that demand for reserves behaves differently at low levels of
interest rates than at higher levels. Below a certain threshold, the
demand rises much more rapidly as rates fall. The reason is that, when
short-term rates are low, it is less costly to hold large amounts of
reserves than repeatedly to incur the fixed cost of adjusting.
Frost's explanation for high reserves in the 1930s is solely the
low level of interest rates.
Policy reaction (1935-37)
Beginning in March 1935, the Federal Open Market Committee (FOMC),
which determines monetary policy and interest rates, became increasingly
concerned with the growth in excess reserves. Its members feared that
such reserves could ultimately lead to an uncontrolled credit expansion,
once banks decided to increase their deposits. At that date, the Fed
staff prepared a background memo titled "Excess reserves and
Federal Reserve policy." The authors believed that increasing
government debt supplied the bonds that led to reserve growth. But the
memo concluded that neither past experience nor central bank theory gave
any guidance for a policy response in the current circumstances
(Meltzer, 2003, pp. 492-493).
Yet in spite of mounting concerns, it took the Fed over a year to
take action. This was due partly to the uncertainty presented in the
March 1935 memo and partly to the need to avoid antagonizing the
Treasury. Concerns over potential inflation were balanced against
concerns over the recovery and the federal government's desire for
low interest rates when it was financing its debt.
By October 1935, excess reserves in the banking system exceeded the
Fed's portfolio of government bonds, and the FOMC decided to
analyze the distribution of excess reserves across banks to make sure
that increases in requirements would not fall disproportionately on some
banks. It also decided to coordinate policy with the Treasury. The
ultimate result of this coordination was that the policy actions in
1936-37 took two forms: increases in reserve requirements by the Fed and
sterilization of gold inflows by the Treasury (explained in more detail
later).
Friedman and Schwartz (1963, p. 544) see monetary policy (that is,
the increase in reserve requirements and, "no less important,"
the gold sterilization program) as "a factor that significantly
intensified the severity of the decline and also probably caused it to
occur earlier than otherwise."
Reserve requirements
The Banking Act of 1935, passed in August 1935, made important
changes to the structure of the Federal Reserve. (6) One of the changes
concerned reserve requirements. Since 1917, reserve requirements had
been set in section 19 of the Federal Reserve Act at various levels
depending on the location of the member bank. (7) The Board of Governors
was now given the authority to change the reserve requirements "in
order to prevent injurious credit expansion or contraction," (8)
but the requirements could be no lower than they had been since 1917 and
no higher than twice those levels.
The purpose of increasing the reserve requirements was to pave the
way for a return to the Fed's traditional policy tools, namely,
rediscounting (buying privately issued debt at a discount to reflect the
time to maturity) and open-market operations. The Fed thought that, as
long as excess reserves were so large, it could have no effect on the
banking sector's lending activities. Only if banks became borrowers
again would the Fed be able to ease or tighten policy; until then, in
the famous phrase of Marriner Eccles, Chairman of the Board of
Governors, the Fed would be "pushing on a string" (Meltzer,
2003, p. 478).
Why were policymakers worried about inflation in 1936? The answer
is twofold. First, there were objective signs of inflation. Wholesale
prices, which had been stable in the early part of 1936, began to rise
in late 1936 and early 1937. The annualized six-month change in
wholesale prices rose steadily from 0.5 percent in August 1936 to 10.2
percent in March 1937. Retail prices as measured by the National
Industrial Conference Board's (NICB) cost-of-living index did not
rise as fast, but the 12-month change was nevertheless 5.4 percent by
March 1937. (9)
The other answer is that some policymakers were still worried about
repeating what they saw as the mistake of the 1920s. In that view, the
Great Depression was partly a result of the speculative excesses of the
1920s, which the Fed had not done enough to prevent. Whether they saw
incipient signs of a speculative boom developing (or whether they wanted
to prevent such a boom from getting started in the first place), there
was for some an inclination toward preemptive action. Although this view
was perhaps not dominant in the FOMC, it nevertheless supported the move
toward action in early 1937 and slowed the reversal of policy later on
during the downturn.
That said, it should be emphasized that the Fed did not see the
increase in reserve requirements as contractionary, and its public
pronouncements insisted that the stance of policy had not changed. In
the Fed's view, mopping up excess reserves through the increase in
requirements should have had no effect. Recent authors such as Currie
(1980), Calomiris and Wheelock (1998), and Telser (2001) have argued
that the increase in reserve requirements did not cause the recession.
Table 2 shows the changes in reserve requirements. The first
increase in reserve requirements was announced on July 14, 1936, and
went into effect a month later. At the time, total reserves stood at
$5.87 billion, split almost exactly between required reserves of $2.95
billion and excess reserves of $2.92 billion. Thus, an increase of 50
percent in reserve requirements could be easily met by banks with the
excess reserves.
The second and third increases were announced on January 30, 1937:
The first was to take effect on March 1; the second on May 1. At the
time of the announcement, total reserves had increased to $6.78 billion,
and required reserves were $4.62 billion, slightly higher than they had
been after the first increase. The increase of 33 percent in
requirements could again be met from excess reserves, leaving over $600
million in excess reserves.
Figure 8, panel A shows total and estimated required reserves at
weekly reporting member banks. The four vertical dotted lines on this
panel and on panels B and C mark the four changes in reserve
requirements (three increases and one decrease).
Two things are apparent from figure 8. One is that, in the
aggregate, the increase in reserve requirements did not reduce excess
reserves to zero (see panel B): The estimated excess reserves on May 5,
1937, the first reporting date after the last increase, were $887
million--28 percent of what they were on August 12, 1936, before the
increases began.
The second point to make is that the growth of total reserves
paused during 1937, and then resumed, mirroring the behavior of the
monetary base (see figure 8, panel A). The two lines in the graph thus
summarize the two prongs of monetary policy: The lower line (required
reserves) reflects the Fed's actions, while the upper line (total
reserves) reflects Treasury's sterilization of gold inflows.
Gold sterilization
As explained previously, since 1934 the Treasury had let gold
inflows increase the monetary base. Starting in December 1936, the
Treasury changed its procedure. Instead of, in effect, converting gold
inflows into the monetary base, it used proceeds from bond sales to pay
for the gold that was brought to the Treasury at the price of $35 per
ounce. As a result, the gold stock in the United States continued to
increase but the monetary base remained roughly constant (see figure 9,
p. 26). From December 1936 to February 1938, the gold stock increased 15
percent, but the monetary base grew by only 4 percent. The policy was
halted in February 1938 and reversed over the ensuing months.
The response of banks
How did banks respond to the increase in reserve requirements?
Figure 8, panel B plots excess reserves. It is apparent that, in the
aggregate, excess reserves were sufficient to meet the new requirements,
and panel B shows no sign of banks scrambling to keep their excess
reserves at high levels, contrary to what is occasionally asserted.
The picture is somewhat different, however, if one looks at more
disaggregated data, Figure 8, panel C shows the proportion of required
reserves out of total reserves by class of member banks. Recall that
member banks were classified according to their location. Banks in New
York City and Chicago (the two central reserve cities) were considerably
closer to their limit than banks in reserve cities and country banks.
[FIGURE 8 OMITTED]
A comparison of table 3 and table 4 confirms that the reaction of
member banks in New York City was markedly different from that of the
banking system overall. From June 1936 to June 1937, total deposits grew
by 2.3 percent overall but only 0.3 percent in New York City member
banks. Loans increased by 8.6 percent overall, and by 21.2 percent among
New York City banks; but the latter banks reduced their holdings of
government bonds by 23.8 percent and other securities by 13.0 percent,
while banks overall reduced these holdings 2.1 percent and 2.4 percent,
respectively.
Although banks did not suddenly increase their reserve holdings,
they did reduce the rate of growth of deposits. Figure 9 shows that
demand deposits, which had been growing steadily at 20 percent per year
since March 1933, grew more slowly starting in July 1936 and peaked in
March 1937. Over the next 12 months, they fell by 6 percent, reached a
low in December 1937, and began growing again after the end of the
recession.
This describes the size of the banking sector from the liability
side. Which assets shrank to meet this fall in liabilities? Figure 10
shows that member bank assets fell into three broad categories:
reserves, investments (U.S. bonds and other securities), and loans.
Reserves grew, as we saw. Loans were not affected much, although they
grew more slowly than before. Among reporting member banks, the 12-month
growth rate of loans peaks on August 4, 1937, at 19.1 percent, and the
absolute level peaks on September 15, 1937, at $10.05 billion, 16
percent higher than a year before. Loans then fall 4.5 percent in the
next three months as the recession deepens. The category that bore the
brunt of the reduction was investments, particularly government debt,
simply because those were the most liquid assets. This can be seen for
weekly reporting member banks in table 5, which shows the composition of
assets for the week following each change in reserve requirements. From
the second to the third increase (March-May 1937), total assets fell by
$1.3 billion: Loans actually increased by $0.5 billion, and most of the
reduction came from U.S. bonds.
Looking at interest rates confirms that the impact of reserve
requirements manifested itself on tradable securities rather than loans.
Table 6 shows that rates charged by banks on loans were little affected
(and in some locations fell) after the reserve requirements increased,
while short-term commercial paper rates rose.
The impact of the second round of reserve requirement increases was
felt immediately in the U.S. bond market. There is in fact a particular
day, March 15, when U.S. long-term bonds, whose yields had remained very
stable, went up by 2 basis points, prompting the Secretary of the
Treasury to get on the phone and complain to Eccles, the Chairman of the
Fed, that the Fed had bungled the increase in reserve requirements.
[FIGURE 9 OMITTED]
Figure 11, panels A and B show clearly how bond rates increased in
March 1937, before the recession began. Figure 12, which shows that
corporate issues declined sharply in March 1937, suggests a channel
through which the increase in reserve requirements could have affected
the economy, namely, by reducing the banking sector's demand for
(government and) corporate liabilities. The fall in lending translated
into higher interest rates and a lower volume of issues.
Prices
The behavior of prices (see figure 13) during the recession is
broadly consistent with the notion that monetary policy was
contractionary. Whichever indicator one uses, it is apparent that prices
peaked in mid-1937, as the recession was under way (recall that there is
some ambiguity as to the exact starting date, either May or August). The
aggregate indexes normally used (the deflators for gross domestic
product and personal consumption expenditures) are only available
annually for this period. The monthly indexes such as the National
Industrial Conference Board's cost-of-living index and the
Wholesale Price Index, closely watched at the time for evidence of
inflation, both peaked in September 1937; the Consumer Price Index did
too, although it is not a very good measure for this period because data
were not collected on a monthly basis, and missing data are
interpolated.
[FIGURE 10 OMITTED]
What is rather puzzling is that the trend in prices, having turned
deflationary during the recession, continued well after the end of the
recession. The National Industrial Conference Board's index bottoms
out in June 1939, having declined by 2.2 percent since the end of the
recession, while wholesale prices, having fallen 3 percent, bottom out
in August 1939 just before the outbreak of the European war sets off
speculative buying.
Cole and Ohanian (1999) have used the recession of 1920-21, during
which output fell sharply after a steep drop in prices and recovered
strongly once the deflation ended, to highlight the puzzling nature of
the slow recovery after the end of deflation in 1933. The recovery of
1938 adds to this puzzle: The economy rebounded as sharply as in
1921--an analogy noted by Friedman and Schwartz (1963) in spite of
continued deflation (Steindl, 2007).
The following conclusions emerge from the foregoing discussion.
First, monetary policy was as much a consequence of Fed actions as
Treasury actions. The fall in the money stock was a direct consequence
of the gold sterilization program. Second, the increases in reserve
requirements began to bite only in early 1937. Finally, the channel
through which monetary policy affected the banking system is not as
straightforward as sometimes asserted. Lending did not begin to fall
until the recession was under way. The reaction of the banking system
was to liquidate securities holdings, primarily U.S. bonds, but also
private sector securities. The impact on market rates is evident
starting in March 1937.
Labor costs
Roose (1954) and other authors have cited alternative explanations
to the monetary and fiscal policy stories. A number of these stories
center on increased labor costs, which I now take up.
New Deal policies and the slow recover.
As Friedman and Schwartz (1963, p. 493) put it, "the most
notable feature of the revival after 1933 was not its rapidity but its
incompleteness": Unemployment remained high throughout the 1930s,
the revival was erratic and uneven, and private investment (particularly
construction) remained very low compared with the 1920s. They go on to
note that prices rose much more than in earlier expansions despite the
large resource gaps that remained. The reason was "almost surely
the explicit measures to raise prices and wages undertaken with
government encouragement and assistance.... In the absence of the wage
and price push, the period 1933-37 would have been characterized by a
smaller rise in prices and a larger rise in output than actually
occurred" (Friedman and Schwartz, 1963, pp. 498-499).
Cole and Ohanian (2004) develop a general equilibrium model to
address this question. Specifically, they document that output,
consumption, investment, and hours worked remained far below trend from
1934 to 1939, while total factor productivity was back to trend in 1936
and wages were 10 percent to 20 percent above trend. They also document
the history of the National Industrial Recovery Act (NIRA), which gave
industries protection from antitrust legislation as long as firms raised
prices and shared their profits with workers in the form of higher
wages. The NIRA was struck down by the Supreme Court in May 1935, but
the National Labor Relations Act (NLRA), or Wagner Act, was passed in
July 1935 to increase the bargaining power of unions; furthermore,
according to Cole and Ohanian (2004), the Roosevelt administration did
not enforce antitrust laws, allowing firms to continue to collude in
raising prices. The combined effect of firm collusion and worker
bargaining power is shown in their equilibrium model to result in lower
output than in a competitive version of the same economy. Starting from
1934 conditions and assuming the same changes in total factor
productivity (that is, changes not due to changes in inputs) as in the
data, the competitive version of the economy returns to trend by 1936 or
so, while the cartelized version of the economy, calibrated so that
wages are 20 percent above their normal level, displays lower
consumption, investment, and employment, along with higher wages.
[FIGURE 11 OMITTED]
[FIGURE 12 OMITTED]
New Deal policies and the 1937 recession The Wagner Act, which is
still in force today, immediately generated legal challenges. Several
cases involving that act were taken up by the Supreme Court in January
1937.
[FIGURE 13 OMITTED]
In an earlier version of their work, Cole and Ohanian (2001, p. 49)
commented that "while more work is required to assess the 1937-38
downturn, our theory raises the possibility that an increase in labor
bargaining power may have been an important contributing factor to the
downturn of 1937-38." In recent testimony to the Senate, Ohanian
(2009) went further to assert: "Wages jumped in many industries
shortly after the NLRA was upheld by the Supreme Court in 1937, and our
research shows that these higher wages played a significant role in the
1937-38 economic contraction."
The behavior of wages
Figure 14 shows the behavior of wages, as measured by the U.S.
Bureau of Labor Statistics (BLS) and the National Industrial Conference
Board, both in nominal terms and deflated by the monthly cost-of-living
index computed by the National Industrial Conference Board.
Nominal average hourly earnings as measured by the BLS had been
close to constant from January to August 1936, oscillating between
$0.571 and $0.575. They fell to $0.569 in September and then began to
rise. By April 1937, they had reached $0.638; they peaked at $0.667 in
November of that year, 17 percent higher than in September 1936. But
most of that increase (70 percent) had taken place before the Supreme
Court handed down its decision on April 12, 1937. The picture is not
much different if we look at the National Industrial Conference
Board's index: According to this measure, 67 percent of the rise
had occurred before the decision.
[FIGURE 14 OMITTED]
Stock prices (shown in figure 15) do not support the notion that
the release of the Supreme Court decision suddenly shifted bargaining
power within existing collusive arrangements from firms to workers. If
that had been the case, then the net present value of the firms'
share of the collusive rents should have fallen upon receipt of the
news. In fact, April 12, 1937, was a quiet day on stock markets, and the
next day the Wall Street Journal commented that the decision
"caused little more than a ripple in the markets," an initial
sell-off in steels having been recovered before day's end, and
trading before and after the decision "hardly better than
dull." The paper went on to assert that "had the decisions ...
gone the other way, there is little doubt that the share market would
have responded with a show of active buying; but as the reverse was
true, the stock market's following managed to be philosophic about
it" (Dow Jones and Company, 1937b, p. 37).
[FIGURE 15 OMITTED]
The commentary, as well as a quotation by Henry Ford the following
day that "we thought the Wagner Act was the law right along"
(Dow Jones and Company, 1937a, p. 2), suggests that the decision had
been correctly anticipated all along. Surprisingly, however, the stock
market had been rising steadily over the previous two years. From May
1935, when the NIRA was struck down, to April 1937, it shot up 70
percent (see figure 15).
Why did wages rise in 1936-37?
There is little doubt that the rise in wages was linked to the
Wagner Act and the resulting increase in labor union activity. Figure 16
compares the level of wages with the number of man-days lost to strikes.
While strikes were recurrent throughout the period, a sustained increase
in strikes is noticeable from the end of 1936 to a peak in June 1937 of
5 million mandays--four times the decade's average.
[FIGURE 16 OMITTED]
To test the claim that the Wagner Act caused wage increases in
manufacturing, I looked at wages in railroads and farming, sectors to
which the act did not apply. Figure 17 shows data collected by the
National Industrial Conference Board for wage rates in 25 industries,
all wage earners in Class I railroads, and farm labor. Wages did not
rise for railroad employees when they were rising in industry: In fact,
railroad wages fell during the same period. However, farm wages follow
the same pattern as industrial wages throughout the whole period.
I have looked at industry data to see if industries that saw a
greater increase in wages also saw a larger drop in employment. To do
this, I regressed the percentage change in employment from July 1937 to
June 1938 (the peak and trough of total employment) on the percentage
change in average hourly earnings from September 1936 to November 1937
(the trough and peak of nominal wages in figure 14, p. 29). The results
for the 31 industries are shown in figure 18. The relationship is
negative and significantly different from 0 at the 1 percent confidence
level. The coefficient is large: A 1 percent increase in wages leads to
a 1.8 percent fall in employment, but it is imprecisely estimated.
[FIGURE 17 OMITTED]
More problematic is the fact that these results are not robust to
slight changes in the dates at which the changes are measured. For
example, just changing the end date for wage increases from November
1937 to June 1937 reduces the [R.sup.2] statistic from 22 percent to 7
percent; and the estimated coefficient is three times smaller and not
significantly different from 0 at the 5 percent confidence level.
Quantitative assessment
I have described the main explanations proposed for the recession
of 1937. To assess which one (or more) of these explanations is the most
plausible, it is necessary to go beyond theoretical plausibility and
pure issues of timing. Ideally, one would construct a well-specified
economic model that encompasses the competing explanations, estimate the
parameters of the model using actual data, and then carry out
experiments in the model. This is a difficult task, if only because
there is not an agreed-upon model to use.
[FIGURE 18 OMITTED]
It is nevertheless possible to make a quantitative assessment,
using the techniques of vector autoregression (VAR) analysis. The basic
idea behind VAR analysis is to construct a statistical model of the
relations between any number of variables of interest. The variables are
all interrelated, both over time (one variable's current value
affects another variable's future value) and within a single time
period. That is because, typically, all of the variables are determined
simultaneously by the economy. Prices do not explain quantities any more
than quantities explain prices: Both are determined jointly by supply
and demand relationships. In a dynamic setting, where variables evolve
over time, an additional complication is that the future may influence
the past. Suppose that it is known with certainty that a certain event
will take place a year from now; individuals will plan ahead accordingly
and alter their decisions today. The future is embedded in the present
to the extent that it is anticipated. Only surprises may reveal to us
what the effect of a particular variable might be.
VAR analysis is in some ways a generalization of standard
regression analysis but acknowledges that the left-hand-side variable in
one relation is the right-and-side variable in another. Therefore all
regressions are computed simultaneously. Each regression has a residual,
which represents the effect of unexpected or unexplained variations. For
example, we may specify that output is a function of past values of
money growth, fiscal surplus, wages, and other variables of interest. In
each time period, we will have the predicted value of output based on
the past histories of these variables, and the actual value will differ
to some extent: That is the error term, or innovation. Statistical
theory tells us that a system of variables can be represented as the sum
of the responses to current and past innovations. if the innovations are
properly identified, it becomes possible to say, for example, that
output responds in a certain way to an unexpected change in money growth
or fiscal policy.
The problem is to identify the innovations to each variable. If we
allow that, say, monetary policy can be affected within the current
period by fiscal policy, then the error term in the money equation will
combine innovations to money as well as innovations to fiscal policy. In
that case, output responses to this innovation will be responses to both
monetary policy and fiscal policy, and statistics are of no use in
disentangling the two. In general, one must make identifying assumptions
guided by economic theory to interpret a VAR.
The VAR I run includes a small set of variables to describe the
state of the economy: industrial production (IP), the rate on commercial
paper to measure short-term interest rates, and the Wholesale Price
Index (WPI) to represent prices (Sims, 1980; and Burbidge and Harrison,
1985). Furthermore, it includes one variable for each competing
explanation: the money stock (M1), the federal surplus, and an index of
real average hourly earnings in industries (AHE), adjusted for changes
in output per man-hour. (10) The data are monthly and extend from
January 1919 to December 1941. (11)
The main identifying assumption is that money does not respond
within the month to other contemporary variables. Thus, innovations to
the regression of money growth on other variables represent only
innovations to money growth itself. This is a common identification
assumption for post-World War II data (Christiano, Eichenbaum, and
Evans, 1999). I also assume that surpluses do not react within the month
to anything but money growth, and that the wage does not respond to
anything but money growth and the fiscal variable.
As it turns out, this particular ordering matters little. Table 7
shows the variance--covariance matrix of the residuals from the VAR.
Note how it is close to diagonal in the first three elements, which
means that the residuals of the monetary, fiscal, and wage equations are
uncorrelated. Therefore, the residuals of the regressions can be
interpreted as fundamental innovations, that is, exogenous and
unpredictable changes in the monetary, fiscal, and wage conditions. (12)
Table 8 shows that the percentage of forecast error at various
horizons is attributable to the innovations in each of the variables.
The three factors together explain about half of the unpredictable
movements in industrial production, but wages alone explain little. The
other half is attributable to innovations to the other variables
(interest rate, prices, and industrial production itself) to which I do
not try to attach any particular meaning.
To understand how much each factor (monetary policy, fiscal policy,
and wages) contributed to the recession of 1937, I examine a historical
decomposition. The method is as follows. Using the estimated statistical
relationships between the variables and data up through December 1935
only, I predict what industrial production will be in all succeeding
months. Then, for each of the three factors, I compute the effect of its
innovations on all the variables in each of the succeeding months from
January 1936 to the end of the sample in December 1941. An innovation to
money growth affects future money growth, but also all other variables.
The effect of the sequence of innovations that I have computed from
January 1936 onward can be traced out for each factor and added to the
baseline projection of industrial production, representing how much that
factor explains.
The results are shown in figure 19. The black line represents the
actual path of industrial output over the period. The baseline
represents the forecast for industrial output based on information up
through December 1935. This forecast essentially sees industrial output
growing at a 4.5 percent trend. To the baseline I add successively the
effect of innovations to the money stock (M1), to the surplus, and to
wages.
The figure supports the following conclusions. First, the effect of
changes in wages starting in early 1937 was to depress output, but by a
small amount. (13) Moreover, the effect remains negative until late
1941, which is not surprising, since, as we saw, wages remained
relatively high. Second, fiscal shocks and monetary shocks between them
do a good job of accounting for the recession, with the following
nuances, if monetary and fiscal shocks had been the only forces at play,
the economy should have peaked in late 1936. Also, the monetary shock
alone does not explain the full depth of the recession; the fiscal and
monetary shocks explain the economy's turning point in mid-1938,
but not the full extent of the recovery.
This indicates that other forces at work in the economy sustained
the expansion from late 1936 to mid-1937, in spite of the contractionary
impact of monetary policy and fiscal policy. Likewise, other forces
contributed to the recovery, even as monetary policy and fiscal policy
turned expansionary in mid-1938. The results from the VAR need to be
interpreted with caution. In particular, they do not disprove the
importance of wages. In the Cole and Ohanian (2004) story, the change in
workers' bargaining power is not a temporary shock to an otherwise
stationary system, but a shift from one steady-state equilibrium to
another. The VAR is not designed to capture such changes. The results do
suggest, however, that as a quantitative matter the monetary and fiscal
shocks are sufficient to account for the general pattern of the
recession. Furthermore, the extent to which these factors fail to
reproduce the data is by predicting an earlier and more prolonged
downturn; in other words, the factor that is missing is an expansionary
one, not a contractionary one like wages.
Conclusion
The recession of 1937 has been cited as a cautionary tale about the
dangers of premature policy tightening on the way out of a deep
downturn. In contrast, some authors have downplayed the role of monetary
policy suggested by Friedman and Schwartz (1963). in particular, Cole
and Ohanian (1999) dismiss the role of reserve requirements in the 1937
recession for two reasons. One is timing: "we would expect to see
output fall shortly after" the changes in reserve requirements;
but, they write, industrial production peaked in August 1937, 12 months
after the first change (Cole and Ohanian, 1999, p. 10). The other is
that interest rates did not increase: Commercial loan rates remained in
the same range, and rates on corporate bonds "were roughly
unchanged between 1936 and 1938" (Cole and Ohanian, 1999, p. 10).
I have shown in this article that tightened monetary policy
consisted in the joint action of increased reserve requirements that
were staggered from August 1936 to May 1937 and gold sterilization that
started in December 1936. Gold sterilization turned the growth rate of
money negative, and banks responded to increased reserve requirements by
curtailing the financing of firms, with visible effects on interest
rates. Industrial production peaked only a few months later, in May
1937.
[FIGURE 19 OMITTED]
Moreover, monetary policy went into reverse: The New York Fed
lowered its discount rate from 1.5 percent to 1 percent on September 27,
1937; the gold sterilization program ended in February 1938 and was
reversed from February to April; and reserve requirements were lowered
on April 16, 1938, just as the federal government announced a large
increase in spending. The recession ended in June 1938.
An alternative story would rely on increased labor costs due to the
effects of the Wagner Act. The act was passed in 1935, but labor
activism built up over the ensuing two years and resulted in 10 percent
wage increases over a short period in early 1937. Although it has no
particular timing advantage over the monetary and fiscal policy
explanations, the labor costs story would plausibly account for the
onset of the recession but not for the recovery, since the wage
increases were not reversed.
Finally, a simple VAR shows that monetary and fiscal factors
account fairly well for the pattern of industrial production and, in
particular, for the depth of the recession, although other factors are
needed to explain why the economy did not contract earlier and why it
rebounded so strongly. Wages cannot account for much of the downturn.
Naturally, there are limits to the persuasiveness of an essentially
statistical exercise. But, in the absence of a full-fledged economic
model, this exercise suggests no additional explanation may be needed.
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--, 1937b, "Financial markets," Wall Street Journal,
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NOTES
(1) See Blinder. (2009), Krugman (2009), and Romer (2009)
(2) Author's calculations based on data from the U S. Bureau
of Economy Analysis, National Income and Product Accounts of the United
States.
(3) These were computed as the marginal tax rate weighted by the
number of returns in each bracket above $4,000, using numbers in U S.
Department of the Treasury, (1938, p. 88; 1940, pp. 119 193). Barro and
Sahasakul (1983) find much lower average marginal tax rates because the
number of fliers was only 20 percent of all households, and they assign
a zero marginal tax rote to the other 80 percent.
(4) Member banks made quarterly reports, whereas nonmember banks
reported twice a year. Furthermore, some member banks, representing 82
percent of aft member banks by assets, reported statistics oil a weekly
basis.
(5) The Federal Deposit Insurance Corporation. which began
operations in January 1934, levied a premium oil participating banks
based on total deposits, and insured deposits up to $5,000 per
depositor. In 1936, insured deposits amounted to $22.230 million,
representing 68 percent of the deposits of participating banks and 47
percent of all bank deposits (Board of Governors of the Federal Reserve
System, 1943, p 401).
(6) Banking Act of 1935 (49 Star, 706).
(7) There were two central reserve cities, namely. New York and
Chicago. and 60 reserve cities (see the list in Board of Governors of
the Federal Reserve System. 1943. p 401).
(8) Banking Act of 1935 (49 Stat 706)
(9) Beney (1936) and National Industrial Conference Board (1938)
(10) The data come from the NBER Macrohistory Database. series
08142 and 01300 Wages are deflated by the Wholesale Price Index
(11) The VAR is monthly' all variables are in logs except the
surplus. which can be negative. A time trend and seasonal dummies are
added because the surplus is not seasonally adjusted Lag length, chosen
to minimize the Akaike information criterion, is 3. As an alternative. I
have also used (the log of) man-days idle due to strikes instead of
wages.
(12) There is some negative correlation between wages adjusted for
labor productivity and money An alternative specification in which
average hourly earnings are not adjusted for productivity yields a
nearly diagonal matrix, and the results of the historical decomposition
are quite similar.
(13) The impulse response function of wages on output is negative
at first but turns positive after ten months This suggests that the
shock identified as a wage shock is more complex than a shock to
workers' bargaining power and probably includes a productivity
component. If man-days idled by strikes is used instead of wages, the
impulse response function is consistently negative, but of smaller
magnitude: The percentage of IP variance explained by innovations to
man-days at the three-year horizon is 2.5 percent instead of 6.5 percent
for average hourly earnings.
Francois R. Velde is a senior economist in the Economic Research
Department at the Federal Reserve Bank of Chicago. The author thanks
Ross Doppelt and Christian Delgado de Jesus for research assistance.
TABLE 1
Growth rates of components of gross national product,
annualized, 1933-38
Nondurable Producers'
goods and Durable durable
services goods equipment
(--percent--)
1933:Q1-1935:Q4 3.8 17.2 32.5
1936:Q1 2.5 18.4 4.5
1936:Q2 10.9 18.1 29.6
1936:Q3 10.5 21.5 44.6
1936:Q4 14.1 11.6 29.5
1937:Q1 -0.4 7.9 26.5
1937:Q2 -0.3 -7.4 0.5
1937:Q3 -7.8 10.8 3.9
1937:Q4 -2.5 -47.4 -106.0
1938:Q1 -2.7 -65.6 -73.0
1938:Q2 -4.9 -17.4 -45.2
1938:Q3 15.9 25.7 56.8
1938:Q4 7.7 44.0 43.5
Nonresidential Residential Government
structures structures purchases
(--percent--)
1933:Q1-1935:Q4 8.9 27.5 5.0
1936:Q1 7.1 -26.9 39.8
1936:Q2 -21.8 0.7 11.2
1936:Q3 59.4 93.0 3.8
1936:Q4 47.7 -15.7 -2.0
1937:Q1 21.9 15.7 -19.9
1937:Q2 112.0 36.2 -2.4
1937:Q3 -96.0 -63.5 2.8
1937:Q4 -54.5 -63.6 7.1
1938:Q1 -3.4 0.0 19.3
1938:Q2 -71.3 13.6 6.9
1938:Q3 41.9 114.1 4.0
1938:Q4 21.2 45.4 3.8
Source: Author's calculations based on data from Balke
and Gordon (1986).
TABLE 2
Member bank reserve requirements, 1917-41
Percent of net
demand deposits Percent
of time
Central deposits
reserve Reserve
Effective date city city Country All
June 21, 1917 13 10 7 3
August 16, 1936 19.5 15 10.5 4.5
March 1, 1937 22.75 17.5 12.25 5.25
May 1, 1937 26 20 14 6
April 16, 1938 22.75 17.5 12 5
Source: Board of Governors of the Federal Reserve System (1943),
table 107, p. 400.
TABLE 3
All banks: Main assets and total deposits, 1936-38
Investments
U.S.
government Other
Call dates Loans Total bonds securities Deposits
(--millions of dollars--)
June 1936 20,636 27,776 17,323 10,453 57,884
December 1936 21,359 28,086 17,587 10,499 60,619
June 1937 22,410 27,155 16,954 10,201 59,222
December 1937 22,065 26,362 16,610 9,752 58,494
June 1938 20,982 26,230 16,727 9,503 58,792
December 1938 21,261 27,570 17,953 9,617 61,319
Source: Board of Governors of the Federal Reserve System (1943),
table 2.
TABLE 4
New fork City member banks: Main assets and total deposits, 1936-38
Investments
U.S.
government Other
Call dates Loans Total bonds securities
(--millions of dollars--)
June 30, 1936 3,528 6,028 4,763 1,265
December 31, 1936 3,855 5,426 4,209 1,217
March 31, 1937 3,961 5,140 3,829 1,311
June 30, 1937 4,276 4,730 3,630 1,100
December 31, 1937 3,673 4,640 3,595 1,045
March 7, 1938 3,532 4,785 3,611 1,174
June 30, 1938 3,172 4,841 3,740 1,101
September 28, 1938 3,146 5,209 3,987 1,222
December 31, 1938 3,262 5,072 3,857 1,215
Call dates Reserves Deposits
(--millions of dollars--)
June 30, 1936 2,106 11,387
December 31, 1936 2.658 11,824
March 31, 1937 2,719 11,400
June 30, 1937 2,749 11,421
December 31, 1937 2,738 10,759
March 7, 1938 2,941 10,570
June 30, 1938 3,517 11,192
September 28, 1938 3,743 11,410
December 31, 1938 4,104 11,706
Source: Board of Governors of the Federal Reserve System (1943),
table 23.
TABLE 5
Assets of weekly reporting member banks after reserve requirement
changes, 1936-38
Government Other
Loans bonds securities Reserves
(--million--millions of dollars--)
August 19, 1936 8,369 10,564 3,323 4,884
March 3, 1937 9,054 10,303 3,318 5,291
May 5, 1937 9,533 9,499 3,208 5,307
April 20, 1938 8,585 9,156 3,068 5,980
Balances
with
Vault domestic Total
cash banks assets
(--millions of dollars--)
August 19, 1936 373 2,288 32,315
March 3, 1937 398 2,055 33,677
May 5, 1937 337 1,797 32,362
April 20, 1938 330 2,188 31,938
Source: Board of Governors of the Federal Reserve System (1943),
table 48.
TABLE 6
Short-term rates and lending rates, 1936-38
1936
June December
(--percent--)
Short-term open-market rates
in New York City
Prime commercial paper, 4-6 months 0.75 0.75
Prime bankers' acceptances, 90 days 0.13 0.19
Rates charged on customers' loans
by banks in principal cities
Total (19 cities) 2.71 2.58
New York City 1.71 1.74
North and East (7 cities) 3.02 2.94
South and West (11 cities) 3.51 3.14
1937
June December
(--percent--)
Short-term open-market rates
in New York City
Prime commercial paper, 4-6 months 1.00 1.00
Prime bankers' acceptances, 90 days 0.47 0.44
Rates charged on customers' loans
by banks in principal cities
Total (19 cities) 2.57 2.52
New York City 1.73 1.70
North and East (7 cities) 2.79 2.72
South and West (11 cities) 3.29 3.23
1938
June December
(--percent--)
Short-term open-market rates
in New York City
Prime commercial paper, 4-6 months 0.88 0.63
Prime bankers' acceptances, 90 days 0.44 0.44
Rates charged on customers' loans
by banks in principal cities
Total (19 cities) 2.56 2.60
New York City 1.70 1.70
North and East (7 cities) 2.70 2.95
South and West (11 cities) 3.31 3.31
Source: Board of Governors of the Federal Reserve System (1943),
tables 2, 120, and 124.
TABLE 7
Variance-covariance matrix of the residuals of the vector
autoregression
M1 Surplus AHE CP rate WPI IP
M1 1.000
Surplus -0.026 1.000
AHE -0.203 0.087 1.000
CP rate -0.454 -0.041 0.041 1.000
WPI 0.070 -0.064 -0.405 0.059 1.000
IP 0.355 -0.032 -0.475 -0.163 0.327 1.000
Note: M1 is the money stock; surplus is the federal surplus; AHE is
an index of real average hourly earnings in industries, adjusted
for changes in output per man-hour; CP rate is the interest rate on
commercial paper; WPI is the Wholesale Price Index; and IP is
industrial production. Sources: Author's calculations based on data
from Friedman and Schwartz (1963); Board of Governors of the
Federal Reserve System (1943), tables 115, 117, 121, and 150; Board
of Governors of the Federal Reserve System, G.17 statistical
release, various issues; and National Bureau of Economic Research,
Macrohistory Database, series 08142 and 01300.
TABLE 8
Variance decomposition of industrial production at various horizons
Standard
Months error M1 Surplus AH CP rate WPI IP
(--percent--)
6 0.097 15.5 4.8 16.1 4.3 6.8 52.6
12 0.136 30.3 7.9 11.2 2.5 5.0 43.0
18 0.165 39.1 8.5 7.7 2.7 3.5 38.4
24 0.187 41.2 8.3 6.9 3.2 2.8 37.7
30 0.203 40.4 8.0 6.8 3.3 2.5 38.9
36 0.216 39.2 8.1 6.7 3.4 2.2 40.4
Note: M1 is the money stock; surplus is the federal surplus; AHE
is an index of real average hourly earnings in industries, adjusted
for changes in output per man-hour; CP rate is the interest rate on
commercial paper; WPI is the Wholesale Price Index; and IP is
industrial production. Sources: Author's calculations based on data
from Friedman and Schwartz (1963); Board of Governors of the
Federal Reserve System (1943), tables 115, 117, 121, and 150; Board
of Governors of the Federal Reserve System, G.17 statistical
release, various issues; and National Bureau of Economic Research,
Macrohistory Database, series 08142 and 01300.
