"Roosevelt Recession" raises unemployment (jan 1, 1937 – jan 1, 1938)

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keynesian economics: The theory, developed by British economist John Maynard Keynes in the 1930s, that deficit spending and interest rate adjustment by government could prevent depressions and limit inflation.

The so-called Roosevelt recession of 1937–1938 dealt another blow to the New Deal. From 1933 to 1937, gross domestic product had grown by roughly 10 percent a year, bringing industrial output back to 1929 levels. Unemployment had declined from 25 percent to 14 percent. “The emergency has passed,” declared Senator James F. Byrnes of South Carolina in May of 1937. Acting on this assumption, Roosevelt slashed the federal budget. Following the president’s lead, Congress halved the WPA’s funding, leading to the layoffs of about 1.5 million workers. The Federal Reserve, fearing rapid inflation, raised interest rates. These measures halted the recovery. The stock market dropped sharply, and unemployment jumped to 19 percent.

Roosevelt quickly reversed course, attempting to spend his way out of recession by boosting funding for the WPA and resuming public works projects. Although improvised, this spending program accorded with the theories of John Maynard Keynes, a visionary British economist. Keynes argued that government intervention could smooth out the highs and lows of the business cycle — preventing depressions and limiting inflation — through deficit spending and the adjustment of interest rates. This view was sharply criticized by Republicans and conservative Democrats in the 1930s, who opposed government management of the economy. But Keynesian economics gradually won wider acceptance as World War II defense spending finally ended the Great Depression. Keynesianism, as it is known, revolutionized economic thinking in the United States and other capitalist societies around the world.

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