1937-38 recession a lesson for the Fed

Washington

HOW fast should the Federal Reserve tighten monetary policy? Should it tighten at all? I recently wrote about these issues, but didn't have the space to explore a fascinating aspect of the debate: The mostly forgotten 1937-38 recession. To many, it's a cautionary tale against adopting tighter policies too soon. The latest to sound the alarm is Ray Dalio, the respected founder of Bridgewater Associates, a huge hedge fund group. His recent memo to clients inspired a page-one story in the Financial Times, headlined: "Dalio warns Fed of 1937-style rate risk".

At the time, it was called the "Roosevelt recession". It "came as a surprise to most Americans", writes historian Alan Brinkley in his The End of Reform: New Deal Liberalism in Recession and War. Until the summer of 1937, the economy was growing briskly, and "many New Dealers were boasting that the Depression was over". Although civilian unemployment was still high (10 per cent in 1936), it was much lower than the peak (23 per cent in 1932) and was declining rapidly.