What was the reason for a boom on Wallstreet in 1938?

Our reporter in N.Y. said today that this 1. week of April 2020 was the best since 1938.

What was the reason for this rebound in 1938?


There might even be some quantitative analyses on this (which would make a [much] better answer), but the "word on the street" (i.e. popsci explanation) is that after the 1937 recession (which actually dragged into the first half of 1938), the rebound was due to FDR's massive spending/stimulus program.

However, looking at the Wikipedia page on the 1937 recession, the discussion on the 1938 rebound probably cannot be easily disentangled from the disputes on what caused the 1937 recession.

The uncontroversial facts are that

According to the National Bureau of Economic Research, the 1937 contraction, which lasted from May 1937 until June 1938, was America’s third-worst recession of the twentieth century, paling in comparison to the 1920 and 1929 downturns.

A few statistics reveal the severity of the 1937 recession: Real GDP fell 10 percent. Unemployment, which had declined considerably after 1933, hit 20 percent. Finally, industrial production fell 32 percent (Bordo and Haubrich 2012).

The causes for the 1938 rebound are thought to be among the observed associations:

The recession ended after the Fed rolled back reserve requirements, the Treasury stopped sterilizing gold inflows and desterilized all remaining gold that had been sterilized since December 1936, and the Roosevelt administration began pursuing expansionary fiscal policies. The recovery from 1938 to 1942 was spectacular: Output grew by 49 percent, fueled by gold inflows from Europe and a major defense buildup.

Actually disentangling the fiscal from the monetary contributors is probably quite difficult, hence the various theories advanced by various macro schools. It's still an active area of research.

For the (mostly) monetarist view in a quantitative perspective see Irwin (2012). But even he acknowledges that:

Stocks began to recover in April 1938 when the sterilization program was officially terminated but two months before the end of the recession. But here too, it is not clear if the stock market recovery was driven by the end of sterilization itself or by the expectation that the economy would recover.

Somewhat on the other side of the fence, Park and Van Horn (2015):

After implementing the difference-in-difference estimators, we find that the increases in reserve requirements did not create financing constraints for member banks and lead them to reduce lending. Therefore, the actions of the Federal Reserve concerning the required reserve ratios cannot be blamed for instigating the economic downturn of 1937-38.

I haven't read this latter paper in detail, but on a quick scan they note in a footnote:

Many scholars have blamed the premature tightening of monetary policy, fiscal policy, or both (Fridman and Schwartz 1963, Romer 1992, Eggertson 2008, Velde 2009, Irwin 2012). On the monetary side, the Federal Reserve doubled reserve requirements, and the Treasury sterilized gold inflows from Europe to the United States. On the fiscal side, the Roosevelt administration attempted to achieve a balanced budget by reducing the growth in government spending and increasing taxes. Other scholars have proposed alternative explanations, such as labor policies and a shift in expectations. Cole and Ohanian (2001, 2009) and Hausman (2014) argue that New Deal industrial and labor policies raised wages in the manufacturing sector and stunted economic recovery. Eggertsson (2008) argues that a shift in beliefs about future inflation and income caused the recession. Mathy (2014) finds that uncertainty regarding fiscal and monetary policy by the Roosevelt administration, not reserve requirements, induced the recession of 1937.


Does this chart assist?

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Have you looked at Timeline of United States history (1930–1949) - Wikipedia or 1938 in the United States - Wikipedia?


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