Those who ignore history are doomed to repeat it

It was 1937. The US economy was almost completely recovered from the Depression. The GDP, production, profits, and wages had all regained their 1929 levels. Unemployment remained high at 14%, but had dropped about half from its Depression high of 25% in 1933.

Sound familiar? It's very similar to where we are today.

But FDR, concerned about large deficits and their impact on the national debt, and egged on by conservatives, decided to cut federal spending and tighten the money supply.

Econ 101 side note

All economies fundamentally consist of a series of transfers of wealth. People and organizations exchange some of their wealth for a necessary (or desired) good or service. Renting a movie? You've just exchanged some of your wealth for a desired good. Buying food at the grocery store? Same thing. Getting your vehicle's oil change? Exchanging wealth for a service. When an airline buys new civilian aircraft from Boeing, it's a bigger example of the same thing. When the federal government orders military aircraft, it's another example of a big transfer of wealth.

All those wealth transfers add up to create the GDP - the sum total of all money that changes hands in this country. When the GDP grows, our economy is doing well. When the GDP flattens out (because not as many transfers of wealth are taking place, or because the transfers are all smaller), the economy stalls. When the GDP shrinks, we're having an economic downturn. If it shrinks a little, that's a recession. If it shrinks a lot, it's a depression.

There are three types of actors in the economy: individuals, companies, and governments.  And all three sets of actors contribute to the economy. The biggest single contributor is the federal government.

Now, back to the story

In 1937, the Roosevelt administration cut spending. This took a huge chunk of money out of the economy. They also tightened the money supply, making what money was left in circulation harder to get. Because businesses weren't back to spending as normal yet, this caused the economy to tank.

The result was the recession of 1937, arguably the second-worst economic downturn of the 20th century.  Industrial production declined almost 30 percent. Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels. Unemployment spiked from 14.3% in 1937 to 19.0% in 1938.

The lesson

Taking a huge chunk of money out of circulation in 1937 by cutting federal spending during a recovery caused the economy to tank. And yet that is exactly what the GOP proposes to do now.