|The dismal science|
By 1936, GDP had climbed back to pre-1929 levels but unemployment was still a problem. In 1937, FDR's cabinet proposed reverting to a policy of fiscal conservatism. FDR had actually run as a fiscal conservative in 1932 and completely switched gears because of a pragmatic approach to politics as well as hijacking the programs Herbert Hoover had instituted and mixing them with ideas former New York Governor Al Smith had used in his home state. In addition to this, he hoped to throw a bone to some of his advisors and the Republicans calling for austerity measures (Sound familiar?). Taxes were raised, FDR attempted to balance the budget, and the Federal Reserve ran a contractionary policy. The huge gains made in 1936 and most of 1937 were lost and the economy reversed itself.
FDR blasted trusts and monopolies for causing the downturn, but they in fact had little to do with it. Keynesians blame it on the balanced budget policy, cutting spending and increasing taxes at an inappropriate time. The WPA and PWA payrolls were severely cut. Monetarists blame it on the Fed's tight credit policy. Similarly, the Hangover Theory basically says the hangover starts when you stop drinking and is worse the longer one has been drinking. Either way, both actions had the same effect: Taking money out of the economy. In reality, it was probably a double-whammy coming from the monetary and fiscal sides.
 Keynes' warning
John Maynard Keynes was in correspondence with FDR and warned against such policies. In 1938, he sent a letter outlining what should be done to fix this new recession. FDR turned back on his newfound fiscal conservatism and reimplemented New Deal policies. Workfare programs were greatly expanded once again. This is sometimes referred to as the "Third New Deal." The Fed reversed its policy as well and eased credit. While FDR had lost the political capital to fully implement another set of stimulative policies on the order of the first two New Deals, the economy began to climb back to its previous position. By the end of 1941, as America mobilized for war, the economy had regained what it lost during the Roosevelt Recession and then some. New Deal critics often dispute this, pointing out that government spending had decreased on the whole in 1938. This is irrelevant. Stimulative policy is supposed to add money to the economy through deficits, not merely increased spending. Spending money that is taxed out of the economy is just shuffling it around; only deficits create monetary expansion and the deficit did indeed increase. Outlays on the whole also increased every year after 1938 and, of course, deficits and outlays exploded during World War II.
FDR's return to increased spending made him increasingly unpopular among the wingnuts. Hoover blasted FDR for taking the nation toward socialism in the '36 election. Various wingnuts like Father Coughlin accused FDR of being a commie/fascist/tool of the Jewish bankers/insert conspiracy theory here. (Sound familiar?). His court-packing plan in 1937 didn't help matters any. Ironically, the Supreme Court had gotten into the habit of scrapping what are now considered to be his worst programs like the National Industrial Recovery Act (NIRA) and Agricultural Adjustment Act (AAA) and leaving the rest alone for the most part.
 New Deal opponents
New Deal critics often like to gloss over FDR's policy reversal in 1937 to paint the New Deal as a failure in its entirety. The Roosevelt Recession was a setback and without it, it's entirely plausible that the US would have been out of the Depression entirely before World War II. The US actually took longer to get out of the Depression than most other nations - the evil Swedes, for example, ran a very hardcore stimulative policy and was back to pre-crash levels by the early '30s. The fact is, 100% of the time during the Great Depression, the economy was improving when FDR ran deficits and faltering when he practiced fiscal conservatism. Occasionally, critics will point to "increased regulations" or "poor business confidence" as a result of these regulations as causes of the recession. This is bullshit for multiple reasons. One, they rarely if ever point to anything specific, making this explanation extremely weasely. Occasionally, they will point to the Wagner Act passed in 1935, which...(gasp!) protected workers' right to unionize. And it wasn't even heavily enforced at that point. Two, the most harshly regulatory of FDR's policies, the NRA, was ruled unconstitutional in 1935. And even under the NRA, the economy was still growing quite speedily.