Depression (economics)
Encyclopedia
In economics
, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession
, which is seen by some economists as part of the modern business cycle
.
Considered, by some economists, a rare and extreme form of recession, a depression is characterized by its length, by abnormally large increases in unemployment
, falls in the availability of credit
— often due to some kind of banking or financial crisis, shrinking output—as buyers dry up and suppliers cut back on production, and investment, large number of bankruptcies—including sovereign debt defaults, significantly reduced amounts of trade
and commerce—especially international, as well as highly volatile relative currency value fluctuations—most often due to devaluation
s. Price deflation
, financial crises
and bank failure
s are also common elements of a depression that are not normally a part of a recession.
the National Bureau of Economic Research
determines contractions and expansions in the business cycle, but does not declare depressions. Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output
). Another proposed definition of depression includes two general rules: (1) a decline in real GDP exceeding 10%, or (2) a recession lasting 2 or more years.
There are also differences in the duration of depression across definitions. Some economists refer only to the period when economic activity is declining. The more common use, however, also encompasses the time until economic activity has returned close to normal levels..
A recession is briefly defined as a period of declining economic activity spread across the economy (according to NBER). Under the first definition, each depression will always coincide with a recession, since the difference between a depression and a recession is the severity of the fall in economic activity. In other words, each depression is always a recession, sharing the same starting and ending dates and having the same duration.
Under the second definition, depressions and recessions will always be distinct events however, having the same starting dates. This definition of depression implies that a recession and a depression will have different ending dates and thus distinct durations. Under this definition, the length of a depression will always be longer than that of the recession starting the same date.
A nice example is the difference in the chronology of the Great Depression in the U.S. under the view of alternative definitions. Using the second definition of depression, most economists refer to the Great Depression, as the period between 1929 and 1941. On the other hand, using the first definition, the depression that started in August 1929 lasted until March 1933. Note that NBER, which publishes the recession (instead of depression) dates for the U.S. economy, has identified two recessions during that period. The first between August 1929 and March 1933 and the second starting in May 1937 and ending in June 1938.
of the 1930s, but the term had been in use long before then. Indeed, an early major American economic crisis, the Panic of 1819
, was described by then-president James Monroe
as "a depression", and the economic crisis immediately preceding the 1930s depression, the Depression of 1920–21, was referred to as a "depression" by president Calvin Coolidge
.
However, in the 19th and early 20th centuries, financial crises were traditionally referred to as "panics", e.g., the 'major' Panic of 1907
, and the 'minor' Panic of 1910–1911, though the 1929 crisis was more commonly called "The Crash", and the term "panic" has since fallen out of use. At the time of the Great Depression (of the 1930s), the phrase "The Great Depression" had already been used to refer to the period 1873–96 (in the United Kingdom), or more narrowly 1873–79 (in the United States), which has since been renamed the Long Depression
.
Common use of the phrase "The Great Depression" for the 1930s crisis is most frequently attributed to British economist Lionel Robbins
, whose 1934 book The Great Depression is credited with 'formalizing' the phrase, though US president Herbert Hoover
is widely credited with having 'popularized' the term/phrase, informally referring to the downturn as a "depression", with such uses as "Economic depression cannot be cured by legislative action or executive pronouncement", (December 1930, Message to Congress) and "I need not recount to you that the world is passing through a great depression", (1931).
", but not a depression. The only two eras commonly referred to at the current time as "depressions" are the 1870s and 1930s.
To some degree this is simply a stylistic change, similar to the decline in the use of "panic" to refer to financial crises, but it does also reflect that the economic cycle – both in the United States and in most OECD countries – though not in all – has been more moderate since 1945.
There have been many periods of prolonged economic underperformance in particular countries/regions since 1945, detailed below, but terming these as "depressions" is controversial. The late-2000s recession, which is the most significant global crisis since the Great Depression, has at times been termed a depression, but this terminology is not widely used, with the episode instead being referred to by other terms, such as the punning "Great Recession".
, which affected most national economies in the world throughout the 1930s. This depression is generally considered to have begun with the Wall Street Crash of 1929
, and the crisis quickly spread to other national economies. Between 1929 and 1933, the gross national product of the United States
decreased by 33% while the rate of unemployment
increased to 25% (with industrial unemployment alone rising to approximately 35% - U.S. employment was still over 25% agricultural). The probable causes of the Great Depression include the loose money policies of the Federal Reserve during the latter 1920s and the consequent misallocation of capital based on easy and inexpensive credit, although this is still hotly debated.
A long-term effect of the Great Depression was the departure of every major currency from the gold standard
, although the initial impetus for this was World War I. See: Bretton Woods Accord In any case, the world economy has simply outgrown the capacity of additions to the world gold supply to accommodate the increase in world population and increased trade without periodic, painful revaluations of any currencies tied to gold.
in Britain and the United States, the Long Depression
(1873–1896) was indeed longer than what is now referred to as the Great Depression, but shallower. However, it was known as "the Great Depression" until the 1930s.
, built on a speculative
real estate market. The bubble burst on May 10, 1837 in New York City
, when every bank
stopped payment in gold
and silver
coin
age. The Panic was followed by a five-year depression, with the failure of bank
s and record high unemployment levels.
, Brazil, Chile
, and Mexico experienced great depressions in the 1980s, and Argentina experienced another
in 1998–2002.
This definition also includes the economic performance of New Zealand
from 1974–1992 and Switzerland
from 1973 to the present, although this designation for Switzerland has been controversial.
Over the period 1980–2000, Sub-Saharan Africa broadly suffered a fall in absolute income levels.
was almost twice as intense as the Great Depression in the countries of Western Europe
and the United States in the 1930s. Average standards of living
registered a catastrophic fall in the early 1990s in many parts of the former Eastern Bloc
- most notably, in post-Soviet states
. Even before Russia's financial crisis of 1998, Russia
's GDP was half of what it had been in the early 1990s. Some populations are still poorer today than they were in 1989 (e.g. Ukraine
, Moldova
, Serbia
, Central Asia
, Caucasus
). The collapse of the Soviet planned economy and the transition to market economy
resulted in catastrophic declines in GDP of about 45% during the 1990–1996 period and poverty in the region had increased more than tenfold.
Finnish economists refer to the Finnish economic decline
around the breakup of the Soviet Union (1989–1994) as a great depression; this is partly attributed to the breakup of the Soviet Union, and partly to the Scandinavian banking crisis, which was also suffered, to a lesser degree, by Sweden and Norway.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
, which is seen by some economists as part of the modern business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
.
Considered, by some economists, a rare and extreme form of recession, a depression is characterized by its length, by abnormally large increases in unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
, falls in the availability of credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
— often due to some kind of banking or financial crisis, shrinking output—as buyers dry up and suppliers cut back on production, and investment, large number of bankruptcies—including sovereign debt defaults, significantly reduced amounts of trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
and commerce—especially international, as well as highly volatile relative currency value fluctuations—most often due to devaluation
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
s. Price deflation
Deflation (economics)
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% . This should not be confused with disinflation, a slow-down in the inflation rate...
, financial crises
Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
and bank failure
Bank failure
A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. More specifically, a bank usually fails economically when the market value of its assets declines to a value that is...
s are also common elements of a depression that are not normally a part of a recession.
Definition
There is no agreed definition of the term depression, though some have been proposed. In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
the National Bureau of Economic Research
National Bureau of Economic Research
The National Bureau of Economic Research is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community." The NBER is well known for providing start and end...
determines contractions and expansions in the business cycle, but does not declare depressions. Generally, periods labeled depressions are marked by a substantial and sustained shortfall of the ability to purchase goods relative to the amount that could be produced using current resources and technology (potential output
Potential output
In economics, potential output refers to the highest level of real Gross Domestic Product output that can be sustained over the long term. The existence of a limit is due to natural and institutional constraints...
). Another proposed definition of depression includes two general rules: (1) a decline in real GDP exceeding 10%, or (2) a recession lasting 2 or more years.
There are also differences in the duration of depression across definitions. Some economists refer only to the period when economic activity is declining. The more common use, however, also encompasses the time until economic activity has returned close to normal levels..
A recession is briefly defined as a period of declining economic activity spread across the economy (according to NBER). Under the first definition, each depression will always coincide with a recession, since the difference between a depression and a recession is the severity of the fall in economic activity. In other words, each depression is always a recession, sharing the same starting and ending dates and having the same duration.
Under the second definition, depressions and recessions will always be distinct events however, having the same starting dates. This definition of depression implies that a recession and a depression will have different ending dates and thus distinct durations. Under this definition, the length of a depression will always be longer than that of the recession starting the same date.
A nice example is the difference in the chronology of the Great Depression in the U.S. under the view of alternative definitions. Using the second definition of depression, most economists refer to the Great Depression, as the period between 1929 and 1941. On the other hand, using the first definition, the depression that started in August 1929 lasted until March 1933. Note that NBER, which publishes the recession (instead of depression) dates for the U.S. economy, has identified two recessions during that period. The first between August 1929 and March 1933 and the second starting in May 1937 and ending in June 1938.
Terminology
Today the term "depression" is most often associated with the Great DepressionGreat Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
of the 1930s, but the term had been in use long before then. Indeed, an early major American economic crisis, the Panic of 1819
Panic of 1819
The Panic of 1819 was the first major financial crisis in the United States, and had occurred during the political calm of the Era of Good Feelings. The new nation previously had faced a depression following the war of independence in the late 1780s and led directly to the establishment of the...
, was described by then-president James Monroe
James Monroe
James Monroe was the fifth President of the United States . Monroe was the last president who was a Founding Father of the United States, and the last president from the Virginia dynasty and the Republican Generation...
as "a depression", and the economic crisis immediately preceding the 1930s depression, the Depression of 1920–21, was referred to as a "depression" by president Calvin Coolidge
Calvin Coolidge
John Calvin Coolidge, Jr. was the 30th President of the United States . A Republican lawyer from Vermont, Coolidge worked his way up the ladder of Massachusetts state politics, eventually becoming governor of that state...
.
However, in the 19th and early 20th centuries, financial crises were traditionally referred to as "panics", e.g., the 'major' Panic of 1907
Panic of 1907
The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on...
, and the 'minor' Panic of 1910–1911, though the 1929 crisis was more commonly called "The Crash", and the term "panic" has since fallen out of use. At the time of the Great Depression (of the 1930s), the phrase "The Great Depression" had already been used to refer to the period 1873–96 (in the United Kingdom), or more narrowly 1873–79 (in the United States), which has since been renamed the Long Depression
Long Depression
The Long Depression was a worldwide economic crisis, felt most heavily in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution in the decade following the American Civil War. At the time, the episode was labeled the Great...
.
Common use of the phrase "The Great Depression" for the 1930s crisis is most frequently attributed to British economist Lionel Robbins
Lionel Robbins
Lionel Charles Robbins, Baron Robbins, FBA was a British economist and head of the economics department at the London School of Economics...
, whose 1934 book The Great Depression is credited with 'formalizing' the phrase, though US president Herbert Hoover
Herbert Hoover
Herbert Clark Hoover was the 31st President of the United States . Hoover was originally a professional mining engineer and author. As the United States Secretary of Commerce in the 1920s under Presidents Warren Harding and Calvin Coolidge, he promoted partnerships between government and business...
is widely credited with having 'popularized' the term/phrase, informally referring to the downturn as a "depression", with such uses as "Economic depression cannot be cured by legislative action or executive pronouncement", (December 1930, Message to Congress) and "I need not recount to you that the world is passing through a great depression", (1931).
Occurrence
Due to the lack of an agreed definition, and the strong negative associations, the characterization of any period as a "depression" is contentious. The term was frequently used for regional crises from the early 19th century until the 1930s, and for the more widespread crises of the 1870s and 1930s, but economic crises since 1945 have generally been referred to as "recessions", with the 1970s global crisis referred to as "stagflationStagflation
In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...
", but not a depression. The only two eras commonly referred to at the current time as "depressions" are the 1870s and 1930s.
To some degree this is simply a stylistic change, similar to the decline in the use of "panic" to refer to financial crises, but it does also reflect that the economic cycle – both in the United States and in most OECD countries – though not in all – has been more moderate since 1945.
There have been many periods of prolonged economic underperformance in particular countries/regions since 1945, detailed below, but terming these as "depressions" is controversial. The late-2000s recession, which is the most significant global crisis since the Great Depression, has at times been termed a depression, but this terminology is not widely used, with the episode instead being referred to by other terms, such as the punning "Great Recession".
Great Depression
The best-known depression was the Great DepressionGreat Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, which affected most national economies in the world throughout the 1930s. This depression is generally considered to have begun with the Wall Street Crash of 1929
Wall Street Crash of 1929
The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...
, and the crisis quickly spread to other national economies. Between 1929 and 1933, the gross national product of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
decreased by 33% while the rate of unemployment
Unemployment
Unemployment , as defined by the International Labour Organization, occurs when people are without jobs and they have actively sought work within the past four weeks...
increased to 25% (with industrial unemployment alone rising to approximately 35% - U.S. employment was still over 25% agricultural). The probable causes of the Great Depression include the loose money policies of the Federal Reserve during the latter 1920s and the consequent misallocation of capital based on easy and inexpensive credit, although this is still hotly debated.
A long-term effect of the Great Depression was the departure of every major currency from the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
, although the initial impetus for this was World War I. See: Bretton Woods Accord In any case, the world economy has simply outgrown the capacity of additions to the world gold supply to accommodate the increase in world population and increased trade without periodic, painful revaluations of any currencies tied to gold.
Long Depression
Starting with the adoption of the gold standardGold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
in Britain and the United States, the Long Depression
Long Depression
The Long Depression was a worldwide economic crisis, felt most heavily in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution in the decade following the American Civil War. At the time, the episode was labeled the Great...
(1873–1896) was indeed longer than what is now referred to as the Great Depression, but shallower. However, it was known as "the Great Depression" until the 1930s.
Panic of 1837
The Panic of 1837 was an American financial crisisFinancial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
, built on a speculative
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
real estate market. The bubble burst on May 10, 1837 in New York City
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
, when every bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
stopped payment in gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
and silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...
coin
Coin
A coin is a piece of hard material that is standardized in weight, is produced in large quantities in order to facilitate trade, and primarily can be used as a legal tender token for commerce in the designated country, region, or territory....
age. The Panic was followed by a five-year depression, with the failure of bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s and record high unemployment levels.
Regional depressions in the 1970s, 1980s, and 1990s
Several Latin American countries had severe downturns in the 1980s: by the Kehoe and Prescott definition of a great depression as at least one year with output 20% below trend, ArgentinaEconomy of Argentina
This article provides an overview of the Economic history of Argentina.-Emergence into the world economy:Prior to the 1880s, Argentina was a relatively isolated backwater, dependent on the wool, leather and hide industry for both the greater part of its foreign exchange and the generation of...
, Brazil, Chile
Economy of Chile
The economy of Chile is ranked as an upper-middle income economy by the World Bank, and is one of South America's most stable and prosperous nations, leading Latin American nations in human development, competitiveness, income per capita, globalization, economic freedom, and low perception of...
, and Mexico experienced great depressions in the 1980s, and Argentina experienced another
Argentine economic crisis (1999-2002)
The Argentine economic crisis was a financial situation, tied to poilitical unrest, that affected Argentina's economy during the late 1990s and early 2000s...
in 1998–2002.
This definition also includes the economic performance of New Zealand
Economy of New Zealand
New Zealand has a market economy which is greatly dependent on international trade, mainly with Australia, the European Union, the United States, China, and Japan. It has only small manufacturing and high-tech sectors, being strongly focused on tourism and primary industries like agriculture...
from 1974–1992 and Switzerland
Economy of Switzerland
The economy of Switzerland is one of the world's most stable economies. Its policy of long-term monetary security and political stability has made Switzerland a safe haven for investors, creating an economy that is increasingly dependent on a steady tide of foreign investment...
from 1973 to the present, although this designation for Switzerland has been controversial.
Over the period 1980–2000, Sub-Saharan Africa broadly suffered a fall in absolute income levels.
Post-Communism
The economic crisis in the 1990s that struck former members of the Soviet UnionSoviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
was almost twice as intense as the Great Depression in the countries of Western Europe
Western Europe
Western Europe is a loose term for the collection of countries in the western most region of the European continents, though this definition is context-dependent and carries cultural and political connotations. One definition describes Western Europe as a geographic entity—the region lying in the...
and the United States in the 1930s. Average standards of living
Standard of living
Standard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...
registered a catastrophic fall in the early 1990s in many parts of the former Eastern Bloc
Eastern bloc
The term Eastern Bloc or Communist Bloc refers to the former communist states of Eastern and Central Europe, generally the Soviet Union and the countries of the Warsaw Pact...
- most notably, in post-Soviet states
Post-Soviet states
The post-Soviet states, also commonly known as the Former Soviet Union or former Soviet republics, are the 15 independent states that split off from the Union of Soviet Socialist Republics in its dissolution in December 1991...
. Even before Russia's financial crisis of 1998, Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
's GDP was half of what it had been in the early 1990s. Some populations are still poorer today than they were in 1989 (e.g. Ukraine
Ukraine
Ukraine is a country in Eastern Europe. It has an area of 603,628 km², making it the second largest contiguous country on the European continent, after Russia...
, Moldova
Moldova
Moldova , officially the Republic of Moldova is a landlocked state in Eastern Europe, located between Romania to the West and Ukraine to the North, East and South. It declared itself an independent state with the same boundaries as the preceding Moldavian Soviet Socialist Republic in 1991, as part...
, Serbia
Serbia
Serbia , officially the Republic of Serbia , is a landlocked country located at the crossroads of Central and Southeast Europe, covering the southern part of the Carpathian basin and the central part of the Balkans...
, Central Asia
Soviet Central Asia
Soviet Central Asia refers to the section of Central Asia formerly controlled by the Soviet Union, as well as the time period of Soviet administration . In terms of area, it is nearly synonymous with Russian Turkestan, the name for the region during the Russian Empire...
, Caucasus
Caucasus
The Caucasus, also Caucas or Caucasia , is a geopolitical region at the border of Europe and Asia, and situated between the Black and the Caspian sea...
). The collapse of the Soviet planned economy and the transition to market economy
Shock therapy (economics)
In economics, shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large scale privatization of previously public owned assets....
resulted in catastrophic declines in GDP of about 45% during the 1990–1996 period and poverty in the region had increased more than tenfold.
Finnish economists refer to the Finnish economic decline
Economy of Finland
Finland has a highly industrialised, mixed economy with a per capita output equal to that of other western economies such as France, Germany, Sweden or the United Kingdom. The largest sector of the economy is services at 65.7 percent, followed by manufacturing and refining at 31.4 percent. Primary...
around the breakup of the Soviet Union (1989–1994) as a great depression; this is partly attributed to the breakup of the Soviet Union, and partly to the Scandinavian banking crisis, which was also suffered, to a lesser degree, by Sweden and Norway.
See also
- RecessionRecessionIn economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
- List of recessions
- List of recessions in the United States
- StagflationStagflationIn economics, stagflation is a situation in which the inflation rate is high and the economic growth rate slows down and unemployment remains steadily high...
- Late 2000s recessionLate 2000s recessionThe late-2000s recession, sometimes referred to as the Great Recession or Lesser Depression or Long Recession, is a severe ongoing global economic problem that began in December 2007 and took a particularly sharp downward turn in September 2008. The Great Recession has affected the entire world...