Depression (economics)

Last updated
The stock market crash of 1929 marked the start of the Great Depression, the most widespread in modern history, with effects felt until the start of World War II Depression-stock-market-crash-1929.jpg
The stock market crash of 1929 marked the start of the Great Depression, the most widespread in modern history, with effects felt until the start of World War II

In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe economic downturn than a recession, which is a slowdown in economic activity over the course of a normal business cycle.

Economics social science that analyzes the production, distribution, and consumption of goods and services

Economics is the social science that studies the production, distribution, and consumption of goods and services.

The business cycle, also known as the economic cycle or trade cycle, is the downward and upward movement of gross domestic product (GDP) around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth, and periods of relative stagnation or decline.

Contents

A depression is an unusual and extreme form of recession. Depressions are characterized by their length, by abnormally large increases in unemployment, falls in the availability of credit (often due to some form 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 trade), as well as highly volatile relative currency value fluctuations (often due to currency devaluations). Price deflation, financial crises and bank failures are also common elements of a depression that do not normally occur during a recession.

Unemployment when people are without work and actively seeking work

Unemployment or joblessness is the situation of actively looking for employment, but not being currently employed.

Trade Exchange of goods and services.

Trade involves the transfer of goods or services from one person or entity to another, often in exchange for money. A system or network that allows trade is called a market.

In modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency or currency basket. In contrast, a depreciation is a decrease in a currency's value due to market forces under a floating exchange rate, not government or central bank policy actions.

Definitions

In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions. [1] 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). [2] Another proposed definition of depression includes two general rules: [3] [4]

United States federal republic in North America

The United States of America (USA), commonly known as the United States or America, is a country composed of 50 states, a federal district, five major self-governing territories, and various possessions. At 3.8 million square miles, the United States is the world's third or fourth largest country by total area and is slightly smaller than the entire continent of Europe's 3.9 million square miles. With a population of over 327 million people, the U.S. is the third most populous country. The capital is Washington, D.C., and the largest city by population is New York. Forty-eight states and the capital's federal district are contiguous in North America between Canada and Mexico. The State of Alaska is in the northwest corner of North America, bordered by Canada to the east and across the Bering Strait from Russia to the west. The State of Hawaii is an archipelago in the mid-Pacific Ocean. The U.S. territories are scattered about the Pacific Ocean and the Caribbean Sea, stretching across nine official time zones. The extremely diverse geography, climate, and wildlife of the United States make it one of the world's 17 megadiverse countries.

National Bureau of Economic Research American private nonprofit research organization

The National Bureau of Economic Research (NBER) 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 dates for recessions in the United States.

Potential output highest level of real gross domestic product (potential output) that can be sustained over the long term

In economics, potential output refers to the highest level of real gross domestic product that can be sustained over the long term.

  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. [1]

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 useful 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. [5]

Terminology

Today the term "depression" is most often associated with the Great Depression 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", [6] and the economic crisis immediately preceding the 1930s depression, the Depression of 1920–21, was referred to as a "depression" by president Calvin Coolidge.

Great Depression 20th-century worldwide economic depression

The Great Depression was a severe worldwide economic depression that took place mostly during the 1930s, beginning in the United States. The timing of the Great Depression varied across nations; in most countries it started in 1929 and lasted until the late-1930s. It was the longest, deepest, and most widespread depression of the 20th century. In the 21st century, the Great Depression is commonly used as an example of how intensely the world's economy can decline.

The Panic of 1819 was the first major peacetime financial crisis in the United States. It was followed by a general collapse of the American economy that persisted through 1821. The Panic announced the transition of the nation from its colonial commercial status with Europe toward an independent economy, increasingly characterized by the financial and industrial imperatives of central bank monetary policy, which made it susceptible to boom and bust cycles.

James Monroe 5th President of the United States

James Monroe was an American statesman and Founding Father who served as the fifth president of the United States from 1817 to 1825. He is perhaps best known for his foreign policy principle, known as the "Monroe Doctrine", which prohibited further European colonization of the Americas. Monroe was the last president of the Virginia dynasty, and his presidency ushered in what is known as the Era of Good Feelings. Born in Westmoreland County, Virginia, Monroe was of the planter class and fought in the American Revolutionary War. He was wounded in the Battle of Trenton with a musket ball to the shoulder. After studying law under Thomas Jefferson from 1780 to 1783, he served as a delegate in the Continental Congress.

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, [6] though US president Herbert Hoover is widely credited with having 'popularized' the term/phrase, [6] [7] 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

Give any country's households one-million dollars each (perfect equality), and sixty years later you will find gross inequality - consistently. This is how successful capitalism is designed to work and monetary systems require governance or rebalancing as they mature (see Mature Capitalism, to ensure cost-of-living and incomes stay in balance as is needed to support a minimum Social Contract. [8]

In history, these cycles, and their associated debt corrections, are recorded thirty-times [9] . The Torah and Bible (Leviticus 25:26) document them in circa 760 BCE as does the Code of Hammurabi in 1763 BCE.

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 "stagflation", but not a depression. The only two eras commonly referred to at the current time as "depressions" are the 1870s and 1930s. [10]

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 current economic cycle, which has comprised the most significant global crisis since the Great Depression, has at times been termed a depression, [10] but this terminology is not widely used, with the episode instead being referred to by other terms, such as the "Great Recession".

Notable depressions

The General Crisis of 1640

The largest Great Depression of all time occurred during the General Crisis. The Ming Province of China bankrupt, Poland ceased to exist, and the Stuart Monarchy was in civil war on three fronts in Ireland, Scotland, and England. Thomas Hobbes, a University of Edinburgh Professor, created the first recorded explanation of the need for a universal Social Contract in his 1652 book Leviathon based on the general misery within society during this period.

Great Depressions (Mature Capitalisms) and Results ... Past Great Depressions.jpg
Great Depressions (Mature Capitalisms) and Results ...

Great Depression of 1837

[11] Widely acknowledged to be a worse Great Depression than the later Great Depression of the 1930s. This great depression was ended in the United States by the California Gold Rush and its' ten-times addition to America's Gold Reserves. As with most great depressions, it was followed by a thirty-year period of boom economy in the United States, that we now call the Second Industrial Revolution (of the 1850s).

Panic of 1837

The Panic of 1837 was an American financial crisis, built on a speculative real estate market. [12] The bubble burst on May 10, 1837 in New York City, when every bank stopped payment in gold and silver coinage. The Panic was followed by a five-year depression, [12] with the failure of banks and record high unemployment levels. [13]

Long Depression

New York police violently attacking unemployed workers in Tompkins Square Park, 1874 Tompkins square riot 1874.jpg
New York police violently attacking unemployed workers in Tompkins Square Park, 1874

Starting with the adoption of the gold standard 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.[ citation needed ]

Great Depression

The Great Depression of the 1930s affected most national economies in the world. This depression is generally considered to have begun with the Wall Street Crash of 1929, and the crisis quickly spread to other national economies. [14] 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).[ citation needed ]

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 II (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.

Greek Depression

Beginning in 2009, Greece sank into a recession that, after two years, became a depression. The country saw an almost 20% drop in economic output, and unemployment soared to near 25%. [15] Greece's high amounts of sovereign debt precipitated the crisis, and the poor performance of its economy since the introduction of severe austerity measures has slowed the entire eurozone's recovery. Greece's continuing troubles have led to discussions about its departure from the eurozone.

Other depressions

Global

The late 1910s and early 1920s were marked by an economic depression that unraveled in particularly catastrophic circumstances: The Great War and its aftermath led to a global nosedive in commodities that ruined many developing nations, while servicemen returning from the trenches found themselves with high unemployment as businesses failed, unable to transition into a peacetime economy. Also, the Spanish flu pandemic of 1918-20 brought economic activity to a standstill as even more people became incapacitated. Most developed countries had mostly recovered by 1921-22, however Germany saw its economy crippled until 1923-24 because of the hyperinflation crisis.

The 1973 oil crisis, coupled with the rising costs of maintenance of welfare state in most countries led to a recession between 1973 and 1975, followed by a period of almost minimal growth and rising inflation and unemployment. The 1980-82 recession marked the end of the period.

The savings & loans and the leveraged buyout crises led to a severe depression in mid-to-late 1989, causing a recession in 1990-91 (also fueled by the oil price crisis), whose effects lasted as late as 1994. This downturn is more remembered for its political effects: British Prime Minister Margaret Thatcher had to resign in November 1990 as a result of the socioeconomic debacle caused by her later policies; and while his approval ratings were above 60%, U.S. President George H. W. Bush lost the 1992 election to Bill Clinton because of the domestic malady marked by the depression and increasing urban decay.

In 2005, the persistent oil price rises and economic overheating caused by deregulation led to a gradual deterioration of the world economy with inflation and unemployment rising as growth slowed down: The housing bubble in the U.S. burst in 2007, and the American economy slipped into a recession. This in turn provoked the failure of many prominent financial institutions throughout 2008, most notably Lehman Brothers, leading to the loss of millions of jobs.

Regional

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, Argentina, Brazil, Chile, and Mexico experienced great depressions in the 1980s, and Argentina experienced another in 1998–2002. South American countries fell once again into this in the early-to-mid 2010s as a result of falling prices of commodities such as in the 1980s, with the economies of Argentina, Brazil and Venezuela falling into recession as massive government spending further strained their financial situation.

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. [16] [17]

Over the period 1980–2000, Sub-Saharan Africa broadly suffered a fall in absolute income levels. [18]

Post-Communism

The economic crisis in the 1990s that struck former members of the Soviet Union was almost twice as intense as the Great Depression in the countries of Western Europe and the United States in the 1930s. [19] [20] [21] 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. [22] Even before Russia's financial crisis of 1998, Russia's GDP was half of what it had been in the early 1990s. [21] Some populations are still poorer today than they were in 1989 (e.g. Ukraine, Moldova, Serbia, Central Asia, Caucasus).[ citation needed ] 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 [23] and poverty in the region had increased more than tenfold. [24]

Finnish economists refer to the Finnish economic decline around the breakup of the Soviet Union (1989–1994) as a great depression (suuri lama). However, the depression was multicausal, with its severity compounded by a coincidence of multiple sudden external shocks, including loss of Soviet trade, the savings and loan crisis and early 1990s recession in the West, with the internal overheating that had been brewing throughout the 1980s. Liberalization had resulted in the so-called "casino economy". Persistent structural and monetary policy problems had not been solved, leaving the economy vulnerable to even mild external shocks. The depression had lasting effects: the Finnish markka was floated and was eventually replaced by the euro in 1999, ending decades of government control of the economy, but also high, persistent unemployment. Employment has never returned even close to pre-crisis level.

See also

Related Research Articles

In economics, a recession is a business cycle contraction when there is a general slowdown in economic activity. Macroeconomic indicators such as GDP, investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters.

Causes of the Great Depression

The causes of the Great Depression in the early 20th century have been extensively discussed by economists and remain a matter of active debate. They are part of the larger debate about economic crises. The specific economic events that took place during the Great Depression are well established. There was an initial stock market crash that triggered a "panic sell-off" of assets. This was followed by a deflation in asset and commodity prices, dramatic drops in demand and credit, and disruption of trade, ultimately resulting in widespread unemployment and impoverishment. However, economists and historians have not reached a consensus on the causal relationships between various events and government economic policies in causing or ameliorating the Depression.

The Long Depression was a worldwide price and economic recession, beginning in 1873 and running either through the spring of 1879, or 1896, depending on the metrics used. It was the most severe 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. The episode was labeled the "Great Depression" at the time, and it held that designation until the Great Depression of the 1930s. Though a period of general deflation and a general contraction, it did not have the severe economic retrogression of the Great Depression.

The early 2000s recession was a decline in economic activity which mainly occurred in developed countries. The recession affected the European Union during 2000 and 2001 and the United States in 2002 and 2003. The UK, Canada and Australia avoided the recession, while Russia, a nation that did not experience prosperity during the 1990s, in fact began to recover from said situation. Japan's 1990s recession continued. This recession was predicted by economists, because the boom of the 1990s slowed in some parts of East Asia during the 1997 Asian financial crisis. The recession in industrialized countries wasn't as significant as either of the two previous worldwide recessions. Some economists in the United States object to characterizing it as a recession since there were no two consecutive quarters of negative growth.

Economic collapse is any of a broad range of bad economic conditions, ranging from a severe, prolonged depression with high bankruptcy rates and high unemployment, to a breakdown in normal commerce caused by hyperinflation, or even an economically caused sharp rise in the death rate and perhaps even a decline in population.

A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy.

Baring crisis

The Baring crisis or the Panic of 1890 was an acute recession. Although less serious than other panics of the era, still it is the nineteenth century’s most famous sovereign debt crisis.

At the micro-economic level, deleveraging refers to the reduction of the leverage ratio, or the percentage of debt in the balance sheet of a single economic entity, such as a household or a firm. It is the opposite of leveraging, which is the practice of borrowing money to acquire assets and multiply gains and losses.

Great Moderation

In economics, the Great Moderation is the reduction in the volatility of business cycle fluctuations in developed nations starting in the mid-1980s, compared with the decades before. It is believed to be caused by institutional and structural changes, particularly in central bank policies, in the later half of the twentieth century.

Global recession a recession that affects many countries around the world

A global recession is recession that affects many countries around the world—that is, a period of global economic slowdown or declining economic output.

Depression of 1920–21

The Depression of 1920–21 was a sharp deflationary recession in the United States and other countries, beginning 14 months after the end of World War I. It lasted from January 1920 to July 1921. The extent of the deflation was not only large, but large relative to the accompanying decline in real product.

The 1990s economic boom in the United States was an extended period of economic prosperity, during which GDP increased continuously for almost ten years. It commenced after the end of the early 1990s recession in March 1991, and ended in March 2001 with the start of the early 2000s recession, following the bursting of the dot com bubble.

1973–75 recession

The 1973–75 recession or 1970s recession was a period of economic stagnation in much of the Western world during the 1970s, putting an end to the overall Post–World War II economic expansion. It differed from many previous recessions by being a stagflation, where high unemployment and high inflation existed simultaneously.

The Great Recession in the United States was a severe financial crisis combined with a deep recession. While the recession officially lasted from December 2007 to June 2009, it took several years for the economy to recover to pre-crisis levels of employment and output. This slow recovery was due in part to households and financial institutions paying off debts accumulated in the years preceding the crisis along with restrained government spending following initial stimulus efforts. It followed the bursting of the housing bubble, the housing market correction and subprime mortgage crisis.

Comparisons between the Great Recession and the Great Depression explores the experiences in the United States and the United Kingdom.

References

  1. 1 2 "The NBER's Business Cycle Dating Procedure: Frequently Asked Questions". Nber.org. Archived from the original on 2012-10-08. Retrieved 2012-09-07.
  2. "Private Tutor". Infoplease.com. Archived from the original on 2012-09-13. Retrieved 2012-09-07.
  3. "Diagnosing depression". The Economist. December 30, 2008. Archived from the original on February 15, 2009.
  4. "Archived copy". Archived from the original on 2009-02-02. Retrieved 2009-04-15.CS1 maint: Archived copy as title (link)
  5. "Archived copy". Archived from the original on 2009-02-19. Retrieved 2008-10-01.CS1 maint: Archived copy as title (link)
  6. 1 2 3 "When Did the Great Depression Receive Its Name? (And Who Named It?)". hnn.us. Archived from the original on 1 September 2013. Retrieved 9 May 2018.
  7. The Glory and the Dream: A Narrative History of America, 1932–1972, William Manchester
  8. Tilley,Edward (December 21, 2018). End of War - Managing Mature Capitalisms. Dashflows Book Group.
  9. Debt write offs
  10. 1 2 Krugman, Paul (June 27, 2010), "The Third Depression", The New York Times , archived from the original on April 11, 2012
  11. "The Social History of an American Depression, 1837-1843". The American Historical Review. 1935-07-01. Archived from the original on |archive-url= requires |archive-date= (help).
  12. 1 2 "Panic of 1837 (1837 - 1842) — History of Economic Recessions". Politonomist.com. 2009-01-02. Archived from the original on 2009-04-06. Retrieved 2012-09-07.
  13. Timberlake, Jr., Richard H. (1997). "Panic of 1837". In Glasner, David; Cooley, Thomas F. Business cycles and depressions: an encyclopedia. New York: Garland Publishing. pp. 514–16. ISBN   978-0-8240-0944-1.CS1 maint: Multiple names: authors list (link)
  14. "About the Great Depression". English.uiuc.edu. Archived from the original on 2008-12-20. Retrieved 2012-09-07.
  15. "Greece sinks deeper into depression in third quarter". Reuters. Archived from the original on 2012-11-14. Retrieved 2012-11-14.
  16. Abrahamsen Y, R.; Aeppli, E.; Atukeren, M.; Graff, C.; Müller; Schips, B. (2005). "The Swiss disease: Facts and artifacts. A reply to Kehoe and Prescott". Review of Economic Dynamics . 8 (3): 749–758. doi:10.1016/j.red.2004.06.003.
  17. Kehoe, T. J.; Ruhl, K. J. (2005). "Is Switzerland in a Great Depression?". 8. Review of Economic Dynamics: 759–775.
  18. Chang, Ha-Joon. "Kicking Away the Ladder: How the Economic and Intellectual Histories of Capitalism Have Been Re-Written to Justify Neo-Liberal Capitalism" Archived 2015-12-17 at the Wayback Machine . Post-Autistic Economics Review . 4 September 2002: Issue 15, Article 3. Retrieved on 8 October 2008.
  19. "What Can Transition Economies Learn from the First Ten Years? A New World Bank Report in Transition Newsletter". Worldbank.org.
  20. "Kalikova & Associates - Law Firm" (in Russian). K-a.kg. Archived from the original on 2012-09-07. Retrieved 2012-09-07.
  21. 1 2 Who Lost Russia?, The New York Times, October 8, 2000
  22. Child poverty soars in eastern Europe Archived 2004-07-18 at the Wayback Machine , BBC News, October 11, 2000
  23. Poverty, crime and migration are acute issues as Eastern European cities continue to grow Archived 2010-01-02 at the Wayback Machine , A report by UN-Habitat, January 11, 2005
  24. "Study Finds Poverty Deepening in Former Communist Countries", The New York Times, October 12, 2000, archived from the original on February 5, 2017