Economic depression

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An economic depression is a period of carried long-term economic downturn that is the result of lowered economic activity in one or more major national economies. It is often understood in economics that economic crisis and the following recession that may be named economic depression are part of economic cycles where the slowdown of the economy follows the economic growth and vice versa. It is a result of more severe economic problems or a downturn than the recession itself, which is a slowdown in economic activity over the course of the normal business cycle of growing economy.

Contents

Economic depressions may also be characterized by their length or duration, showing increases in unemployment, larger increases in unemployment or even abnormally large levels of unemployment (as with for example some problems in Japan in incorporating digital economy, [1] that such technological difficult resulting in very large unemployment rates or lack of good social balance in employment among population, lesser revenues for businesses, or other economic difficulties, with having signs of financial crisis, that may also reflect on the work of banks, or may result in banking crisis (in various ways that may be for example unauthorized transformations of banks), and further the crisis in investment and credit; that further could reflect on innovation and new businesses investments lessening or even shrinking, or buyers dry up in recession and suppliers cut back on production and investment in technology, in financial crisis that may be more country defaults or debt problems, and further in feared businesses bankruptcies, and overall business slowdown. Other bad signs of economic depression could be significantly reduced amounts of trade and commerce (especially international trade), as well as in currency markets that maybe fluctuations or unexpected exchange rates with observed highly volatile currency value fluctuations (often due to relative currency devaluations). Other signs of depression are prices deflation, financial crises, stock market crash or even bank failures, or even specific behaviour of economic agents or population, that are also common or also non common elements of a depression that do not normally occur during a recession.

Definitions

In the United States the National Bureau of Economic Research determines contractions and expansions in the business cycle, but does not declare depressions. [2] 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). [3] Another proposed definition of depression includes two general rules: [4] [5]

  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 the economic activity has returned close to normal levels. [2]

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 depression will always be longer than that of the recession starting the same date.

A useful example is a 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. [6]

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", [7] 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, [7] though US president Herbert Hoover is widely credited with having 'popularized' the term/phrase, [7] [8] 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 "stagflation", but not a depression. The only two eras commonly referred to at the current time as "depressions" are the 1870s and 1930s. [9]

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 2008–2009 economic cycle, which has comprised the most significant global crisis since the Great Depression, has at times been termed a depression, [9] 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 depression of all time occurred during the General Crisis.[ citation needed ] The Ming Empire of China went bankrupt and the Stuart Monarchy fought a civil war on three fronts in Ireland, Scotland, and England. Thomas Hobbes, an English philosopher, created the first recorded explanation of the need for a universal Social Contract in his 1651 book Leviathan based on the general misery within society during this period.

Great depression of 1837

This depression is acknowledged to be a worse depression in the United States than the later Great Depression of the 1930s. [10] [ better source needed ] This depression ended in the United States due to the California Gold Rush and its tenfold addition to the United States' gold reserves. As with most depressions, it was followed by a thirty-year period of a booming economy in the United States, which is now called the Second Industrial Revolution (of the 1850s).[ citation needed ]

Panic of 1837

The Panic of 1837 was an American financial crisis, built on a speculative real estate market. [11] The bubble burst on 10 May 1837 in New York City, when every bank stopped payment in gold and silver coinage. The Panic was followed by a five-year depression, [11] with the failure of banks and record high unemployment levels. [12]

Long Depression

New York police using force to remove rioting protesters in Tompkins Square Park, 1874 Tompkins square riot 1874.jpg
New York police using force to remove rioting protesters 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 in some sectors. Many who lived through it regarded it to have been worse than the 1930s depression at times. 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. [13] 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).

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%. [14] Greece's high amounts of sovereign debt precipitated the crisis, and the poor performance of its economy after the introduction of severe austerity measures slowed the entire eurozone's recovery.[ citation needed ] Greece's troubles led to discussions about its departure from the eurozone.

Post-communism depression

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. [15] [16] [17] 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. [18] Even before Russia's financial crisis of 1998, Russia's GDP was half of what it had been in the early 1990s. [17] 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 a market economy resulted in catastrophic declines in GDP of about 45% from 1990 to 1996 [19] and poverty in the region had increased more than tenfold. [20]

Finnish economists refer to the Finnish economic decline during and after 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 the pre-crisis level.[ citation needed ]

Other depressions

Global

The late 1910s and early 1920s were marked by an economic depression that unraveled in particularly catastrophic circumstances: World War I 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; 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: 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, Mexico, and Peru experienced great depressions in the 1980s, and Argentina experienced another between 1998 and 2002. South American countries fell once again into this in the early-to-mid 2010s.

This definition also includes the economic performance of New Zealand from 1974 to 1992 and Switzerland from 1973 to the present, although this designation for Switzerland has been controversial. [21] [22]

From 1980 to 2000, Sub-Saharan Africa broadly suffered a fall in absolute income levels. [23]

See also

Related Research Articles

In economics, a recession is a business cycle contraction that occurs when there is a period of broad decline in economic activity. Recessions generally occur when there is a widespread drop in spending. This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, the bursting of an economic bubble, or a large-scale anthropogenic or natural disaster. There is no official definition of a recession, according to the IMF.

Business cycles are intervals of general expansion followed by recession in economic performance. The changes in economic activity that characterize business cycles have important implications for the welfare of the general population, government institutions, and private sector firms.

<span class="mw-page-title-main">Panic of 1837</span> 19th-century United States financial crisis

The Panic of 1837 was a financial crisis in the United States that began a major depression which lasted until the mid-1840s. Profits, prices, and wages dropped, westward expansion was stalled, unemployment rose, and pessimism abounded.

<span class="mw-page-title-main">Causes of the Great Depression</span> Overview of the causes of the Great Depression

The causes of the Great Depression in the early 20th century in the United States have been extensively discussed by economists and remain a matter of active debate. They are part of the larger debate about economic crises and recessions. The specific economic events that took place during the Great Depression are well established.

The Long Depression was a worldwide price and economic recession, beginning in 1873 and running either through March 1879, or 1899, depending on the metrics used. It was 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 it marked a period of general deflation and a general contraction, it did not have the severe economic retrogression of the later Great Depression.

<span class="mw-page-title-main">Early 2000s recession</span> Recession that occurred in the early 2000s

The early 2000s recession was a major decline in economic activity which mainly occurred in developed countries. The recession affected the European Union during 2000 and 2001 and the United States from March to November 2001. The UK, Canada and Australia avoided the recession, while Russia, a nation that did not experience prosperity during the 1990s, began to recover from it. Japan's 1990s recession continued. A combination of the Dot Com Bubble collapse and the September 11th attacks lengthed and worsened the recession.

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.

<span class="mw-page-title-main">Baring crisis</span> International recession in 1890

The Baring crisis or the Panic of 1890 was an acute recession. Although less serious than other panics of the era, it is the nineteenth century’s most famous sovereign debt crisis, and the 17th largest decline in U.S. stock market history.

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.

<span class="mw-page-title-main">Great Moderation</span> Phenomenon in economies of developed nations since the mid-1980s

The Great Moderation is a period of macroeconomic stability in the United States of America coinciding with the rise of independent central banking beginning from 1980 and continuing to the present day. It is characterized by generally milder business cycle fluctuations in developed nations, compared with decades before. Throughout this period, major economic variables such as real GDP growth, industrial production, unemployment, and price levels have become less volatile, while average inflation has fallen and recessions have become less common.

<span class="mw-page-title-main">Great Depression</span> Worldwide economic depression (1929–1939)

The Great Depression was a period of severe global economic downturn that occurred from 1929 to 1939. It was characterised by high unemployment rates and widespread business failures around the world. The economic contagion began around September 1929 in the United States, the largest economy in the world. Economic historians usually consider the catalyst of the Great Depression to have been the devastating Wall Street stock market crash of October, a sharp decline in U.S. stock prices often referred to as 'Black Tuesday'.

<span class="mw-page-title-main">Great Recession</span> Global economic decline from 2007 to 2009

The Great Recession was a period of market decline in economies around the world that occurred from late 2007 to mid-2009. The scale and timing of the recession varied from country to country. At the time, the International Monetary Fund (IMF) concluded that it was the most severe economic and financial meltdown since the Great Depression.

<span class="mw-page-title-main">Global recession</span> Recession that affects many countries around the world

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

<span class="mw-page-title-main">Depression of 1920–1921</span> Sharp deflationary recession

The Depression of 1920–1921 was a sharp deflationary recession in the United States, United Kingdom 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 a major economic expansion that lasted between 1993 and 2001, coinciding with the economic policies of the Clinton administration. It began following the early 1990s recession during the presidency of George H.W. Bush and ended following the infamous dot-com crash in 2000. Until July 2019, it was the longest recorded economic expansion in the history of the United States.

<span class="mw-page-title-main">Depression of 1882–1885</span>

The Depression of 1882–1885, or Recession of 1882–1885, was an economic contraction in the United States that lasted from March 1882 to May 1885, according to the National Bureau of Economic Research. Lasting 38 months, it was the third-longest recession in the NBER's chronology of business cycles since 1854. Only the Great Depression (1929–1941) and the Long Depression (1873–1879) were longer.

<span class="mw-page-title-main">Economic recovery</span> Phase of the business cycle following a recession

An economic recovery is the phase of the business cycle following a recession. The overall business outlook for an industry looks optimistic during the economic recovery phase.

References

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  2. 1 2 "The NBER's Business Cycle Dating Procedure: Frequently Asked Questions". Nber.org. Archived from the original on 8 October 2012. Retrieved 7 September 2012.
  3. ↑ "Private Tutor". Infoplease.com. Archived from the original on 13 September 2012. Retrieved 7 September 2012.
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  5. ↑ "Home Improvement Tips and Techniques | Business Cycles". Archived from the original on 2 February 2009. Retrieved 15 April 2009.
  6. ↑ "US Business Cycle Expansions and Contractions". National Bureau of Economic Research. Archived from the original on 19 February 2009. Retrieved 1 October 2008.
  7. 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.
  8. ↑ The Glory and the Dream: A Narrative History of America, 1932–1972, William Manchester
  9. 1 2 Krugman, Paul (27 June 2010), "The Third Depression", The New York Times , archived from the original on 11 April 2012
  10. ↑ Rezneck, Samuel (1 July 1935). "The Social History of an American Depression, 1837–1843". The American Historical Review. 40 (4): 662–687. doi:10.2307/1842418. JSTOR   1842418.
  11. 1 2 "Panic of 1837 (1837–1842) – History of Economic Recessions". Politonomist.com. 2 January 2009. Archived from the original on 6 April 2009. Retrieved 7 September 2012.
  12. ↑ Timberlake, Richard H. Jr. (1997). "Panic of 1837" . In Glasner, David; Cooley, Thomas F. (eds.). Business cycles and depressions: an encyclopedia. New York: Garland Publishing. pp. 514–516. ISBN   978-0-8240-0944-1.
  13. ↑ "About the Great Depression". English.uiuc.edu. Archived from the original on 20 December 2008. Retrieved 7 September 2012.
  14. ↑ "Greece sinks deeper into depression in third quarter". Reuters. 14 November 2012. Archived from the original on 14 November 2012. Retrieved 14 November 2012.
  15. ↑ "What Can Transition Economies Learn from the First Ten Years? A New World Bank Report in Transition Newsletter". Worldbank.org. Archived from the original on 9 June 2013.
  16. ↑ "Kalikova & Associates – Law Firm" (in Russian). K-a.kg. Archived from the original on 7 September 2012. Retrieved 7 September 2012.
  17. 1 2 Who Lost Russia?, The New York Times, 8 October 2000
  18. ↑ "Child poverty soars in eastern Europe". BBC News. 11 October 2000. Archived from the original on 18 July 2004.
  19. ↑ "Poverty, crime and migration are acute issues as Eastern European cities continue to grow" (A report by UN-Habitat). 11 January 2005. Archived from the original on 2 January 2010.
  20. ↑ "Study Finds Poverty Deepening in Former Communist Countries", The New York Times, 12 October 2000, archived from the original on 5 February 2017
  21. ↑ Abrahamsen, Y.; Aeppli, R.; Atukeren, E.; Graff, M.; Müller, C.; 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. hdl: 10419/50866 .
  22. ↑ Kehoe, T. J.; Ruhl, K. J. (2005). "Is Switzerland in a Great Depression?". Review of Economic Dynamics . 8 (3): 759–775. doi:10.1016/j.red.2005.03.003.
  23. ↑ Chang, Ha-Joon (4 September 2002). "Kicking Away the Ladder". Post-Autistic Economics Review . No. 15. article 3. Archived from the original on 17 December 2015. Retrieved 8 October 2008.
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