Depression (economics)

The stock market crash of 1929 marked the start of the greatest depression in modern history with some effects felt through 1945.

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 devaluations. Price deflation, financial crises and bank failures 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 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: (1) a decline in real GDP exceeding 10%, or (2) a recession lasting 2 or more years.^[3][4]

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",^[5] 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,^[5] though US president Herbert Hoover is widely credited with having 'popularized' the term/phrase,^[5][6] 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.^[7]

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,^[7] but this terminology is not widely used, with the episode instead being referred to by other terms, such as the punning "Great Recession".

Notable depressions

Great Depression

Main article: Great Depression

The best-known depression was the Great Depression, 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.^[8] 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.

Long Depression

For more details on this topic, see Long Depression.

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.

Panic of 1837

Main article: Panic of 1837

The Panic of 1837 was an American financial crisis, built on a speculative real estate market.^[9] 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,^[9] with the failure of banks and record high unemployment levels^{[citation needed]}.

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, Argentina, 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.^[10][11]

Over the period 1980–2000, Sub-Saharan Africa broadly suffered a fall in absolute income levels.^[12]

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.^[13][14] 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.^[15] Even before Russia's financial crisis of 1998, Russia's GDP was half of what it had been in the early 1990s.^[14] 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^[16] and poverty in the region had increased more than tenfold.^[17]

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.

See also

• Recession
• List of recessions
• List of recessions in the United States
• Stagflation
• Late 2000s recession

References

1. ^ http://www.nber.org/cycles/recessions_faq.html
2. ^ http://www.infoplease.com/ce6/history/A0821657.html
3. ^ "Diagnosing depression". The Economist. December 30, 2008. http://www.economist.com/finance/displaystory.cfm?story_id=12852043. 
4. ^ http://businesscycles.info/recession-definition/
5. ^ ^{a b c} When Did the Great Depression Receive Its Name? (And Who Named It?), 2-16-09, by Noah Mendel, History News Network
6. ^ The Glory and the Dream: A Narrative History of America, 1932–1972, William Manchester
7. ^ ^{a b} Krugman, Paul (June 27, 2010), "The Third Depression", New York Times, http://www.nytimes.com/2010/06/28/opinion/28krugman.html 
8. ^ http://www.english.uiuc.edu/maps/depression/about.htm
9. ^ ^{a b} http://www.politonomist.com/history-of-economic-recessions-00273/3/
10. ^ Abrahamsen Y, R.; Aeppli, E.; Atukeren, M.; Graff, C.; Müller; Schips, B. (2005). "The Swiss disease: Facts and artefacts. A reply to Kehoe and Prescott". Review of Economic Dynamics 8 (3): 749–758. doi:10.1016/j.red.2004.06.003. 
11. ^ Kehoe, T. J.; Ruhl, K. J. (2005). Is Switzerland in a Great Depression?. 8. Review of Economic Dynamics. pp. 759–775. 
12. ^ Chang, Ha-Joon. "Kicking Away the Ladder: How the Economic and Intellectual Histories of Capitalism Have Been Re-Written to Justify Neo-Liberal Capitalism". Post-Autistic Economics Review. 4 September 2002: Issue 15, Article 3. Retrieved on 8 October 2008.
13. ^ See “What Can Transition Economies Learn from the First Ten Years? A New World Bank Report,” in Transition Newsletter (http://worldbank.org/transitionnewsletter/janfeb2002). [1]
14. ^ ^{a b} Who Lost Russia?, New York Times, October 8, 2000
15. ^ Child poverty soars in eastern Europe, BBC News, October 11, 2000
16. ^ Poverty, crime and migration are acute issues as Eastern European cities continue to grow, A report by UN-Habitat, January 11, 2005
17. ^ "Study Finds Poverty Deepening in Former Communist Countries", New York Times, October 12, 2000, http://www.nytimes.com/2000/10/12/world/study-finds-poverty-deepening-in-former-communist-countries.html .