Depression is an economic condition that occurs when the levels of production, income, sales, and employment in a nation decline and remain far below normal levels for several years or longer. However, economic declines of that length and seriousness are rare in most nations. They are so rare that economists have no generally agreed upon definition for the term depression.
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The economic downturns usually experienced by nations are called recessions or contractions. Economists define a recession as a noticeable decline in gross domestic product (GDP), income, sales, and employment that lasts more than a few months. GDP is the market value of all goods and services produced within a country during a given period. In most recessions, GDP declines for at least two consecutive quarters (six months). Eleven recessions have occurred in the United States since the end of World War II in 1945. These postwar recessions usually lasted a little less than a year.
Economic downturns in the United States in the 1800’s and early 1900’s were often more severe than those since World War II. The earlier slumps sometimes included widespread bank failures and stock market crashes, in addition to falling production, business closings, and rising unemployment. Many families lost all of their money. Those episodes were commonly called financial crises or panics.
Some economists believe that the laissez faire economic policies of the U.S. government at the time contributed to the length and seriousness of these economic downturns. Laissez faire policies are based on the idea that businesses operate most efficiently when they are able to compete largely free of government regulation and oversight. Government officials thought that giving businesses free rein to pursue their economic interests would result in higher levels of production, employment, and wages for the nation as a whole. In that largely unregulated environment, however, periods of rapid economic expansion sometimes led to people feeling overconfident and to excessive lending and borrowing. Eventually many loans couldn’t be repaid and widespread business failure occurred. As a result, nations experienced cycles of economic boom and bust.
U.S. depressions.
The two worst economic slumps in the United States were the Panic of 1873 and the Great Depression of the 1930’s. Both were widely described as depressions. The Panic of 1873 triggered an economic downturn that lasted more than five years. The Great Depression was a worldwide economic slump. During the Great Depression, the GDP of the United States declined dramatically. As production and business activity continued to shrink during the early 1930’s, unemployment rose to record levels. Around 25 percent of U.S. workers were out of work in 1933. The annual unemployment rate did not dip below 14 percent until 1941. In comparison, there has not been a single year since the early 1940’s when U.S. unemployment has averaged as high as 10 percent.
Depressions since World War II.
When recessions occur today, governments and their central banks often undertake policies aimed at preventing them from turning into depressions. A central bank is a government agency, such as the U.S. Federal Reserve or the Reserve Bank of Australia, whose actions affect interest rates and the flow of money in the economy. During recessions, central banks may lower interest rates in order to encourage business investment and stimulate demand (spending) and production. This is known as monetary policy. Governments may also try to stimulate the economy by passing legislation that lowers taxes or raises government spending. These are examples of fiscal policy.
Economic downturns that are severe enough to be described as depressions are rare but not extinct. In recent decades, no large, major industrialized nation has experienced a downturn in which GDP has declined as much as 10 percent. But economic slumps of that seriousness have occurred in smaller industrialized nations. Finland experienced such a downturn over several years in the early 1990’s. So did Ireland and Iceland during the global economic crisis that began in 2007, and Greece experienced the same problem as it battled its national debt.
Some nations in earlier stages of economic development have also experienced steep downturns. For example, a financial crisis in Asia caused a sharp decline in the economies of Indonesia, Malaysia, and Thailand in 1997 and 1998. In another instance, following the collapse of the Soviet Union in 1991, Russia and several other Eastern European countries decided to place greater emphasis on market forces (supply and demand) and less on government planning. In the early stages of reorganizing their economies, those nations suffered major slumps.
