depression (in economics)

The Columbia Encyclopedia, 6th ed.

depression (in economics)

depression, in economics, period of economic crisis in commerce, finance, and industry, characterized by falling prices, restriction of credit, low output and investment, numerous bankruptcies, and a high level of unemployment. A less severe crisis is usually known as a recession, a more common occurance generally thought to be a normal part of the business cycle; it is traditionally defined as as two consecutive quarterly declines in the gross national product. Recessions mark a downward swing in the curve of the business cycle and are caused by a disequilibrium between the quantity of goods produced and the consumers' ability to purchase. If a recession continues long enough, it can turn into a depression. Neither term has ever been distinctly defined by a set of criteria, however, so it is difficult to say at what point the two merge, but some statistics regarded by economists as indicative of a depression include a 10% decrease in per-capita gross domestic product and consumption and 10% unemployment that persists for at least 24 months. A short period in which fear takes hold of companies and investors is more properly called a panic and does not necessarily occur in every depression, but lack of confidence in business is always present in an economic downturn.

A depression develops when overproduction, decreased demand, or a combination of both factors forces curtailment of production, dismissal of employees, and wage cuts. Unemployment and lowered wages further decrease purchasing power, causing the crisis to spread and become more acute. Recovery is generally slow, the return of business confidence being dependent on the development of new markets, exhaustion of the existing stock of goods, or, in some cases, remedial action by governments. Depressions and recessions today tend to become worldwide in scope because of the international nature of trade and credit.

Insufficient numbers of profitable investment outlets, overexpansion of commerce, industry, or agriculture, a stock-market crash, the failure of a great banking or industrial firm, or war may be among the precipitating factors of a downturn. In antiquity, and even up to the 18th cent., depressions had chiefly noneconomic causes, such as wars and weather-induced crop failures. From c.1700 to 1825 economic crises were in the main speculative or commercial; since 1825 they have been increasingly industrial, although the Japanese recessions of the 1990s were caused in part by reduced consumer demand.

The economic crises of the 20th cent. saw the entry of governments into large areas of the economy that had previously been in private hands. Job reeducation programs, government employment of the previously unemployed, and increased public welfare responsibilities are among the programs adopted to alleviate depressions. Moreover, by applying Keynesian economic principles to public policy, governments have sought to affect the business cycle directly and prevent depressions. Large-scale public works expenditure (pump priming), tax cuts, interest rate adjustments, and deficit spending during recession are among the measures that have been taken to reduce the severity of periodic economic downturns such as those experienced in the United States in 1982 and internationally in the early 1990s and 2000s. In the collapse of the U.S. housing bubble that began in 2007, the uncertainties associated with mortgage-related securities and other financial instruments that had pervaded the international financial system undermined or threatened a wide range of financial institutions, leading in 2008 to unprecedented measures by the Federal Reserve in an attempt to avoid a financial collapse and depression. Nonetheless, the resulting financial crisis and recession was the worst in the United States since the 1980s and also severely affected many other nations.

See also Great Depression.

See M. Bernstein, The Great Depression (1987); C. P. Kindleberger, The World in Depression, 1929–1939 (rev. ed. 1986) and Manias, Panics, and Crashes (rev. ed. 1989); W. C. Mitchell, Business Cycles and Their Causes (1989); A. W. Mullineux, Business Cycles and Financial Crises 1990).

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