Economic depression: what it is – Dictionary of Economics

Concept of economic depression

Economic depression is the phase following the crisis and which, according to most economic theories, is a consequence of a drop in demand and manifests itself with a decrease in investment and wages, which reduces purchasing power and, therefore, the level of consumption. Thus, Keynesianism tries to explain the conditions that make possible and prolong depressions; while Marxism considers that depressions are a clear sign of the weaknesses of capitalism.

Just as in recessions prices tend to fall, in depressions it is common for situations of hyperinflation or sustained deflation to occur over time.

When are we facing an economic depression?

There is no consensus on when an economic crisis goes from being a recession to being considered a depression, just as a recession occurs when there are two consecutive quarters with negative rates of change in GDP, there is no measure to determine when a depression exists. Some economists have tried to peg it as a decline in GDP greater than 10% or a prolonged recession lasting more than three years. Depression is usually spoken of when the recession deepens over time and when economic activity shows no signs of improvement in some of its main aspects.

Causes of economic depression

The economist John Maynard Keynes explained in his General Theory of Employment, Interest and Money that the main cause of economic depressions is insufficient demand for goods and services.

In the short term, these drops in economic activity may be caused by a drop in aggregate demand (decrease in consumption, investment, public spending,…), or it could be caused by a drop in aggregate supply, that is, That is, companies reduced their production.

Depressions throughout history

1- Panic of 1837 in the USA

The Panic of 1837 is the name given to a wave of economic panic that took place in the United States, and that was born as a result of a speculative fever. The event that triggered the chaos occurred on May 10, 1837 in New York, when all the banks stopped making their payments in kind (gold and silver coins). The panic was followed by an economic crisis that lasted five years, during which banks failed and unemployment reached very high levels.

The causes of the event are said to have been, on the one hand, the policy of United States President Andrew Jackson, who issued an executive order on payments in kind and refused to renew the legal charter of the Second Bank of the United States, which it meant the withdrawal of government funds from that bank; and, on the other hand, Martin Van Buren, the next president (from March 1837, five weeks before the panic broke out), was blamed for his refusal to involve the government in the economy. He was a fan of the French doctrine of ‘laissez-faire’ that favored the free market without government intervention. This contributed to the duration and intensity of the panic.

2- Long Depression or Great Depression (1873-1896)

The Long Depression, known at the time as the “Great Depression,” lasted from 1873 to 1896.8 It affected much of the world and was contemporary with the Second Industrial Revolution.

3- The crash of 29 and the depression of the 30s

The date given by many historians to place the start of the Great Depression on ‘Black Thursday’, October 24, 1929 on the New York Stock Exchange. On that day, the world’s largest stock market crashed.

Not long ago, on September 3, the price of securities traded reached its all-time high. Prices reached their minimum in 1932, by then they had been reduced by almost 90%. The pre-1929 level was not recovered until 1954.

The stock market crash had serious consequences for the US real economy: it created pessimistic expectations about the future that compressed consumption and investment; it destroyed the savings of many families and impoverished them; cut off funding to companies facing declining demand; it harmed the viability of financial institutions that had lent to institutional and private investors to buy securities, etc. But it was not the only cause, nor the main one, of the Great Depression in the international economy during the 1930s.