Depression

By: EconomyWatch   Date: 14 October 2010

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Economic depression is a severe and prolonged period of downturn. For a downturn to be classified as depression, the generally accepted definition calls for a decline of at least 10% in GDP and for a period of at least three years. Typically, depression is characterized by a sustained and significant shortfall in purchasing power.

Some characteristics of depression are:

  • abnormal rise in unemployment

 

  • fall in output and investment

 

  • decline in international trade

 

  • exchange rate volatility

 

  • deflation or hyperinflation

 

First Depression: Panic of 1837

The ‘Panic of 1837’ was the first US financial crisis that escalated into a depression. The real estate bubble (created by speculative buying) burst in May. Banks panicked and put payments in gold and silver coins on hold. This was followed by a five-year long depression, which was characterized by the failure of financial institutions and very high levels of unemployment.

Long Depression

The Long Depression was an economic catastrophe that impacted the whole world during the 1870s. Its main victims were Europe and the United States. The United Kingdom was worst affected, as it lost its leadership in the industrial world to its European counterparts. The depression was triggered by the Vienna Stock Exchange crash on May 9, 1873. The Franco-Prussian War and stringent monetary policies followed by the US added to the intensity of the downturn.

Great Depression

The most notable depression struck the global economy in the early 1930s. It was triggered by shares worth $12.9 million being sold on one day (three times the normal trading amount) on October 29, 1929. Share prices plummeted 15-20%, leading to one of the worst stock market crashes. The Great Depression, lasting a decade, was attributed to the Fed’s monetary policies. People started exchanging dollars for gold, leading to a decline in the value of the currency. Moreover, the supply of money was static. This led to panic among people and reduced their trust in banks. They withdrew cash and horded it. Between 1929 and 1933, GDP nosedived 33%. The unemployment rate surged to 25%. A long-term effect of this depression was the abandonment of the gold standard.

The 2008 financial crisis brought the world to the brink of another depression. This global downturn had far-reaching effects, including renowned financial institutions (that survived the Great Depression) to declare bankruptcy.


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