Economic Depression
An economic depression is a prolonged and severe decline in economic activity, more extreme and longer-lasting than an ordinary recession. Depressions are characterised by a deep fall in output, high unemployment, deflation, and widespread financial distress.[1]
Definition
There is no universally agreed quantitative definition of a depression, but it is generally distinguished from a recession by its severity and duration. While a recession may last a few quarters, a depression can persist for years and involve a fall in output of many percentage points.[1]
Characteristics
| Feature | Description |
|---|---|
| Output | A large and sustained fall in GDP. |
| Unemployment | Very high rates, often reaching double digits. |
| Prices | Often falling (deflation). |
| Financial system | Bank failures and credit contraction. |
| Duration | Typically years rather than quarters. |
Historical examples
The most famous example is the Great Depression of the 1930s, which began with the Wall Street Crash of 1929 and spread worldwide, causing massive unemployment and output losses. It was eventually followed by recovery, aided by the New Deal in the United States and, later, by wartime mobilisation. Other episodes include the Long Depression of the 1870s and, more recently, the prolonged stagnation in Japan from the 1990s.[1]
Policy responses
Depressions call for aggressive policy responses, including large-scale fiscal stimulus, monetary easing and unconventional measures, financial sector intervention, and, sometimes, structural reform. The experience of the Great Depression shaped modern macroeconomic policy and led to the creation of institutions such as the International Monetary Fund and the World Bank.[1]