recession & recovery

8/8/2019 Recession & Recovery

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Recessionand

Recovery


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Introduction

In economics, a recession is a (1) business cycle contraction, a general slowdownin economic activity over a period of time. During recessions, many macroeconomicindicators vary in a similar way. Production as measured by Gross Domestic Product(GDP), employment, investment spending, capacity utilization, household incomes,business profits and inflation all fall during recessions; while bankruptcies and theunemployment rate rise.

Recessions are generally believed to be caused by a widespread drop in spending.Governments usually respond to recessions by adopting expansionarymacroeconomic policies, such as increasing money supply, increasing governmentspending and decreasing taxation.

(1) The term business cycle (or economic cycle) refers to economy-widefluctuations in production or economic activity over several months or years.These fluctuations occur around a long-term growth trend, and typically involveshifts over time between periods of relatively rapid economic growth (expansionor boom), and periods of relative stagnation or decline (contraction orrecession).

Definition

A period of general economicdecline; typically defined as a decline in GDP for twoor more consecutive quarters. A recession is typically accompanied by a drop in thestock market, an increase in unemployment, and a decline in the housing market. Arecession is generally considered less severe than a depression, and if a recessioncontinues long enough it is often then classified as a depression. There is no oneobvious cause of a recession, although overall blame generally falls on the federalleadership, often either the President himself, the head of the Federal Reserve, orthe entire administration.

In the United States, the Business Cycle Dating Committee of the National Bureauof Economic Research (NBER) is generally seen as the authority for dating USrecessions. The NBER defines an economic recession as: "a significant decline in[the] economic activity spread across the country, lasting more than a few months,normally visible in realGDP growth, real personal income, employment (non-farmpayrolls), industrial production, and wholesale-retail sales."
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Attributes

A recession has many attributes that can occur simultaneously and includesdeclines in component measures of economic activity (GDP) such as consumption,investment, government spending, and net export activity. These summary

measures reflect underlying drivers such as employment levels and skills,household savings rates, corporate investment decisions, interest rates,demographics, and government policies.

Economist Richard C. Koo wrote that under ideal conditions, a country's economyshould have the household sector as net savers and the corporate sector as netborrowers, with the government budget nearly balanced and net exports near zero.When these relationships become imbalanced, recession can develop within thecountry or create pressure for recession in another country. Policy responses areoften designed to drive the economy back towards this ideal state of balance.

A severe (GDP down by 10%) or prolonged (three or four years) recession isreferred to as an economic depression, although some argue that their causesand cures can be different. As an informal shorthand, economists sometimes referto different recession shapes, such as V-shaped, U-shaped, L-shaped and W-shaped recessions.

Type of recession or shape

Recessions and subsequent growth periods may have distinctive shapes whengraphed. In the US, V-shaped, or short-and-sharp contractions followed by rapidand sustained recovery, occurred in 1954 and 199091; U-shaped (prolongedslump) in 1974-75, and W-shaped, or double-dip recessions in 1949 and 1980-82.Japans 1993-94 recession was U-shaped and its 8-out-of-9 quarters of contractionin 1997-99 can be described as L-shaped. Korea, Hong Kong and South-east Asiaexperienced U-shaped recessions in 1997-98, although Thailands eight consecutivequarters of decline should be termed L-shaped.

Psychological aspectsRecessions have psychological and confidence aspects. For example, if theexpectation develops that economic activity will slow, firms may decide to reduceemployment levels and save money rather than invest. Such expectations cancreate a self-reinforcing downward cycle, bringing about or worsening a recession.Consumer confidence is one measure used to evaluate economic sentiment. Theterm "Animal Spirits" has been used to describe the psychological factors
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underlying economic activity. Economist Robert J. Shiller wrote that the term"...refers also to the sense of trust we have in each other, our sense of fairness ineconomic dealings, and our sense of the extent of corruption and bad faith. Whenanimal spirits are on ebb, consumers do not want to spend and businesses do notwant to make capital expenditures or hire people."

Balance sheet recession

The bursting of a real estate or financial asset price bubble can cause a recession.For example, economist Richard Koo wrote that Japan's "Great Recession" thatbegan in 1990 was a "balance sheet recession." It was triggered by a collapse inland and stock prices, which caused Japanese firms to become insolvent, meaningtheir assets were worth less than their liabilities. Despite zero interest rates andexpansion of the money supply to encourage borrowing, Japanese corporations in

aggregate opted to pay down their debts from their own business earnings ratherthan borrow to invest as firms typically do. Corporate investment, a key demandcomponent of GDP, fell enormously (22% of GDP) between 1990 and its peakdecline in 2003. Japanese firms overall became net savers after 1998, as opposedto borrowers. Koo argues that it was massive fiscal stimulus (borrowing andspending by the government) that offset this decline and enabled Japan to maintainits level of GDP. In his view, this avoided a U.S. type Great Depression, in whichU.S. GDP fell by 46%. He argued that monetary policy was ineffective becausethere was limited demand for funds while firms paid down their liabilities. In abalance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary

remedy.

Liquidity trap

A liquidity trap situation can develop in which interest rates reach near zero (ZIRP)yet do not effectively stimulate the economy. In theory, near-zero interest ratesshould encourage firms and consumers to borrow and spend. However, if too manyindividuals or corporations focus on saving or paying down debt rather thanspending, lower interest rates have less effect on investment and consumption

behavior; the lower interest rates are like "pushing on a string."

Economist Paul Krugman described the U.S. 2009 recession and Japan's lost decadeas liquidity traps. One remedy to a liquidity trap is expanding the money supply viaquantitative easing or other techniques in which money is effectively printed topurchase assets, thereby creating inflationary expectations that cause savers tobegin spending again.
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Government stimulus spending and mercantilist policies to stimulate exports andreduce imports are other techniques to stimulate demand. He estimated in March2010 that developed countries representing 70% of the world's GDP were caught ina liquidity trap.

Predictors

Although there are no completely reliable predictors, the following are regarded tobe possible predictors.

Inverted yield curve, the model developed by economist Jonathan H. Wright,uses yields on 10-year and three-month Treasury securities as well as the

Fed's overnight funds rate. Another model developed by Federal ReserveBank of New York economists uses only the 10-year/three-month spread. Itis, however, not a definite indicator;

The three-month change in the unemployment rate and initial jobless claims. Index of Leading (Economic) Indicators (includes some of the above

indicators). Lowering of asset prices, such as homes and financial assets, or high

personal and corporate debt levels.

Government responsesMost mainstream economists believe that recessions are caused by inadequate

aggregate demand in the economy, and favor the use of expansionarymacroeconomic policy during recessions. Strategies favored for moving aneconomy out of a recession vary depending on which economic school thepolicymakers follow. Monetarists would favor the use of expansionarymonetary policy, while Keynesian economists may advocate increasedgovernment spending to spark economic growth. Supply-side economistsmay suggest tax cuts to promote business capital investment. When interestrates reach the boundary of an interest rate of zero percent conventional

monetary policy can no longer be used and government must use othermeasures to stimulate recovery. Keynesians argue that fiscal policy, tax cutsor increased government spending, will work when monetary policy fails.Spending is more effective because of its larger multiplier but tax cuts takeeffect faster.
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Stock market

Some recessions have been anticipated by stock market declines. In Stocks for theLong Run, Siegel mentions that since 1948, ten recessions were preceded by astock market decline, by a lead time of 0 to 13 months (average 5.7 months), whileten stock market declines of greater than 10% in the DJIA were not followed by arecession.

The real-estate market also usually weakens before a recession. However real-estate declines can last much longer than recessions.

Since the business cycle is very hard to predict, Siegel argues that it is not possibleto take advantage of economic cycles for timing investments. Even the NationalBureau of Economic Research (NBER) takes a few months to determine if a peak ortrough has occurred in the US.

During an economic decline, high yield stocks such as fast moving consumer goods,pharmaceuticals, and tobacco tend to hold up better. However when the economystarts to recover and the bottom of the market has passed (sometimes identified oncharts as a MACD), growth stocks tend to recover faster. There is significantdisagreement about how health care and utilities tend to recover. Diversifying one'sportfolio into international stocks may provide some safety; however, economiesthat are closely correlated with that of the U.S. may also be affected by a recessionin the U.S.

There is a view termed the halfway rule according to which investors startdiscounting an economic recovery about halfway through a recession. In the 16U.S. recessions since 1919, the average length has been 13 months, although therecent recessions have been shorter. Thus if the 2008 recession followed theaverage, the downturn in the stock market would have bottomed around November2008. The actual US stock market bottom of the 2008 recession was in March 2009.

Politics

Generally an administration gets credit or blame for the state of economy during itstime.[ This has caused disagreements about when a recession actually started. In

an economic cycle, a downturn can be considered a consequence of an expansionreaching an unsustainable state, and is corrected by a brief decline. Thus it is noteasy to isolate the causes of specific phases of the cycle.

The 1981 recession is thought to have been caused by the tight-money policyadopted by Paul Volcker, chairman of the Federal Reserve Board, before RonaldReagan took office. Reagan supported that policy. Economist Walter Heller,chairman of the Council of Economic Advisers in the 1960s, said that "I call it a
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Reagan-Volcker-Carter recession. The resulting taming of inflation did, however, setthe stage for a robust growth period during Reagan's administration.

Economists usually teach that to some degree recession is unavoidable, and itscauses are not well understood. Consequently, modern government administrationsattempt to take steps, also not agreed upon, to soften a recession.

Impacts

Unemployment

The full impact of a recession on employment may not be felt for several quarters.Research in Britain shows that low-skilled, low-educated workers and the young aremost vulnerable to unemployment in a downturn. After recessions in Britain in the1980s and 1990s, it took five years for unemployment to fall back to its originallevels.

Business

Productivity tends to fall in the early stages of a recession, then rises again asweaker firms close. The variation in profitability between firms rises sharply.Recessions have also provided opportunities for anti-competitive mergers, with a

negative impact on the wider economy: the suspension ofcompetition policy in theUnited States in the 1930s may have extended the Great Depression.

Social effects

The living standards of people dependent on wages and salaries are more affectedby recessions than those who rely on fixed incomes or welfare benefits. The loss ofa job is known to have a negative impact on the stability of families, andindividuals' health and well-being.

History

Global

There is no commonly accepted definition of a global recession, although the IMFregards periods when global growth is less than 3% to be global recessions. The
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IMF estimates that global recessions seem to occur over a cycle lasting between 8and 10 years. During what the IMF terms the past three global recessions of thelast three decades, global per capita output growth was zero or negative.

Economists at the International Monetary Fund (IMF) state that a global recessionwould take a slowdown in global growth to three percent or less. By this measure,four periods since 1985 qualify: 19901993, 1998, 20012002 and 20082009.
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United Kingdom

List of recessions in the United Kingdom

This is a list of (recent) recessions (and depressions) that have affected theeconomy of the United Kingdom.

Name Dates Duration GDP

reduction

Causes Other data

1919-21

depression

1919-

1921

~3 years 10.9%

19196.0% 19208.1% 1921

The end of the

First WorldWar

Deflation ~10% in

1921, and ~14%in 1922.

GreatDepression

1930-1931

~2years 0.7% 19305.1% 1931

USDepression.Reducingdemand forUK exports,also highinterest ratedefending the

gold standard.

UK came offgoldstandard Sept1931. 3-5%deflation pa. UKmuch less affectedthan US.

Mid 1970srecession

1973-75

2 years(6 out of9 Qtr)

3.9%3.37%

1973 oil crisis Took 14 quartersfor GDP to recoverto that at start ofrecession.

Early1980srecession

1980-82

~2 years(6 - 7Qtr)

5.8% Cause -possiblymonetaristgovernment

policies toreduceinflation? See1979-1983

Company earningsdecline 35%.Unemploymentrises 124% from5.3% of theworking populationin Aug 1979 to11.9% in 1984.Took 13 quartersfor GDP to recoverto that at start of1980.
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Early1990srecession

1990-92

~2 years(5 Qtr)

2.5% US savingsand loan crisisleading to the

Early 1990srecession.

Company earningsdecline 25%. Peakbudget deficit

~8% of GDP.Unemploymentrises 55% from6.9% of theworking populationin 1990 to 10.7%in 1993. Took 13quarters for GDPto recover to thatat start ofrecession.

Late-

2000srecession

2008-

Present

6 Qtrs so

far, fromQ2 2008(~May)

6.0% to

end Sep-09Forecasts~5-6.2%.

Financial crisis

of 2007-2010

Manufacturing

output down 7%by end 2008.Unemployment2.8M at beginning2010CBI forecastmanufacturingoutput to drop10% in 2009.Unemploymentforecast to rise to

3.0M (9.4%) in2010.It has beenthe longestrecession since thewar. It hasaffected lots ofparts of thecountry includingbanks andinvestment firms.Longest recessionto hit post-warBritain.
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United States

List of recessions in the United States

In the United States the beginning and ending dates of national recessions aredetermined by the National Bureau of Economic Research (NBER). The NBERdefines a recession as "a significant decline in economic activity spread across theeconomy, lasting more than a few months, normally visible in real gross domesticproduct (GDP), real income, employment, industrial production, and wholesale-retail sales".

There have been as many as 47 recessions in the United States since 1790

(although economists and historians dispute certain 19th-century recessions).These downturns are driven by changes in the government's regulatory, fiscal,trade and monetary policies. Cycles in agriculture, consumption, and businessinvestment, and the health of the banking industry also contribute to thesedeclines. U.S. recessions have increasingly affected economies on a worldwidescale, especially as countries' economies become more intertwined.

In the 19th century, recessions frequently coincided with financial crises.Determining the occurrence of pre-20th-century recessions is more difficult due tothe dearth of economic statistics, so scholars rely on historical accounts ofeconomic activity, such as contemporary newspapers or business ledgers. Althoughthe NBER does not date recessions before 1857, economists customarilyextrapolate dates of U.S. recessions back to 1790 from business annals based onvarious contemporary descriptions. Their work is aided by historical patterns, inthat recessions often follow external shocks to the economic system such as warsand variations in the weather affecting agriculture, as well as banking crises.

Major modern economic statistics, such as unemployment and gross domesticproduct, were not compiled on a regular and standardized basis until after WorldWar II. The average duration of the 11 recessions between 1945 and 2001 is 10months, compared to 18 months for recessions between 1919 and 1945, and 22months for recessions from 1854 to 1919. Because of the great changes in theeconomy over the centuries, it is difficult to compare the severity of modern

recessions to early recessions. Recessions after World War II appear to have beenless severe than earlier recessions, but the reasons for this are unclear.
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Early recessions and crises

Attempts have been made to date recessions in America beginning in 1790. Theseperiods of recession were not identified until the 1920s. To construct the dates,researchers studied business annals during the period and constructed time series

of the data. The earliest recessions for which there is the most certainty are thosethat coincide with major financial crises.

Beginning in 1834, an index of business activity by the Cleveland Trust Companyprovides data for comparison between recessions. Beginning in 1854, the NationalBureau of Economic Research dates recession peaks and troughs to the month. Butfor the earliest recessions, there are no standardized indexes, and the data areconsidered unreliable. As the data get older, their reliability worsens.

In 1791, Congress chartered the First Bank of the United States to handle thecountry's financial needs. The bank had some functions of a modern central bank,

although it was responsible for only 20% of the young country's currency. In 1811the bank's charter lapsed, but it was replaced by the Second Bank of the UnitedStates, which lasted from 181636.

Name Dates Duration

Time since

previous

recession

Characteristics

Panic of1797

17961799

~3 years ~6 years

Just as a land speculation bubble wasbursting, deflation from the Bank of

England (which was facing insolvencybecause of the cost of Great Britain'sinvolvement in the FrenchRevolutionary Wars) crossed to NorthAmerica and disrupted commercial andreal estate markets in the United Statesand the Caribbean, and caused a majorfinancial panic. Prosperity continued inthe south, but economic activity wasstagnant in the north for three years.The young United States engaged inthe Quasi-War with France.

18021804recession

18021804

~2 years ~3 years

A boom of war-time activity led to adecline after the Peace of Amiensended the war between the UnitedKingdom and France. Commodity pricesfell dramatically. Trade was disruptedby pirates, leading to the First BarbaryWar.
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Depressionof 1807

18071810

~3 years ~3 years

The Embargo Act of 1807 was passedby the United States Congress underPresident Thomas Jefferson as tensionsincreased with the United Kingdom.Along with trade restrictions imposed

by the British, shipping-relatedindustries were hard hit. TheFederalists fought the embargo andallowed smuggling to take place in NewEngland. Trade volumes, commodityprices and securities prices all began tofall. Macon's Bill Number 2 ended theembargoes in May 1810, and arecovery started.

1812

recession 1812 ~6 months ~18 months

The United States entered a briefrecession at the beginning of 1812. Thedecline was brief primarily because the

United States soon increasedproduction to fight the War of 1812,which began June 18, 1812.

181521depression

18151821 ~6 years ~3 years

Shortly after the war ended on March23, 1815, the United States entered aperiod of financial panic as bank notesrapidly depreciated because of inflationfollowing the war. The 1815 panic wasfollowed by several years of milddepression, and then a major financialcrisis the Panic of 1819, which

featured widespread foreclosures, bankfailures, unemployment, a collapse inreal estate prices, and a slump inagriculture and manufacturing. Thelengthy depression, if trulyuninterrupted, was the longest inAmerican history, although the NBERdoes not provide precise dating for thisperiod.

18221823recession

18221823

~1 year ~1 year

After only a mild recovery following thelengthy 181521 depression,

commodity prices hit a peak in March1822 and began to fall. Manybusinesses failed, unemployment roseand an increase in imports worsenedthe trade balance.

18251826recession

18251826

~1 year ~2 years The Panic of 1825, a stock crashfollowing a bubble of speculativeinvestments in Latin America led to a
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decline in business activity in theUnited States and England. Therecession coincided with a major panic,the date of which may be more easilydetermined than general cycle changes

associated with other recessions.

18281829recession

18281829

~1 year ~2 years

In 1826 England forbid the UnitedStates to trade with English coloniesand in 1827 the United States adopteda counter-prohibition. Trade declined,

just as credit became tight formanufacturers in New England.

183334recession

18331834

~1 year ~4 years

The United States' economy declinedmoderately in 183334. News accountsof the time confirm the slowdown. Thesubsequent expansion was driven byland speculation.

In the 1830s, U.S. President Andrew Jackson fought to end the Second Bank of theUnited States. Following the Bank War, the Second Bank lost its charter in 1836.From 1837 to 1862 there was no national presence in banking, but still plenty of
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state and even local regulation such as laws against branch banking whichprevented diversification. In 1863, in response to financing pressures of the CivilWar, Congress passed the National Banking Act, creating nationally charteredbanks. There was neither a central bank nor deposit insurance during this era, andthus banking panics were common. Recessions often led to bank panics andfinancial crises, which in turn worsened the recession.

The dating of recessions during this period is controversial. Modern economicstatistics, such as gross domestic product and unemployment, were not gatheredduring this period. Victor Zarnowitz evaluated a variety of indexes to measure theseverity of these recessions. From 1834 to 1929, one measure of recessions is theCleveland Trust Company index, which measured business activity and, beginningin 1882, an index of trade and industrial activity was available, which can be usedto compare recessions.

US recessions, Free Banking Era to the Great

Depression

Dates Duration Time sincepreviousrecession

Businessactivity

Trade &industrialactivity

Characteristics

Panic of 183718361838 ~2 years ~2 years 32.8%

A sharp downturn in the American economy was caused by bank failures and lackof confidence in the paper currency. Speculation markets were greatlyaffected when American banks stopped payment in specie (gold and silvercoinage). Over 600 banks failed in this period. In the south the cotton marketcompletely collapsed.

Depression of 183943Late 1839

Late 1843

~4 years ~1 year 34.3%

This was one of the longest and deepest depressions. It was a period of pronounceddeflation and massive default on debt. The Cleveland Trust Company Indexshowed the economy spent 68 months below its trend and only 9 monthsabove it. The Index declined 34.3% during this depression.

184546 recession1845late 1

846~1 year ~2 years 5.9%

This recession was mild enough that it may have only been a slowdown in the
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June 1869Dec 1870

1 year6months

1 year6months

9.7%

A few years after the Civil War, a short recession occurred. It was unusual since itcame amid a period when railroad investment was greatly accelerating, even

producing the First Transcontinental Railroad. The railroads built in thisperiod opened up the interior of the country, giving birth to the Farmers'movement. The recession may be explained partly by ongoing financialdifficulties following the war, which discouraged businesses from building upinventories. Several months into the recession there was a major financialpanic.

Panic of 1873 and the Long DepressionOct 1873

Mar1879

5 years5months

2 years10months

33.6%(27.3%)

Economic problems in Europe prompted the failure ofJay Cooke & Company, the

largest bank in the United States, which burst the post-Civil Warspeculativebubble. The Coinage Act of 1873 also contributed by immediatelydepressing the price of silver, which hurt North American mining interests. Thedeflation and wage cuts of the era led to labor turmoil, such as the GreatRailroad Strike of 1877. In 1879, the United States returned to the goldstandard with the Specie Payment Resumption Act. This is the longestperiod of economic contraction recognized by the NBER. The LongDepression is sometimes held to be the entire period from 187396.

188285 recessionMar 1882

May

1885

3 years2

months

3 years 32.8% 24.6%

Like the Long Depression that preceded it, the recession of 188285 was more of aprice depression than a production depression. From 1879 to 1882 there hadbeen a boom in railroad construction which came to an end, resulting in adecline in both railroad construction and in related industries, particularly ironand steel.[20] A major economic event during the recession was the Panic of1884.

188788 recessionMar 1887

April1888

1 year1 month

1 year10months

14.6% 8.2%

Investments in railroads and buildings weakened during this period. This slowdownwas so mild that it is not always considered a recession. Contemporaryaccounts apparently indicate it was considered a slight recession.

189091 recessionJuly 1890

May1891

10 months 1 year 5months

22.1% 11.7%
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Jan 1910 Jan1912

2 years 1 year7 months

14.7% 10.6%

This was a mild but lengthy recession. The national product grew by less than 1%,and commercial activity and industrial activity declined. The period was also

marked by deflation.Recession of 19131914

Jan 1913Dec 1914

1 year11months

1 year 25.9% 19.8%

Productions and real income declined during this period and were not offset untilthe start of World War I increased demand. Incidentally, the FederalReserve Act was signed during this recession, creating the Federal ReserveSystem, the culmination of a sequence of events following the Panic of1907.

Post-World War I recessionAug 1918

March1919

7 months3 years

8 months 24.5% 14.1%

Severe hyperinflation in Europe took place over production in North America. Thiswas a brief but very sharp recession and was caused by the end of wartimeproduction, along with an influx of labor from returning troops. This in turncaused high unemployment.

Depression of 192021Jan 1920

July

1921

1 year6

months

10 months 38.1% 32.7%

The 1921 recession began a mere 10 months after the post-World War I recession,as the economy continued working through the shift to a peacetime economy.The recession was short but extremely painful. The year 1920 was the singlemost deflationary year in American History; production, however, did not fallas much as might be expected from the deflation. GNP may have declinedbetween 2.5 and 7 percent, even as wholesale prices declined by 36.8%. Theeconomy had a strong recovery following the recession.

192324 recessionMay 1923

June

1924

1 year2

months

2 years 25.4% 22.7%

From the depression of 192021 until the Great Depression, an era dubbed theRoaring Twenties, the economy was generally expanding. Industrialproduction declined in 192324, but on the whole this was a mild recession.

192627 recessionOct 1926

Nov1 year

1 month2 years

312.2% 10.0%
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1927 monthsThis was an unusual and mild recession, thought to be caused largely because

Henry Ford closed production in his factories for six months to switch fromproduction of the Model T to the Model A. Charles P. Kindleberger saysthe period from 1925 to the start of the Great Depression is best thought of as

a boom, and this minor recession just proof that the boom "was not general,uninterrupted or extensive".

Depression

In economics, a depression is a sustained, long-term downturn in economic activityin one or more economies. It is a more severe downturn than a recession, which isseen by economists as part of a normal business cycle.

Considered a rare and extreme form of recession, a depression is characterized byits length, and by abnormally large increases in unemployment, falls in the

availability of credit quite often due to some kind of banking/financial crisis,shrinking output and investment, numerous bankruptcies including sovereigndebt defaults, significantly reduced amounts of trade and commerce especiallyinternational, as well as highly volatile relative currency value fluctuations mostoften due to devaluations. Price deflation, financial crises and bank failures are alsocommon elements of a depression.
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Definition

There is no widely agreed definition for a depression, though some have beenproposed. In the United States the National Bureau of Economic Researchdetermines contractions and expansions in the business cycle, but does not declaredepressions. Generally, periods labeled depressions are marked by a substantialand sustained shortfall of the ability to purchase goods relative to the amount thatcould be produced using current resources and technology (potential output).Another proposed definition of depression includes two general rules: 1) a decline inreal GDP exceeding 10%, or 2) a recession lasting 2 or more years.

Terminology

Use of the term "depression" to refer to an economic downturn dates to the 19th

century, when it was used by various American and British politicians andeconomists. The term has connotations both of "a depressed (below usual) level ofeconomic output", and psychological depression (unhappiness). While in thetechnical sense it refers to a deep or prolonged reduction in economic activity, it ispopularly used to suggest a crisis of confidence; compare malaise. Alternativeterms for extended periods of poor economic performance include "lost decade" andL-shaped recession.

Today the term "depression" is most often associated with the Great Depression ofthe 1930s, but the term had been in use long before then. Indeed, the first majorAmerican economic crisis, the Panic of 1819, was described by then-presidentJames Monroe as "a depression", and the economic crisis immediately preceding

the 1930's depression, the Depression of 192021, was referred to as a"depression" by president Calvin Coolidge. However, in the 19th and early 20thcenturies, financialcrises were traditionally referred to as "panics", e.g., the 'major'Panic of 1907, and the 'minor' Panic of 19101911, though the 1929 crisis wasmore commonly called "The Crash", and the term "panic" has since fallen out ofuse. At the time of the Great Depression (of the 1930s), the phrase "The GreatDepression" had already been used to refer to the period 187396 (in the UnitedKingdom), or more narrowly 187379 (in the United States), which has since beenretroactively renamed the Long Depression.

Common use of the phrase "The Great Depression" for the 1930s crisis is most

frequently attributed to British economist Lionel Robbins, whose 1934 book TheGreat Depression is credited with 'formalizing' the phrase, though US presidentHerbert Hoover is widely credited with having 'popularized' the term/phrase,informally referring to the downturn as a depression, with such uses as "Economicdepression cannot be cured by legislative action or executive pronouncement",(December 1930, Message to Congress) and "I need not recount to you that theworld is passing through a great depression", (1931).
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Occurrence

Due to the lack of an agreed definition, and the strong negative associations, thecharacterization of any period as a "depression" is contentious. The term wasfrequently used for regional crises from the early 19th century until the 1930s, and

for the more widespread crises of the 1870s and 1930s, but economic crises since1945 have generally been referred to as "recessions", with the 1970s global crisisreferred to as "stagflation", but not a depression. The only two eras commonlyreferred to at the current time as "depressions" are the 1870s and 1930s.

To some degree this is simply a stylistic change, similar to the decline in the use of"panic" to refer to financial crises, but it does also reflect that the economic cycle both in the United States and in most OECD countries though not in all hasbeen more moderate since 1945.

There have been many periods of prolonged economic underperformance in

particular countries/regions since 1945, detailed below, but terming these as"depressions" is controversial. The late-2000s recession, which is the mostsignificant global crisis since the Great Depression, has at times been termed adepression, but this terminology is not widely used, with the episode instead beingreferred to by other terms, such as the punning "Great Recession".

Great depressions

The Great Depression was a severe worldwide economic depression in the decadepreceding World War II. The timing of the Great Depression varied across nations,but in most countries it started in about 1929 and lasted until the late 1930s orearly 1940s. It was the longest, most widespread, and deepest depression of the20th century. In the 21st century, the Great Depression is commonly used as anexample of how far the world's economy can decline. The depression originated inthe U.S., starting with the stock market crash of October 29, 1929 (known as BlackTuesday). From there, it quickly spread to almost every country in the world.

The Great Depression had devastating effects in virtually every country, rich and

poor. Personal income, tax revenue, profits and prices dropped. while internationaltrade plunged by to . Unemployment in the U.S. rose to 25%, and in somecountries rose as high as 33%. Cities all around the world were hit hard, especiallythose dependent on heavy industry. Construction was virtually halted in manycountries. Farming and rural areas suffered as crop prices fell by approximately60%. Facing plummeting demand with few alternate sources of jobs, areasdependent on primary sector industries such as cash cropping, mining and loggingsuffered the most.
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Some economies started to recover by the mid-1930s. However, in many countriesthe negative effects of the Great Depression lasted until the start of World War II.

Economic indicators

Change in economic indicators 1929-32

USA Britain France Germany

Industrial production -46% -23 -24 -41

Wholesale prices -32% -33 -34 -29

World trade -70% -60 -54 -61

Unemployment +607% +129 +214 +232

Start of the Great DepressionEconomic historians usually attribute the start of the Great Depression to thesudden devastating collapse of US stock market prices on October 29, 1929, knownas Black Tuesday. However, some dispute this conclusion, and see the stock crashas a symptom, rather than a cause of the Great Depression. Even after the WallStreet Crash of 1929, optimism persisted for some time; John D. Rockefeller saidthat "These are days when many are discouraged. In the 93 years of my life,depressions have come and gone. Prosperity has always returned and will again.In fact, the stock market turned upward in early 1930, returning to early 1929levels by April. This was still almost 30% below the peak of September 1929.Together, government and business actually spent more in the first half of 1930

than in the corresponding period of the previous year. On the other hand,consumers, many of whom had suffered severe losses in the stock market theprevious year, cut back their expenditures by ten percent. Likewise, beginning inthe summer of 1930, a severe drought ravaged the agricultural heartland of theUSA.

By mid-1930, interest rates had dropped to low levels. But expected deflation andthe continuing reluctance of people to borrow meant that consumer spending andinvestment were depressed.[13] By May 1930, automobile sales had declined tobelow the levels of 1928. Prices in general began to decline, although wages heldsteady in 1930; but then a deflationary spiral started in 1931. Conditions were

worse in farming areas, where commodity prices plunged, and in mining andlogging areas, where unemployment was high and there were few other jobs. Thedecline in the US economy was the factor that pulled down most other countries atfirst, then internal weaknesses or strengths in each country made conditions worseor better. Frantic attempts to shore up the economies of individual nations throughprotectionist policies, such as the 1930 U.S. SmootHawley Tariff Act andretaliatory tariffs in other countries, exacerbated the collapse in global trade. By
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late 1930, a steady decline in the world economy had set, which did not reachbottom until 1933.

Causes

There were multiple causes for the first downturn in 1929. These include thestructural weaknesses and specific events that turned it into a major depressionand the manner in which the downturn spread from country to country. In relationto the 1929 downturn, historians emphasize structural factors like massive bankfailures and the stock market crash. In contrast, economists (such as BarryEichengreen, Milton Friedman and Peter Temin) point to monetary factors such asactions by the US Federal Reserve that contracted the money supply, as well asBritain's decision to return to the Gold Standard at pre-World War I parities(US$4.86:1).

Recessions and business cycles are thought to be a normal part of living in a worldof inexact balances between supply and demand. What turns a normal recession or'ordinary' business cycle into an actual depression is a subject of much debate andconcern. Scholars have not agreed on the exact causes and their relativeimportance. Moreover, the search for causes is closely connected to the issue ofavoiding future depressions.

Thus, the personal political and policy viewpoints of scholars greatly colors theiranalysis of historic events occurring eight decades ago. An even larger question iswhether the Great Depression was primarily a failure on the part offree markets or,

alternately, a failure of government efforts to regulate interest rates, curtailwidespread bank failures, and control the money supply. Those who believe in alarger economic role for the state believe that it was primarily a failure of freemarkets, while those who believe in a smaller role for the state believe that it wasprimarily a failure of government that compounded the problem.

Current theories may be broadly classified into two main points of view and severalheterodox points of view. First, there are demand-driven theories, most importantlyKeynesian economics, but also including those who point to the breakdown ofinternational trade, and Institutional economists who point to underconsumptionand over-investment (causing an economic bubble), malfeasance by bankers andindustrialists, or incompetence by government officials. The consensus viewpoint isthat there was a large-scale loss of confidence that led to a sudden reduction inconsumption and investment spending. Once panic and deflation set in, manypeople believed they could make more money by keeping clear of the markets asprices dropped lower and a given amount of money bought ever more goods,exacerbating the drop in demand.

Second, there are the monetarists, who believe that the Great Depression startedas an ordinary recession, but that significant policy mistakes by monetary
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authorities (especially the Federal Reserve), caused a shrinking of the moneysupply which greatly exacerbated the economic situation, causing a recession todescend into the Great Depression. Related to this explanation are those who pointto debt deflation causing those who borrow to owe ever more in real terms.

Lastly, there are various heterodox theories that downplay or reject theexplanations of the Keynesians and monetarists. For example, some new classicalmacroeconomists have argued that various labor market policies imposed at thestart caused the length and severity of the Great Depression. The Austrian school ofeconomics focuses on the macroeconomic effects ofmoney supply, and how centralbanking decisions can lead to over-investment (economic bubble). The Marxistcritique of political economy emphasizes the tendency of capitalism to createunbalanced accumulations of wealth, leading to overaccumulations of capital and arepeating cycle of devaluations through economic crises.

Debt deflation

Irving Fisher argued that the predominant factor leading to the Great Depressionwas over-indebtedness and deflation. Fisher tied loose credit to over-indebtedness,which fueled speculation and asset bubbles. He then outlined 9 factors interactingwith one another under conditions of debt and deflation to create the mechanics ofboom to bust. The chain of events proceeded as follows:

1. Debt liquidation and distress selling2. Contraction of the money supply as bank loans are paid off3. A fall in the level of asset prices4. A still greater fall in the net worths of business, precipitating bankruptcies5. A fall in profits

6. A reduction in output, in trade and in employment.7. Pessimism and loss of confidence8. Hoarding of money9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

[16]

During the Crash of 1929 preceding the Great Depression, margin requirementswere only 10%. Brokerage firms, in other words, would lend $9 for every $1 aninvestor had deposited. When the market fell, brokers called in these loans, whichcould not be paid back. Banks began to fail as debtors defaulted on debt anddepositors attempted to withdraw their deposits en masse, triggering multiple bank

runs. Government guarantees and Federal Reserve banking regulations to preventsuch panics were ineffective or not used. Bank failures led to the loss of billions ofdollars in assets. Outstanding debts became heavier, because prices and incomesfell by 2050% but the debts remained at the same dollar amount. After the panicof 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000banks failed during the 1930s). By April 1933, around $7 billion in deposits hadbeen frozen in failed banks or those left unlicensed after the March Bank Holiday.
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Bank failures snowballed as desperate bankers called in loans which the borrowersdid not have time or money to repay. With future profits looking poor, capitalinvestment and construction slowed or completely ceased. In the face of bad loansand worsening future prospects, the surviving banks became even moreconservative in their lending. Banks built up their capital reserves and made fewerloans, which intensified deflationary pressures. A vicious cycle developed and thedownward spiral accelerated.

The liquidation of debt could not keep up with the fall of prices which it caused. Themass effect of the stampede to liquidate increased the value of each dollar owed,relative to the value of declining asset holdings. The very effort of individuals tolessen their burden of debt effectively increased it. Paradoxically, the more thedebtors paid, the more they owed. This self-aggravating process turned a 1930recession into a 1933 great depression.

Macroeconomists including Ben Bernanke, the current chairman of the U.S. FederalReserve Bank, have revived the debt-deflation view of the Great Depression

originated by Fisher.

Turning point and recovery

Various countries around the world started to recover from the Great Depression atdifferent times. In most countries of the world, recovery from the Great Depressionbegan in 1933. In the U.S., recovery began in the spring of 1933. However, theU.S. did not return to 1929 GNP for over a decade and still had an unemploymentrate of about 15% in 1940, albeit down from the high of 25% in 1933.

There is no consensus among economists regarding the motive force for the U.S.economic expansion that continued through most of the Roosevelt years (and the1937 recession that interrupted it).

The common view among mainstream economists is that Roosevelt's New Dealpolicies either caused or accelerated the recovery, although his policies were neveraggressive enough to bring the economy completely out of recession. Someeconomists have also called attention to the positive effects from expectations ofreflation and rising nominal interest rates that Roosevelt's words and actionsportended. However, opposition from the new Conservative Coalition caused arollback of the New Deal policies in early 1937, which caused a setback in therecovery.[36]

According to Christina Romer, the money supply growth caused by hugeinternational gold inflows was a crucial source of the recovery of the United Stateseconomy, and that the economy showed little sign of self-correction. The goldinflows were partly due to devaluation of the U.S. dollar and partly due todeterioration of the political situation in Europe.In their book, A Monetary Historyof the United States, Milton Friedman and Anna J. Schwartz also attributed therecovery to monetary factors, and contended that it was much slowed by poor
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management of money by the Federal Reserve System. Current Chairman of theFederal ReserveBen Bernanke agrees that monetary factors played important rolesboth in the worldwide economic decline and eventual recovery. Bernanke, also seesa strong role for institutional factors, particularly the rebuilding and restructuring ofthe financial system, and points out that the Depression needs to be examined ininternational perspective. Economists Harold L. Cole and Lee E. Ohanian, believethat the economy should have returned to normal after four years of depressionexcept for continued depressing influences, and point the finger to the lack ofdownward flexibility in prices and wages, encouraged by Roosevelt Administrationpolicies such as the National Industrial Recovery Act.

Gold standard

Economic studies have indicated that just as the downturn was spread worldwide by

the rigidities of the Gold Standard, it was suspending gold convertibility (ordevaluing the currency in gold terms) that did most to make recovery possible.What policies countries followed after casting off the gold standard, and whatresults followed varied widely.

Every major currency left the gold standard during the Great Depression. GreatBritain was the first to do so. Facing speculative attacks on the pound and depletinggold reserves, in September 1931 the Bank of England ceased exchanging poundnotes for gold and the pound was floated on foreign exchange markets.

Great Britain, Japan, and the Scandinavian countries left the gold standard in 1931.Other countries, such as Italy and the U.S., remained on the gold standard into1932 or 1933, while a few countries in the so-called "gold bloc", led by France andincluding Poland, Belgium and Switzerland, stayed on the standard until 19351936.

According to later analysis, the earliness with which a country left the gold standardreliably predicted its economic recovery. For example, Great Britain andScandinavia, which left the gold standard in 1931, recovered much earlier thanFrance and Belgium, which remained on gold much longer. Countries such as China,which had a silver standard, almost avoided the depression entirely. The connectionbetween leaving the gold standard as a strong predictor of that country's severity ofits depression and the length of time of its recovery has been shown to be

consistent for dozens of countries, including developing countries. This partlyexplains why the experience and length of the depression differed between nationaleconomies.

World War II and recovery
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The common view among economic historians is that the Great Depression endedwith the advent of World War II. Many economists believe that governmentspending on the war caused or at least accelerated recovery from the GreatDepression. However, some consider that it did not play a very large role in therecovery, although it did help in reducing unemployment. The massive rearmamentpolicies leading up to World War II helped stimulate the economies of Europe in193739. By 1937, unemployment in Britain had fallen to 1.5 million. Themobilization of manpower following the outbreak of war in 1939 finally endedunemployment.

America's entry into the war in 1941 finally eliminated the last effects from theGreat Depression and brought the unemployment rate down below 10%. In theU.S., massive war spending doubled economic growth rates, either masking theeffects of the Depression or essentially ending the Depression. Businessmenignored the mounting national debt and heavy new taxes, redoubling their effortsfor greater output to take advantage ofgenerous government contracts.

Effects

The majority of countries set up relief programs, and most underwent some sort ofpolitical upheaval, pushing them to the left or right. In some states, thedesperate citizens turned toward nationalist demagoguesthe mostinfamous being Adolf Hitlersetting the stage for World War II in 1939.

Great Depression in Australia

1920s: The calm before the storm...

The Great War had depleted Britain's savings and foreign investments, and wartimeinflation had upset the United Kingdom's terms of trade. A sluggish economy inBritain naturally reduced British demand for imports from Australia throughout the1920s and this had affected Australia's balance of payments also. Throughout the1920s the Australian unemployment rate floated between 6% and 11%.

The Great War had also caused many necessary infrastructure projects to bedelayed or abandoned, and many of these were begun in the 1920s, including theSydney Harbour Bridge and Sydney's underground railway system in addition to theCommonwealth government beginning to fund major highways. New dams andgrain elevators were built, and the rural railway network was expanded in nearlyevery state. Large sums of government money were made available to providereturned First World War servicemen with farmland and agricultural equipmentunder soldier settlement schemes. All these publicly funded projects were paid for
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recession & recovery

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