Imagine a fourth of the nation unemployed. That was the case during the Great Depression. Bad times for the economy are called economic depressions. It’s worse than a recession. In this article we explain what is a depression. We’ll explore what makes them happen. We’ll also look at how they affect people. Lastly we’ll discuss how to clear yourself out of one.
Defining Economic Depression
What distinguishes a depression from other economic maladies? It’s just a question of how bad it gets and how long it lasts.
What Counts as an Economic Depression?
There is no one size fits all rule for economists. But, they tend to expect a steep decline in GDP. Gross Domestic Product (GDP) measures the value of everything a country produces. A depression typically means GDP drops by 10% or more. And it remains down for a few years. It’s not just a bad year. It’s a long time of being tortured.
Indicators of a Depression
Other indicators are less restrained; by them, we’re in a depression. Unemployment shoots up. Lots of factories close. People can’t get loans. Businesses stop investing. Perhaps the stock market would crash, too. Now, these are all symptoms of a very ill economy.
How Is a Depression Different From a Recession?
A recession is a bad cold. Depression is like a really bad flu. Recessions are briefer and milder. Depressions last longer. They cause much more pain. A depression makes people more frightened and hopeless. The problem is, governments are rewriting the rules.
Past Economic Recessions
Here are some of the times depressions strike. You will then bring some of it up and visit them to sit with them in their hospital room.
The Great Depression (1929–1939)
The Great Depression was the biggest one. It started in 1929. The stock market crashed. Banks failed. Millions lost their jobs. Those people were starving and without shelter. It lasted for about 10 years. It took a toll on countries around the globe. Overproduction and risky investments made matters worse.
The Long Depression (1873–1879)
What came before the Great Depression was the Long Depression. It started in 1873. And it went on for six years or so. Railroad investments turned sour. Banks had problems. Thousands of companies went broke. This depression also harmed many countries.
Other Notable Depressions
There have been other depressions as well. Some were smaller. Others only applied to specific nations. Each one had its own causes. But they all had common effects — job loss, financial panic.
Causes and Contributing Factors
What causes an economy to enter a depression? Usually, one thing goes wrong, then several other things go wrong.
Banking Panics And Financial Crises
Banks play a big part. When banks fail, people get no money. Businesses can’t get loans. These conditions can lead to a credit crunch. Speculating too much can also lead to trouble. > Too much risk results in a bubble. Bubbles always burst.
Overproduction and Underconsumption
Sometimes companies make too much stuff. People can’t buy it all. This phenomenon is known as overproduction. If folks have no money, they cannot buy things. This is underconsumption. When these things conspire, businesses suffer. They might have to close.
Also read: Global Trade Imbalances and Protectionism
Trade matters for the global economy. And if countries aren’t trading fairly, it can be a real problem. If countries erect trade barriers, it exacerbates the situation. Tariffs are taxes on imports. These can be bad for businesses and consumers.
Impact of Great Economic Depressions
Depressions don’t just damage the economy. They hurt people too.
Social and Human Costs
The largest expense is lost jobs. People are fired and unable to find work. This creates suffering and homelessness. Human beings are stressed and depressed. Take increase in mental health problems. Families suffer.
Reconstruction of economy and innovation
Challenges often require change — depressions even more so. Old industries might die out. New ones might appear. And companies seek new methods of doing so. Policies by governments may change. At times innovation springs from tough times.
Political and Geopolitical Effects
When the economy is bad, people get mad. They may lose faith in their rulers. This can cause political instability as well. In extreme instances, it can also lead to wars or revolutions. A depression can change the distribution of power in the world.
Mitigation and Recovery Strategies
What can we do to prevent a depression? And how do we get out of one when it does?
It’s not all doom and gloom, and government intervention is a key part of the solution.
Governments can use money to stimulate the economy. They could reduce taxes, putting more money into people’s pockets. These are referred to as fiscal policies. The goal is to boost demand. This would create jobs and bring the economy back to life.
Central Banking and Monetary Policy
Interest rates can be lowered by central banks. That makes it less expensive to borrow money. Or, they can print more money. That’s known as quantitative easing. These are known as monetary policies. The objective is to expand the money supply. This may lead to more lending and investment.
International Collaboration and Commerce Agreements
And countries should come together. They can negotiate trade deals — This reduces trade barriers. They can also harmonize their economic policies. This can help from stabilizing the world economy.
Conclusion
An economic depression is a prolonged and steep downturn. It brings high unemployment, poverty and social unrest. It is important to understand the causes and impacts. It enables policymakers and individuals to prepare and respond. Through government action, and working together across the globe, we can lessen the worst effects. Economic health rises and falls. The only way to tell only for the choice is to respond and keep responding.
