Introduction to Depression
Depression, in economics, a period during which there is a widespread decrease in economic activity. Factories close, or else operate at a reduced pace, because not enough of their products can be sold at a profit and great numbers of men and women lose their jobs. Persons and companies cannot pay their debts, and credit is hard to get. Numerous firms, especially smaller ones, go out of business. Depressions form a basic problem of capitalism. What to do about them often is the subject of much political and economic dispute.
1785-88. Debts and disorganized business conditions at the end of the Revolutionary War caused this first United States depression. Shays' rebellion in Massachusetts reflected the distress of debtors.
1792. Speculation in 1791 raised the price of new bank notes and of the Western lands that often backed those notes. When several unstable banks collapsed, a business panic followed.
1815-22. A steep drop in prices after the War of 1812 and refusal of banks to redeem their notes in specie (coin) brought hard times. The depression included a panic in 1819.
1837-43. The extension of bank credit to too many borrowers for canal and railway building projects and a general crop failure were among the causes of this slump. Banks again suspended specie payment in 1837 after President Jackson forced adoption of a new national bank policy.
1857-58. Failure of the Ohio Life Insurance Company in Cincinnati started a commercial panic in the wake of overexpansion connected with the Mexican War and the discovery of gold in California.
1873-79. Production cutbacks after the Civil War, railway speculation, wars in Europe, and losses in big fires in Boston and Chicago led to hard times. Failure in September, 1873, of Jay Cooke & Company, a Philadelphia firm that handled federal war financing, signaled the business collapse. Nationwide railway strikes involving violence occurred in 1877.
1884-85. Numerous railway bankruptcies led to a panic that was centered mainly in the East.
1893-97. Mass unemployment, distress among farmers, and strikes, including the Pullman strike of 1894, marked this era. A result was vigorous political debate over the quantity and kind of money in circulation. Crop failures in Europe, leading to increased demand for American farm products, helped bring recovery.
1907. Failure of the Knickerbocker Trust Company in New York City, gambling in stocks, and exposure of mismanagement of certain life insurance firms combined to cause this slump.
1913-15. A mild business decline starting in 1913 became a serious depression in 1914 after World War I began in Europe. The war-created demand for American goods restored prosperity by 1916.
1920-22. When European industry recovered from the effects of World War I, the demand for American goods fell sharply. A postwar depression developed.
1929-39. The “Great Depression” of this period was the longest and severest economic slump in American history. According to some estimates, nearly half the industrial workers of the nation were unemployed at the worst period of the depression. President Franklin D. Roosevelt's New Deal program of many economic changes was a result.
Recessions After World War II
The depression that usually comes immediately after a war did not occur after World War II. Instead the period since the war has been marked by periodic recessions.
From 1948 to 1970, a series of short recessions interrupted a period of long-term growth. These recessions, distinguished by six months to a year of reduced output, income, and employment, occurred during 1948-49, 1953-54, 1957-58,1960-61, and 1969-70.
From 1973 to 1975 a more severe recession occurred as a result of the sudden quadrupling of world oil prices and general inflation.
During 1981-82, the United States experienced its most severe economic slump since the Great Depression. High interest rates led to greatly reduced investment and consumer borrowing. As consumer demand fell and many businesses failed, unemployment reached the highest levels since before World War II.
The laying off of thousands, or millions, of workers is the worst feature of a depression. This mass unemployment not only causes personal suffering but also deepens the general economic crisis. Since fewer persons can buy goods, more businesses decline, creating more unemployment. Traditionally, depressions have been marked by drastically falling prices and wages, but this does not always occur.
Values of stocks or securities decline when businesses, no longer making good profits, reduce or omit dividends. A sudden decline, or crash, in stock values has marked the beginning of some depressions, notably the unusually severe one of the 1930's. Earlier ones were signaled by bank or business failures that started panics. In a panic many people, because of general fear about business prospects, suddenly begin to hoard their money and sell their stocks.
A mild depression is generally called a recession. At times the term has been used for a setback in recovery from an already existing depression. Several United States government agencies created in the 1930's, such as the Social Security Administration and the Federal Deposit Insurance Corporation (for insuring bank deposits), have buffered the effects of post-World War II economic crises, leading most economists to label even the most severe modern slumps as only recessions.
What Causes Depressions
Economists do not agree as to the causes of depressions. A major cause, some believe, is that manufacturers produce too much when trade is especially profitable. The market then becomes glutted, or oversupplied. Other economists blame underconsumption, or not enough buying. This condition, they say, results when large numbers of people fail to get a big enough share of wealth or of profits, a share sufficient to enable them to keep buying industry's products.
Still other economists believe that depressions occur when too much money is saved unproductivelywhen it is not invested in ways that lead to the opening up of new jobs and the buying of more goods and services. This view, first strongly advanced by John Maynard Keynes, a British economist, was widely accepted after the depression of the 1930's.
A commonly held view among economists has been that a depression is a natural phase of the so-called business cycle. In this view, a pattern of alternating prosperity and hard times, or of “boom” and “bust,” is unavoidable when manufacturers are free to decide how much they will produce. This pattern has been called a necessary feature of a competitive system in which there are risks as well as benefits.
A depression may also be brought on by what might be termed an originating cause, such as the failure of a large financial institution; the sudden ending of a speculative boom or of a war; or drastic attempts to reduce the rate of inflation. No depression can be said to have a single cause.
Proposed Remedies
Proposals for coping with depressions range widely. At one extreme are economists who say little or nothing should be done to interfere with what they consider to be natural forces of recovery. They believe, in keeping with the business cycle theory, that depressions are self-correcting. Some economists argue that, except for the hardships, depressions are desirable. They say that depressions put inefficient producers out of business and thus clear the way for an economic system that is improved after each recovery.
However, other economists advocate drastic government action of various kinds. Large expenditures on public works, such as highways and hospitals, are urged by economists who agree with Keynes on the cause of depressions. They argue that government deficit spending, or spending that exceeds revenue, is both necessary and desirable to offset a lag in private investing. Other proposals for government action involve adjusting the monetary system, such as by making money and credit more plentiful; raising or lowering certain taxes; and granting subsidies or loans to businesses or farmers. Advocates of government action also urge a social welfare program, or expansion of such a program if one exists, for providing direct payments to unemployed workers.
Holding a middle ground between these views are economists who favor a mixture of restrained government action and private enterprise to cushion the impact of a depression. Labor unions and others urge higher wages, or the equivalent (such as shorter working days that spread jobs among more workers), to increase consumption and to maintain economic stability.
, J. M.—