Depression

What is 'Depression'

Depression is a severe and prolonged downturn in economic activity. In economics, a depression is commonly defined as an extreme recession that lasts two or more years. A depression is characterized by economic factors such as substantial increases in unemployment, a drop in available credit, diminishing output, bankruptcies and sovereign debt defaults, reduced trade and commerce, and sustained volatility in currency values. In times of depression, consumer confidence and investments decrease, causing the economy to shut down.

BREAKING DOWN 'Depression'

A depression is a sustained and severe recession. Where a recession is a normal part of the business cycle, lasting for a period of months, a depression is an extreme fall in economic activity lasting for a number of years. Economists disagree on the duration of depressions; some economists believe a depression encompasses only the period plagued by declining economic activity. Other economists, however, argue that the depression continues up until the point that most economic activity has returned to normal.

The Great Depression began shortly after the Oct. 24, 1929,U.S. stock market crash known as Black Thursday. The stock market bubble had burst and a huge sell-off began, with a record 12.9 million shares traded. The United States was already in a recession, and the following Tuesday, on Oct. 29, 1929, the DJIA fell 12% in another mass sell-off, triggering the start of the Great Depression.

Many investors' portfolios became completely worthless. Although the Great Depression began in the United States, the economic impact was felt worldwide for more than a decade. The Great Depression was characterized by a drop in consumer spending and investment, and by catastrophic unemployment, poverty, hunger and political unrest. In the U.S., unemployment climbed to nearly 25% in 1933, remaining in the double-digits until 1941, when it finally receded to 9.66%.

Shortly after Franklin D. Roosevelt was elected President in 1932, the Federal Deposit Insurance Corporation (FDIC) was created to protect depositors' accounts. In addition, the Securities and Exchange Commission (SEC) was formed to regulate the U.S. stock markets.
 

RELATED TERMS
  1. Depressed

    A state or condition of a market, product or security characterized ...
  2. Economic Collapse

    A complete breakdown of a national, regional or territorial economy. ...
  3. The Great Recession

    The steep decline in economic activity during the late 2000s, ...
  4. Bottom Fishing

    Investing in stocks that are cheap because of a problem with ...
  5. The New Deal

    A series of domestic programs designed to help the United States ...
  6. Deflation

    A general decline in prices, often caused by a reduction in the ...
Related Articles
  1. Markets

    What Caused the Great Depression?

    Learn how government actions may have contributed to this major economic downturn.
  2. Markets

    Lessons Learned From the Banking Crisis

    There are lessons to be learned on how to handle severe financial downturns, and while the Fed is learning, politicians may not be.
  3. Managing Wealth

    The Impact Of Recession On Businesses

    Find out how this economic cycle affects both small and big business.
  4. Markets

    What is a Financial Crisis?

    A financial crisis is a situation in which the values of assets drop rapidly.
  5. Trading

    Recession: What Does It Mean To Investors?

    Understanding the business cycle and your own investment style can help you cope with an economic decline.
  6. Markets

    Top 4 Things To Know About The Last Double-Dip Recession

    The financial media and investors are haunted with the prospect of a double-dip recession. We look to the past to see if a double-dip recession is in our future.
  7. Markets

    How Do Asset Bubbles Cause Recessions?

    Understand how asset bubbles often lead to deep, protracted recessions. Read about historical examples of recessions preceded by asset bubbles.
  8. Markets

    The Dangers Of Deflation

    We look at what life would be like in a deflationary environment, and what you can do to protect your investments.
  9. Markets

    Is Brazil Currently in a Depression?

    Find out if Brazil, the world's seventh-largest economy, may have finally slipped into an economic depression, and learn the reasons why.
  10. ETFs & Mutual Funds

    The Upside Of Deflation

    Deflation has continued to pop up throughout economic history - but is that such a bad thing?
RELATED FAQS
  1. Why is Keynesian economics sometimes called depression economics?

    Learn how in observing the effects of the Great Depression, Keynes identified flaws in classical economic theory particularly ... Read Answer >>
  2. How does macroeconomics explain "stagflation"?

    Learn about stagflation: a macroeconomic term used to describe economic turmoil. It is a time of serious inflation, slow ... Read Answer >>
  3. What macroeconomic problems do policy makers most commonly face?

    Learn about the macroeconomic factors policymakers have to be concerned with when deciding on economic policies, such as ... Read Answer >>
  4. Why is Keynesian economics sometimes called demand-side economics?

    Learn why Keynesian economics is sometimes called demand-side economics, and find out how government spending increases aggregate ... Read Answer >>
  5. What is a deflationary spiral?

    Learn the meaning of a deflationary spiral and its causes; the last deflationary spiral was the Great Depression. QE has ... Read Answer >>
  6. What are the main risks to the economy of a country that has implemented a policy ...

    Learn about the main risks to a country that has implemented a policy of austerity. Austerity implies cutting government ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center