Depression

DEFINITION of 'Depression'

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. Emergency Banking Act Of 1933

    A bill passed during the administration of former U.S. President ...
  2. The Great Recession

    The steep decline in economic activity during the late 2000s, ...
  3. Graveyard Market

    A prolonged bear market where existing investors want to get ...
  4. Economic Stimulus

    Attempts by governments or government agencies to financially ...
  5. Black Thursday

    The name given to Thursday, Oct. 24, 1929, when the Dow Jones ...
  6. Contraction

    A phase of the business cycle in which the economy as a whole ...
Related Articles
  1. Fundamental Analysis

    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.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Active Trading

    Is A Reversal On The Way? Consult Traders' Index

    Use this indicator to gauge the end of a price trend.
  4. Investing Basics

    Policing The Securities Market: An Overview Of The SEC

    Find out how this regulatory body protects the rights of investors.
  5. Personal Finance

    The Crash Of 1929 - Could It Happen Again?

    Learn about the series of events that triggered the Great Depression.
  6. Personal Finance

    Recession And Depression: They Aren't So Bad

    Financial downturns are part of the economic cycle and may have important long-term benefits.
  7. Entrepreneurship

    The Impact Of Recession On Businesses

    Find out how this economic cycle affects both small and big business.
  8. Economics

    What Caused The Great Depression?

    Learn how government actions may have contributed to this major economic downturn.
  9. Budgeting

    The Greatest Market Crashes

    From a tulip craze to a dotcom bubble, read the cautionary tales of the stock market's greatest disasters.
  10. Investing

    Retirees: 7 Lessons from 2008 for the Next Crisis

    When the last big market crisis hit, many retirees ran to the sidelines. Next time, there are better ways to manage your portfolio.
RELATED FAQS
  1. Why have austerity policies failed to stabilize Greece's economy?

    Austerity policies are intended to reduce government debt and bring stability to that nation's economy. Austerity's effectiveness ... Read Full Answer >>
  2. What are the typical day-to-day responsibilities of a Chief Operating Officer (COO)?

    A country's debt crisis affects the world through a loss of investor confidence and systemic financial instability. A country's ... Read Full Answer >>
  3. What impact does disposable income have on the stock market?

    In theory, the impact that disposable income has on the stock market is that a widespread increase in disposable income leads ... Read Full Answer >>
  4. What impact does inflation and deflation have on a blue-chip stock value?

    Inflation and deflation, though opposite scenarios, are quite similar with regard to the havoc they can wreak on an investor's ... Read Full Answer >>
  5. How do investors lose money when the stock market crashes?

    Over the last hundred years, there have been several large stock market crashes that have plagued the American financial ... Read Full Answer >>
  6. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center