A depression is a severe downturn in economic activity indicated by a sharp drop in gross domestic product and chronically high unemployment. While economist may debate the exact definition of a depression there is a general consensus of the symptoms. A general consensus is that a GDP drop of 10 percent and unemployment that rises above 10 percent and remains above that level for 24 consecutive months. There is almost certain to be a stock market collapse leading to immense personal and corporate wealth lost. This leads to massive layoffs as companies look to cut costs.
The great depression is the most severe economic calamity the United States has ever faced. During this period the economy contracted severely and unemployed hit 25 percent. Panic gripped the nation and a run on banks caused many to collapse. The FDIC insurances backs bank accounts today as a way to protect wealth but also ensure confidence in the banking system. This is a direct result of the financial meltdown during the depression. Vast amounts of wealth disappeared practically overnight as the stock market collapsed.
As the depression worsened businesses begin to lay off employees. This stifled disposable incomes reducing purchasing power further slowing growth. As the cycle continued deflationary forces took over and prices began to collapse. As prices fell along with demand more people were laid off. As the great depression shows massive government involvement may be needed to help stimulate economic activity. Before the depression most economic activity rested in the private sector. Increased regulation and government spending meant the government had more involvement in the economy than ever before. Even the most recent great recession shows regulation and some government intervention is sometimes needed to keep markets running effectively. Without massive aid during both the great depression and the most recent recession conditions may have deteriorated further.
Depressions stifle economic activity for years. The United States did not start to really recover from the Great depression until WWII. After that unemployment improved as the nation’s business sector was converted to the war effort. Greece today is a modern example of how devastating a depression can be on an economy. The great depression made it clear that economic regulation was needed. Lax regulatory standards and monetary policy helped make the situation worse. The banking system collapse during the depression led to a compete loss of both consumer and business confidence.
While each depression may not start the same way they all lead to sharp declines of GDP, rapidly rising unemployment, and a suppressed economic cycle for years. Virtually every sector in the economy is affected during a depression. Housing prices drop, construction slows, consumer spending retracts, and confidence plummets. Governments have shown they are very willing to get involved to try and get the markets moving again. Greece today is a good example of how depressions and massive market disruptions produce responses from governments. The great depression was a worldwide depression. With the global economy interconnected like never before any disruption can create ripples half a world away.