The last economic depression was in the 1930s. Since the United States has not suffered one in nearly a century, does this mean the country is safe from such a significant collapse? First, it is crucial to understand what it is and the history of depressions.
What Is an Economic Depression?
What is a recession? This is when the gross domestic product (GDP) goes through two back-to-back quarters of contraction. A depression starts as a recession, but ends up much worse. While there is no standard definition for a depression, it is commonly accepted that it’s a recession that lasts at least two years with at least a 10% drop in GDP.
What Causes a Depression?
Many factors could trigger a recession and then a depression, including:
- A spike in unemployment.
- A decline in available credit.
- Household and corporate bankruptcies.
- A bear market in the stock market.
- Reduce international trade and commerce.
Ultimately, an economic depression can be caused by a drop in consumer confidence. When people stop spending money, the economy starts to shut down.
The History of American Depressions
The U.S. and the rest of the world have experienced numerous economic depressions. Here are some of the steep downturns that the world’s largest economy lived through for the last 200 years:
- Panic of 1837: A financial crisis that lasted for seven years when New York City temporarily ended specie payments (gold and silver) and would not redeem commercial paper at full face value. This caused bank failures, business shutdowns, deflation, and high unemployment.
- The Long Depression: The U.S. and the rest of the world went through a severe contraction that lasted 65 months (1873 to 1879) that saw 18,000 businesses going bankrupt, banks declaring insolvency, and joblessness climbing to around 15%.
- The Forgotten Depression (1920-1921): Following the end of the First World War, the U.S. economy witnessed dramatic changes: an enormous surge in the civilian labor market, adjustments to fiscal and monetary policy, and shrinking monetary policy. Economic historians will say that the U.S. faced a tremendous shock transitioning from a wartime economy to a peacetime one.
But can it happen again? As the economist Hans F. Sennholz wrote in October 1969: “Can it happen again? Inexorable economic law ascertains that it must happen again whenever we repeat the dreadful errors that generated the Great Depression.”