What is a an Economic Depression?

Question: What is a an Economic Depression?

Answer: An economic depression is a severe downturn that lasts several years. Fortunately, the U.S. economy has not experienced an economic depression since The Great Depression of 1929, which lasted ten years. The decline in the GDP growth rates were of a magnitude not seen since:

1. 1930 -8.6%
2. 1931 -6.4%
3. 1932 -13%
4. 1933 -1.3%.

During the Depression, unemployment was 25% and wages (for those who still had jobs) fell 42%. Total U.S. economic output fell from $103 to $55 billion and world trade plummeted 65% as measured in dollars.

The Depression was aggravated by poor monetary policy. Instead of pumping money into the economy, and increasing the money supply, the Federal Reserve allowed the money supply to fall 30%. The "New Deal" created many government programs to end the Depression, but government programs alone could not end it. Unemployment remained in the double-digits until 1941, when the U.S. entry into World War II created defense-related jobs.

An economic depression on the scale of that in 1929 could not happen exactly the way it did before. Many laws and government agencies were put in place because of The Great Depression with the express purpose of preventing that type of cataclysmic economic pain. Central banks around the world, including the U.S. Federal Reserve, are so much more aware of the importance of monetary policy in regulating the economy. In fact, central banks did act in a coordinated fashion to prevent a depression in October 2008.

However, there is only so much monetary policy can do without fiscal stimulus. In 2009, the economic stimulus bill helped prevent an economic depression by stimulating the economy. However, the incredible size of the national debt limits further government spending to stimulate the economy. Both monetary and fiscal policy are needed to prevent a global depression.

GDP FAQ

• What Are the Components of GDP?
• What Is the Difference Between GDP and Growth Rate?
• What Is the Ideal Growth Rate?
• What Is a Recession?
• What Is an Economic Depression?