Depressions, Economic. Depressions are sustained troughs in the business cycle characterized by declines in output, employment, income, and trade. Their spreading effects can be traced through declining prices, profits, interest rates, wages, consumer spending, and capital investment. Depressions date from the earliest years of American history, but the paucity of data precludes evaluation of them in the Colonial Era. Before 1815, depressions were caused primarily by exogenous shocks, that is, by forces external to the economy such as wars, widespread crop failures, or other disasters. With the growth of capitalism, however, depressions became more pervasive, in part because the market held sway over more economic production and exchange, and also because of the dramatic increase in capital formation that accompanied economic development and industrialization. While economists agree on the correlation between business cycles and capitalism, they are unable to offer a simple consistent explanation as to why depressions occur.

The United States experienced depressions after the onset of severe economic contractions in 1818–1819, 1836–1837, 1856–1857, 1872–1873, 1884–1885, 1892–1893, 1920–1921, 1929–1933, and 1937–1938. While most began with stock‐market panics or banking crises, these events did not determine either the severity or length of the contraction: each depression had its own unique history.

Depressions draw attention because of their pervasive effect upon the economy, politics, and society. First of all, unemployment and the decline in income creates human misery. As the economy matured, the urban unemployed found it increasingly difficult to supplement the family's income, since they could no longer fish, hunt, or garden to fill the family's larder. Part‐time jobs for the breadwinner or the breadwinner's family disappeared. With modest savings, families quickly faced destitution. Even for those retaining jobs, the decline in prices led to a demand for wage cuts. Labor unions faced insurmountable challenges. If workers resisted wage cuts and struck, firms could hire replacements from the mass of the unemployed. Deprived of effective economic means of protest, workers and their allies increasingly sought political solutions.

Business enterprises suffered during extended downturns as well. Not only did they postpone new investments in plants and equipment, but they also faced the prospect of substantial losses. In the early nineteenth century, industrial firms confronted depressions by suspending activity. But by the end of the century, the mass‐production industries, such as steel, oil, and cigarettes, changed tactics; rather than reduce production and maintain prices, they slashed prices and maintained production. This ignited competitive wars that were often resolved by mergers and other anticompetitive activities. For banks, depressions presented some of the most daunting challenges. Savings tended to flow out, while repayments on loans slowed. Banks cut back on lending, making it even more difficult for businesses to survive. Deprived of working capital (short‐term loans to cover raw materials, wages, and goods in transit), firms went bankrupt.

Panics of 1819, 1837, and 1857; Depression of 1839 –1843.

While the Antebellum Era witnessed severe business cycles, especially in the late 1810s, the 1830s, and the 1850s, only the downturn of the 1830s and early 1840s has attracted much scholarly attention. Even here, considerable debate exists as to the extent of the decline in production. Part of the difficulty in describing the effects of the antebellum depressions lies in the fact that the economy was not fully integrated. For example, the Panic of 1857 brought hard times in the North, while the southern cotton industry enjoyed unprecedented prosperity. Secondly, the economy remained flexible; it could adjust quickly to price declines. This can be seen in the Panic of 1819. Despite a sudden and sharp decline in output and prices, a wave of bankruptcies, and widespread unemployment, recovery came quickly after 1822 as wages and interest rates adjusted to the price shock.

The depression of 1839–1843 had its origins in international trade and investment. Rapid increases in British investment in the United States encouraged a boom in the mid‐1830s. As British silver flowed into the United States, it was deposited in banks, which then increased their lending. Prices soared. But in 1836, the British government raised interest rates, making British investment more attractive than American, and silver flowed back to England. This caused the short‐lived Panic of 1837. The economy recovered briefly, but with the Panic of 1839 (again abetted by rising British interest rates), prices did not bounce back. Indeed, they fell some 46 percent between 1839 and 1843. But output actually rose 16 percent during this period, leading some experts to argue that this was not a depression.

Nevertheless, the monetary contraction of 1839–1843 wrought considerable havoc on individuals and their governments. Debtors, particularly landowners, turned to their state legislatures seeking relief from creditors. It came in the form of stay laws, restrictions upon forced sales, and freedom from attachment for debt for certain classes of property. In the cities, thousands were thrown out of work. Workers' trade unions, having grown rapidly in good times, disappeared. Aside from some outdoor relief, cities did little to address the needs of the poor. Governments were reluctant to become involved in relief, and even had they wanted to, their finances were in disarray. Revenues dried up, leaving cities to impose wage cuts, lay off employees, and seek additional loans. States fared even worse. In the 1830s, states, especially in the Middle Atlantic and Middle West, had undertaken huge debts to build canals and railroads. By the 1840s, many were on the edge of bankruptcy. In the wave of constitutional revision after the depression, more than half of the states wrote into their constitutions prohibitions against further debt for internal improvements.

Depressions of 1873–1879, 1882–1885, and 1893–1896.

Some historians have described the period from 1873 to 1896 as the long depression, but this is inaccurate. While prices did fall during this period, output rose on average 4 percent a year. Each decade, however, brought a sharp economic contraction, or depression, in 1873–1879 (the longest in American history), 1882–1885, and 1893–1896. The first two had their origins in the collapse of railroad booms. After the Civil War, the nation constructed thousands of miles of railroads. In a race to get the most profitable routes and feeders, railroads sold billions of dollars worth of bonds and stocks. When they discovered that their profit estimates had been too high, they could not pay their debts on the bonds or dividends on their stocks. This led to a financial panic. Banks curtailed credit and foreigners stopped buying American assets. Prices fell some 25 percent, creating havoc for industrial workers and farmers. In the depression of the 1870s, unemployment in construction and manufacturing climbed to perhaps 10 percent, while those who kept their jobs faced wage cuts. In farming, by the mid‐1880s, wheat sold for sixty‐four cents a bushel, half its normal price. Debt‐burdened farmers in newly settled areas faced bankruptcy. Nonfarming businesses that depended upon railroads, construction, and agriculture failed. At the bottom of the depression in the 1870s and again in the 1880s, some ten thousand firms filed for bankruptcy, citing liabilities of almost a quarter of a billion dollars.

Widespread hardship brought demands for relief. Cities again expanded their soup kitchens. Charity organization societies formed in some twenty‐five cities to coordinate relief. But many leaders worried that such assistance would undermine citizens' self‐reliance. Most assistance came in the form of helping the unemployed find work through employment exchanges or public works projects. In 1894, a “Commonwealth Army” of some five hundred jobless workers, organized by Jacob S. Coxey (1854–1951) of Massillon, Ohio, marched to Washington, D.C., in support of Coxey's bold but not revolutionary demand: the creation of $500,000,000 in paper money by the federal government to be distributed to the states so that they could hire the unemployed to build roads. While Coxey's plan failed, the cycle of repeated depressions led to a growing discontent with laissez‐faire policies. Religious leaders and intellectuals, in particular, insisted that the government become more deeply involved in ensuring the material well‐being of its citizens.

Facing wage cuts and layoffs, workers responded with waves of strikes. The most dramatic took place in the railroad industry, which had sought economies in the wake of bankruptcy. In July 1877, workers staged major strikes against the transappalachian railroads. Violence erupted in several places, but the bloodiest battles occurred in Pittsburgh, taking the lives of some fifty civilians and five militiamen. Again in 1894, workers struck Chicago's Pullman Company when it announced wage cuts and layoffs. Eugene V. Debs led his American Railway Union in a sympathetic boycott, refusing to pull Pullman cars. Fourteen thousand state and federal troops were called out by the Grover Cleveland administration and the Justice Department issued an injunction against Debs. Again violence ensued: In Chicago, twenty were killed and thousands of railroad cars destroyed. The workers lost, as they usually did in the major strikes, and their unions witnessed precipitous declines in membership.

Finally, the depressions of the late nineteenth century had political consequences. Although farmers and workers lobbied for a number of reforms, the most pressing issue was the money supply. After the Civil War, the United States slowly moved toward adoption of a gold standard of monetary valuation. This required bringing down wartime inflation and then, as gold discoveries lagged behind the pace of economic growth, prices fell still further. In 1893, a financial panic occurred when foreign investors and American businessmen liquidated their paper assets and demanded gold. Facing huge drains, banks curtailed credit, the economy slowed, unemployment mounted, and the depression of the mid‐1890s settled in. Many demanded relief through the coinage of silver, which, by increasing the monetary supply, would cause prices to rise and hasten recovery. Others argued that in a growing global economy, the nation must adhere to a gold standard. The monetary issue reached its climax in the presidential election of 1896, when the Republican “gold‐bug” William McKinley decisively defeated the Populist and Democratic “free silver” candidate, William Jennings Bryan. Radicalism had been repudiated; political power had been consolidated in the hands of the more prosperous.

Depression of 1920–1921; the Great Depression of the 1930s.

The twentieth century experienced two depressions, both closely associated with public policy. The first occurred in 1920–1921. After World War I, with strong consumer demand from Europe and at home, U.S. firms maintained high levels of production and even increased inventories. But a sudden contraction in demand, as the U.S. government slashed spending and European production recovered, burst this speculative inventory bubble. Real gross national product fell some 6 percent, unemployment spiked to 12 percent, and wholesale prices fell by 37 percent. Prices returned to prewar levels by July 1921, however, and the economy began to rebound.

The Great Depression that began in 1929 did not witness such rapid recovery. Indeed, it proved to be the worst depression in American history. The real gross national product fell 30 percent, prices declined 23 percent, net investment became negative (that is, new capital investment did not equal the depreciation of the existing stock of capital), and unemployment became a fact of life for 24 percent and more of the labor force. Recovery from such an economic catastrophe was slow and difficult. The gross national product did not return to 1929 levels until 1937, and then in 1937–1938 the economy experienced a “depression within a depression.” Unemployment remained high. As late as 1941, even as the war in Europe stimulated the U.S. economy, more than 10 percent of Americans were still seeking work.

The causes of the Great Depression remain a matter of intense debate. Most scholars argue that a combination of factors led to the downturn in 1929, including changes in Federal Reserve policy, a decline in consumption, and diminished investment. The 1929 stock market crash did not cause the depression, but stock speculation on Wall Street had encouraged the Federal Reserve to raise interest rates. Losses in the stock market diminished consumer spending by investors, while poor harvests and low agricultural prices restrained farm spending. After record years of residential construction, investment peaked in 1926 but fell thereafter, dropping to one‐half its 1926 level by 1929. What made this depression so devastating, however, was not the downturn in 1929, but the great skid thereafter, as the economy declined at an accelerating rate into 1933.

Recently, economists have highlighted the international nature of the depression of the 1930s and the role of the gold standard in spreading its misery. During World War I, most nations had gone off gold; that is, they would not redeem their currency for gold at the prewar rate. During the 1920s the leading industrial nations returned to the gold standard. However, the system suffered from serious flaws. Among the most important was the fact that the United States and France held a disproportionate share of the world's gold, reducing the flexibility of other nations. To remain on the gold standard when faced with demands for their gold, these nations would have to raise interest rates, slowing their economies and creating unemployment. In an era of mass politics this proved impossible, and nations began to abandon the gold standard, culminating with Great Britain and the British Commonwealth nations in 1931. Recovery generally came quickly to nations that devalued their currencies.

The United States, however, remained committed to the gold standard, and as other countries devalued, Americans faced tremendous pressure. Offered the choice of American goods or American gold, holders of U.S. dollars preferred gold, believing that the United States would not stay on the gold standard forever. This constrained the Federal Reserve System. It could not expand the monetary supply, since this would increase the potential claims on its gold stocks. Instead, to conserve what gold it had, the Federal Reserve raised interest rates, driving the economy deeper into depression.

Recovery began when Franklin Delano Roosevelt became president in March 1933. While depressions usually brought a change in presidential administrations, Roosevelt won in a landslide and used this mandate to secure passage of an amazing slate of legislation during his first hundred days. Most importantly, he devalued the dollar, increasing the value of gold from slightly more than twenty to thirty‐five dollars an ounce. At these prices, and with political unrest rising in Europe, gold flowed into the United States. Since the money stock in the United States was a function of gold holdings, the money supply grew rapidly, increasing by some 11 or 12 percent a year until 1937. As their reserves grew, banks were encouraged to lend, businesses to build inventories, and consumers to spend in anticipation of further price increases. But given the depth of the depression, the public demanded more than monetary measures. The New Deal, the label given to Roosevelt's policies between 1933 and 1938, brought a host of programs that altered fundamentally the relationship between the government and the economy. Among the most important programs were regulation of securities, trucking, banking, and utilities; federal deposit insurance; agricultural price supports; minimum‐wage and maximum‐hour legislation; collective bargaining for unions; Social Security; unemployment insurance; and public housing. The federal government matched state spending (on a 1:1 or 2:1 ratio, depending on the program) for relief, assistance to the elderly and disabled, and destitute mothers with dependent children.

In 1937, the federal government's decision to increase required bank reserves and to cut spending, coupled with the withholding of Social Security taxes from workers' paychecks, again sent the economy into depression. The stock market fell 50 percent, industrial production 38 percent, and the number of unemployed doubled. The government immediately shifted course, increasing bank reserves and undertaking more spending on public works and work relief. While Keynesianism would not be adopted as explicit policy until after World War II, the 1937–1938 debacle proved that government would no longer stand by while the economy sank.

Post–World War II Era.

From World War II to the end of the twentieth century, the United States did not experience a depression. The business cycle did not disappear, however, as the era witnessed a number of recessions. Growth slowed noticeably in 1954–1955, 1957–1958, 1960–1961, 1969–1970, 1974–1975, 1980–1982, and 1990–1992. The sources of these recessions varied, but all were mercifully brief, thanks in some measure to government policy. First of all, government spending soared in this era, rising from one‐fifth to two‐fifths of the gross national product between 1940 and 1990. Further, postwar governmental activities had a much greater effect upon the level of economic activity. Specifically, fiscal policy worked to moderate economic cycles through automatic stabilizers. When the economy moved into recession, government tax revenues fell, while its expenditures rose. The resulting fiscal deficit stimulated economic recovery.

In the early 1960s, Democratic party policy‐makers moved beyond these built‐in countercyclical effects. Embracing Keynesian economics in 1963, President John F. Kennedy assumed explicit responsibility for macroeconomic performance. The Kennedy tax cuts (passed shortly after his assassination) consciously produced a government budget deficit designed to stimulate the economy and prevent an anticipated recession. The Republican party, by contrasts, led by President Ronald Reagan in the 1980s, tried to reduce the federal government's role. Explicitly repudiating Keynesian economics, Reagan's advisors sought to slash government by means of tax and spending cuts and to reassert the primacy of markets in determining the pace and pattern of economic activity. But while they secured modest tax cuts, spending soared, producing huge fiscal deficits. As Keynesians would have predicted, this brought a sturdy if not spectacular recovery from the 1980–1982 recession. And much to the chagrin of Reaganites, Americans still expected the government to take responsibility for macroeconomic performance. When President George Bush called for fiscal restraint and higher taxes during a recession, he was voted out of office in 1992.
See also Banking and Finance; Canals and Waterways; Charity Organization Movement; Economic Regulation; Foreign Relations: The Economic Dimension; Hoover, Herbert; Labor Movements; Monetarism; Monetary Policy, Federal; New Deal Era, The; Pullman Strike and Boycott; Railroad Strikes of 1877; Securities and Exchange Commission; Strikes and Industrial Conflict; Van Buren, Martin; Works Progress Administration.

Bibliography

Rendings Fels , American Business Cycles 1865–1897, 1959.
Samuel Reznick , Business Depressions and Financial Panics, 1968.
Peter Temin , The Jacksonian Economy, 1969.
Lester V. Chandler , America's Greatest Depression, 1970.
Geoffrey H. Moore , Business Cycles, Panics, and Depressions, in Encyclopedia of American Economic History, ed. Glenn Porter, 1980, II, pp. 151–6.
Nicolas Spulber , Managing the American Economy, from Roosevelt to Reagan, 1989.
Peter Temin , Lessons from the Great Depression, 1989.
Barry Eichengreen , Golden Fetters: The Gold Standard and the Great Depression, 1992.
David Glasner, ed., Business Cycles and Depressions, 1997.

Diane Lindstrom

depression in economics, period of economic crisis in commerce, finance, and industry, characterized by falling prices, restriction of credit, low output and investment, numerous bankruptcies, and a high level of unemployment. A less severe crisis is usually known as a recession, a more common occurance generally thought to be a normal part of the business cycle ; it is traditionally defined as as two consecutive quarterly declines in the gross national product. Recessions mark a downward swing in the curve of the business cycle and are caused by a disequilibrium between the quantity of goods produced and the consumers' ability to purchase. If a recession continues long enough, it can turn into a depression. Neither term has ever been distinctly defined by a set of criteria, however, so it is difficult to say at what point the two merge, but some statistics regarded by economists as indicative of a depression include a 10% decrease in per-capita gross domestic product and consumption and 10% unemployment that persists for at least 24 months. A short period in which fear takes hold of companies and investors is more properly called a panic and does not necessarily occur in every depression, but lack of confidence in business is always present in an economic downturn.

A depression develops when overproduction, decreased demand, or a combination of both factors forces curtailment of production, dismissal of employees, and wage cuts. Unemployment and lowered wages further decrease purchasing power, causing the crisis to spread and become more acute. Recovery is generally slow, the return of business confidence being dependent on the development of new markets, exhaustion of the existing stock of goods, or, in some cases, remedial action by governments. Depressions and recessions today tend to become worldwide in scope because of the international nature of trade and credit.

Insufficient numbers of profitable investment outlets, overexpansion of commerce, industry, or agriculture, a stock-market crash, the failure of a great banking or industrial firm, or war may be among the precipitating factors of a downturn. In antiquity, and even up to the 18th cent., depressions had chiefly noneconomic causes, such as wars and weather-induced crop failures. From c.1700 to 1825 economic crises were in the main speculative or commercial; since 1825 they have been increasingly industrial, although the Japanese recessions of the 1990s were caused in part by reduced consumer demand.

The economic crises of the 20th cent. saw the entry of governments into large areas of the economy that had previously been in private hands. Job reeducation programs, government employment of the previously unemployed, and increased public welfare responsibilities are among the programs adopted to alleviate depressions. Moreover, by applying Keynesian economic principles to public policy, governments have sought to affect the business cycle directly and prevent depressions. Large-scale public works expenditure (pump priming), tax cuts, interest rate adjustments, and deficit spending during recession are among the measures that have been taken to reduce the severity of periodic economic downturns such as those experienced in the United States in 1982 and internationally in the early 1990s and 2000s. In the collapse of the U.S. housing bubble that began in 2007, the uncertainties associated with mortgage-related securities and other financial instruments that had pervaded the international financial system undermined or threatened a wide range of financial institutions, leading in 2008 to unprecedented measures by the Federal Reserve in an attempt to avoid a financial collapse and depression. Nonetheless, the resulting financial crisis and recession was the worst in the United States since the 1980s and also severely affected many other nations.

See also Great Depression .

Bibliography: See M. Bernstein, The Great Depression (1987); C. P. Kindleberger, The World in Depression, 1929–1939 (rev. ed. 1986) and Manias, Panics, and Crashes (rev. ed. 1989); W. C. Mitchell, Business Cycles and Their Causes (1989); A. W. Mullineux, Business Cycles and Financial Crises 1990).

depression In economics, a period of economic hardship, more severe than a recession. It is commonly measured by a fall in output and a rise in unemployment. The most severe and widespread depression was the Great Depression of the 1930s.