Recession

A recession is usually defined in macroeconomics as a fall of a country's real Gross Domestic Product in two or more successive quarters of a year. A recession may also involve falling prices, which can lead to a depression; alternatively it may involve sharply rising prices (inflation), in which case this process is known as stagflation. Most recessions lead to falling inflation rates or what is called disinflation.

Depression

Main articles: Depression, Great Depression

Related Topics:
Depression - Great Depression

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Prior to the Great Depression a huge wave of investing in the stock market had taken place which created artificially high prices of stock. This process was driven by the fact that shares were being used as a collateral for loans in order to buy more stocks. When the economy showed signs of slowing and share prices plummeted, this caused an extensive domino effect. The investments lost their face value and the loans on them "went bad", which, among other things, triggered a crisis of the banking system. In consequence, there was the famous rush on banks, with people not being able to access their deposits. They had disappeared. After this, people grew extremely wary of investment which resulted in extreme deflation.

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When President Franklin D. Roosevelt entered office in 1933, he was intending to continue a relatively conservative fiscal policy to placate his business critics (Herbert Hoover in particular had warned him that any controversial early action would affect business confidence very adversely). However, after Black Tuesday Roosevelt was forced to change his mind, and instituted the "New Deal" economic reforms to stave off any future depressions. Contrary to myth, Roosevelt did not engage in sustained deficit spending until World War II neared, so that the Depression continued.

Related Topics:
Franklin D. Roosevelt - 1933 - Herbert Hoover - Business confidence - Black Tuesday - New Deal - Deficit spending

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To date no repetitions of the Great Depression have happened in the United States. At least, none politicians and the media call "depressions", regardless of their impact on actual human lives. However, Japan suffered from a depression during the 1990s, while this word may be used to describe the situation of many poorer countries (although in many cases these countries never achieved sustained economic development in the first place).

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It is an open question whether a "depression" can even be noticed at all under the terminology in use among technical economists today. Galbraith among others thought it could not, and that the terminology was merely exercise in concealment - a potent criticism from an economist who was a central part of that Administration during the war years.

Related Topics:
Galbraith - War years

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