17 February 2010

A brief list of Depressions

This is an edited version of an entry posted on the Urban Dictionary under the name, Abu Yahya.

A depression is a prolonged economic crisis characterized by drastic (i.e., >20%) decline in output, reduction in employment, and deflation. Other technical conditions include a liquidity trap and "permanent" (i.e., persisting in many sectors for several quarters) failure to reach equilibrium.

Difference between a Recession and a Depression

The technical distinction between a recession and depression can vary depending on the school of economics, although economists usually agree on which event is a recession, and which is a depression. In Keynesian economics, a depression is defined by the existence of a flat liquidity-money (LM) curve (which means that interest rates have no influence on people's determination to hold their wealth as cash); and/or a nearly vertical investment-savings (IS) curve (which means interest rates have no influence on the willingness of entrepreneurs to expand/continue operations).

In contrast, a recession is a much less drastic event. Interest rates still have influence on investment and liquidity, and there is no deflation. Conventional fiscal policy and monetary policy, combined and in moderate doses, can restore full employment.

(Please see the CEPA Economics Site for Keynesian theories of the business cycle)

Neoclassical economics/New Classical economics defines a recession as a shift in people's income/leisure preferences as the result of a technology shock. The technology shock sharply reduces the returns to labor, so workers are paid less and many withdraw their labor from the market. In a depression, the technology shocks are compounded and cause a permanent change in the production function; large numbers of enterprises are no longer viable.

More generally, a recession involves the downward phase of a routine business cycle; these typically occur every three to seven years. A depression represents a partial collapse of the industrial system, usually brought about by failed financial intermediaries.

Partial List of Depressions

Here follows a short list of economic crises that were regarded as possible depressions at the time. Items and resources will be added as they become available.

1815-21Post-Napoleonic War Depression
1829-331832 Panic (per Conant, p.623)
1830-'33 Depression (per Handcock, p.228)
Numerous banking failures in UK
1837-44Commercial Crises of 1836-39
(Handcock, p.240)
(Conant, p.623)
Crash, Wall Street
(Sobel, p.32)
1854-57Depression of 1854 (UK)
1867-69Failure of Overend Gurney and Co
(Conant, p.643)
1876-79Crisis of 1876
(Conant, p.648)
1893-96Crisis of 1893
(Conant, p.668)
1920-22Post-WW1 Depression
1929-1939Great Depression

Major Panics & Localized Crises

Crisis of 1825 (UK)
(Conant, p.619)
1847Commercial Crisis of 1847 (UK & France)
(Handcock, p.259)
(Conant, p.631)
1857Commercial Crisis of 1857 (UK)
(Handcock, p.292)
Crash, New York ("Western Blizzard")
(Sobel, p.77)
1861-1863Cotton Famine (UK)
US Civil War
1907Knickerbocker Trust Panic (USA)
(Sobel, p.297)
(Conant, p.698)

Sources & Additional Reading

W. D. Handcock, English Historical Documents 1833-1874, Routledge (1996), p.228; this table cites the official Poor Law Report of 1909.

Robert Sobel, Panic on Wall Street: a Classic History of America's Financial Disasters, E. P Dutton (1988)

Charles Conant, A History of Modern Banks of Issue, G.P. Putnam & Sons (1915),



At 4:27 AM, January 26, 2012, Blogger Competition Exams said...

The distinctions are very clear and appropriate. Thanks for this.
I have one question. Can a period of prolonged recession be termed as a Depression? Especially when history of it is written after a few decades.

At 3:29 PM, February 14, 2012, Blogger James R MacLean said...

Well, we don't have reliable GDP data for business cycles prior to 1913 (the beginning of a severe economic downturn, but probably just a recession made worse by the panic outflows of gold). In fact, Friedman & Schwartz (1963) mainly rely on price movements and changes in money velocity in order to determine the comparative severity of downturns.

Depressions were thus associated with panics which were so severe they caused the permanent dissolution of many nonfinancial firms. The Crisis of 1907, for example, triggered a very severe crisis in the real economy through 1908 that cleared the way for large multidivisional corporations in the USA.

I think the key difference is not duration (the 1920-21 Depression was pretty short) but etiology.


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