An economic depression is defined as a state of long-term severe stagnation in economic activity, and in addition, it is defined as a severe stagnation that lasts for three years or more and leads to a decrease in real GDP by at least 10% in a given year; economic depressions are less frequent for Moderate Recessions Economic depressions usually tend to be accompanied by a rise in the unemployment rate and a decrease in the level of economic inflation. The economies of different regions of the world have experienced economic depressions, and one of the most famous of these cases is what will be covered in the content of this article.
What are the most famous economic depressions?
The economy witnessed multiple periods of turmoil and multiple financial and economic crises that struck countries and regions, including at the level of the entire world, and all these economic turmoil shared certain characteristics, but each of them had its own causes and effects that negatively affected the economy, and one of the most famous cases of economic depression was as follows:
Long depression
The long depression or the so-called financial panic, and the worst event, occurred in 1873, and it occurred after the outbreak of the civil war when the American banking system grew and seemed to be in force, and the problem began in Europe when the stock market collapsed and investors began to sell their investments in American projects, especially railroads. Companies were borrowing money so they could build new lines through the use of bonds, so the Europeans began selling their railroad bonds, which contributed to an increase in the bonds offered for sale more than the need, which did not enable companies to find any way to obtain cash, so many railroads went bankrupt. This led to the bankruptcy of the largest banks in New York City that had invested in those projects, and when the dealers saw the bankruptcy of these banks, they started their panic and resorted to demanding their money, which contributed to the failure of at least 100 banks.
The Great Depression
The Great Depression was the worst financial and economic catastrophe that occurred in the twentieth century and in the history of the world. It lasted from 1929 to 1939. This is due to the stock market crash that occurred in 1929, which led to a panic that killed millions of investors and a decline in consumer spending and investment, which caused a sharp decline in industrial production and employment. Losing companies laid off workers, and by 1933, the Great Depression had arrived. At its lowest level, nearly 15 million Americans were unemployed, and nearly half of the banks had failed.
Causes of the Great Depression
The American economy expanded during the 1920s and 1929s of the 1920s, and the country’s total wealth doubled, a period called the “Rising Twenties.” The stock market, represented by the New York Stock Exchange on Wall Street, was a center for reckless speculation. By putting their savings in stocks, and as a result, the stock market was expanding rapidly, reaching its peak in 1929, by which time the level of production had fallen and the unemployment rate had risen, causing stock prices to rise far above their actual value. Wages and consumer debt were increasing. The agricultural sector suffered due to the decline in food prices. Banks also had a surplus of large loans that they could not liquidate. All this led to the entry of the American economy into a recession; consumer spending slowed and goods began to accumulate, which slowed factory production. However, stock prices continued to rise and reached levels of future profits that could not be expected, and with this situation continuing for a long time, what was called the “Great Depression.”
Stagflation
Inflationary stagflation, or stagflation or stagflation accompanied by stagflation, is defined as an economic condition that suffers from a rise in the rate of inflation accompanied by a decline in economic growth and a decline in production. The so-called stagflation and this case proved that realistic economic data may, in some cases, overcome existing economic theories.
Causes of stagflation
The occurrence of inflationary stagnation is due to several reasons, which are evident in the following points:
- Inflationary stagflation occurs due to the sudden rise in oil prices, which reduces the productive capacity of the economy. This happened when the Organization of Petroleum Exporting Countries (OPEC) issued an export ban to Western countries in 1973, which led to a significant increase in global oil prices, thus increasing production costs and rising unemployment.
- The stagflation occurred as a result of bad economic policy when US President Nixon in 1970 set tariffs on imports and frozen wages and prices for 90 days to prevent prices from rising, and this led to a shortage in the quantities of oil, which led to a significant increase in its prices, which contributed to the economic chaos that resulted in an inflationary depression.
- The occurrence of stagflation is due to the removal of the gold cap for currencies.
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