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A depression is a prolonged, widespread period of low economic activity, much deeper and longer than a recession. The term depression can be applied in many technical senses. Still, it is usually characterized by dramatic declines in GDP, high unemployment, declines in consumer spending and business investment, numerous bank failures, and deflation.
Recessions are a natural occurrence in the economic cycle. Depressions are not. They are indicative of a breakdown in the normal operation of the economy, and they can do long-term harm – businesses that do not reopen, workers who do not return to the labor force, and confidence that takes years to recover.
That name connects with the Great Depression, which was the worst in the history of the United States and had the worst economic outcomes due to a combination of poor monetary, fiscal, and financial regulatory policies.
Example: In the Great Depression, the unemployment rate in the USA was approximately 25%. The banks collapsed in succession, destroying savings. Farmers were driven off their land as agricultural prices fell. Nearly half of industrial production was lost.
The wreckage was so extensive and enduring that the government adopted a financial policy approach that included deposit insurance, financial regulation, and a much more active central bank role in economic management.
