Recession

Definition

A recession is a significant decline in economic activity across the economy that lasts for an extended period, usually visible in real GDP, income, employment, industrial production, and wholesale-retail sales. It often leads to increased unemployment and reduced consumer spending. Understanding recession helps to analyze historical economic downturns, such as those in the 19th century, where financial instability created widespread economic challenges.

5 Must Know Facts For Your Next Test

1. The Panic of 1873 was triggered by over-speculation in railroads and real estate, leading to a recession that lasted several years and caused widespread bank failures.
2. The Panic of 1893 was marked by the collapse of major railroad companies and triggered a severe recession that led to high unemployment rates and social unrest.
3. Recessions are typically identified after two consecutive quarters of negative GDP growth, but other indicators such as employment levels and industrial production are also considered.
4. The federal government often responds to recessions with monetary policy measures like lowering interest rates or fiscal policies like increasing government spending to stimulate the economy.
5. Recessions can have long-lasting effects on consumer behavior, often leading to increased savings rates as individuals become more cautious about spending.

Review Questions

• How did the economic conditions leading up to the Panic of 1873 contribute to the subsequent recession?
  • The Panic of 1873 was largely caused by rampant over-speculation in railroads and real estate, resulting in a bubble that eventually burst. This created a chain reaction of bank failures as institutions were heavily invested in these sectors. The ensuing recession saw a drastic drop in consumer confidence and spending, which further deepened the economic downturn and affected various industries nationwide.
• What were the key factors that contributed to the severity of the recession following the Panic of 1893?
  • The recession following the Panic of 1893 was exacerbated by several factors including the collapse of major railroad companies, which were central to the economy at that time. Additionally, international trade issues and high levels of debt among businesses played significant roles. The combination of these elements resulted in skyrocketing unemployment rates and widespread poverty during this period, which made recovery slow and painful.
• Evaluate the long-term impacts of the recessions from both the Panic of 1873 and Panic of 1893 on American economic policy.
  • The recessions from both the Panic of 1873 and Panic of 1893 led to significant changes in American economic policy aimed at preventing future financial crises. In response to these downturns, there was a push for more regulation in banking practices to avoid speculation-driven collapses. Additionally, these events highlighted the need for better fiscal policies, which ultimately contributed to reforms that shaped modern monetary policy frameworks aimed at stabilizing the economy during turbulent times.

Related terms

Depression: A prolonged period of economic downturn that is more severe than a recession, characterized by significant declines in GDP and widespread unemployment.

Inflation:

The rate at which the general level of prices for goods and services rises, eroding purchasing power and often influencing recessionary cycles.

Banking Crisis: A situation where a large number of banks face insolvency or liquidity problems, often triggering or exacerbating economic recessions.