What is a Financial Crisis? - Master of Finance Degrees

Without much explanation, most would know right away that a “financial crisis” is some sort of negative situation involving finances. What exactly are financial crises, though, and what are some examples through which much can be learned on the subject? Follow along for a quick brief on what this term means to society.

Financial Crises Defined

Unofficially, financial crises are, simply put, crises which adversely and strongly affect the greater whole of society through some financial impact. Officially, for events to be described by this term, they must take on several, distinct characteristics that set them apart from, other, more minor occurrences in societal financial systems. If an event is detrimental to the whole economy, is characterized by a sudden downturn in societal economics, and can also be described as either a major recession or depression, then that event is likely to be officially dubbed a “financial crisis.”

For a closer look at these types of events, history has provided us with many, educational events from which we can further grow. The following, real-life events are examples of such financial crises in U.S. history.

The Great Tobacco Depression

The Great Tobacco Depression was an economic crisis that took place in early America in 1703. As a result of recent tobacco crop failures combined with an economic system that was based largely just on regional tobacco production, a substantial economic crisis quickly unfolded. This then caused major issues for nearly everyone living in the new area at the time, as money and other means of trade capital became exceedingly precious and rare commodities. Eventually, this crisis was corrected through adjustments to the economic and political systems of the time.

The 1970s Energy Crisis

In the 1970s, the U.S. underwent yet another economics-based crisis in what is now called “The 1970s Energy Crisis.” It was at this time that, due to actual and also purely speculative reasons, energy resources such as oil and gasoline became very costly and difficult to obtain. Subsequently, the country went into yet another crisis of finances, but this crisis too was eventually headed off by a number of factors including many geopolitical counteractions.

The Great Depression

To understand the severity of the crisis that would become known as “The Great Depression”, the words of the Encyclopedia Britannica really cut to the heart of the matter: “It was the longest and most severe depression ever experienced by the industrialized Western world, sparking fundamental changes in economic institutions, macroeconomic policy, and economic theory.” Caused by a stock market crash in conjunction with several, other events at the time, this economic crisis saw many starved and otherwise destitute Americans by its end. That end took about 10, agonizingly-long years to be reached.

The Current Coronavirus Crisis

As of this writing, the 2020 Coronavirus has caused the most recent economic crisis to face the country. As a growing number of cases of this new and much-unknown virus have crept across the country and elsewhere in the world, the US economy and others have down-turned quite dramatically. For those interested more in the overall effects of the virus on world and US markets as well as other finance-based information on the fight to conquer and rebound from the virus, the World Economic Forum is a leading source of such emerging information right now.

Financial crises are large-scale hits to the financial security and other quality of life areas of entire societies. There are plenty of these events in history, and even at current time, from which we can learn and grow as a society and one, functional financial system. These are the basics of what the term “financial crisis” actually means today.