This article is from the Depression FAQ, by Cynthia Frazier with numerous contributions by others.
It seems there are some people whose brain chemistry is predisposed to the depressive response, and others who are at much lower risk of depression even if exposed to the same physical or psychological triggers. The close relatives of manic-depressives are at a higher risk for unipolar depression than the population at large or their adopted/by marriage relations.
There seems to be a link between high creativity and the gene for manic-depression: artists and writers often are not manic-depressive themselves, but have a family member who is. Studies of families in which members of each generation develop manic-depressive illness found that those with the illness have a somewhat different genetic make-up than those who do not get ill. However, the reverse is not true: not everybody with the genetic make-up that causes vulnerability to manic-depressive illness has the disorder. Apparently additional factors, possibly a stressful environment, are involved in its onset.
Major depression also seems to occur, generation after generation, in some families. However, depression can occur in people with no family history of any form of mental illness. And there probably is no human who is entirely immune to depression if stressed enough.
Psychological triggers: many, if not most, people with depression can point to some incident or condition which they believe is responsible for their unhappiness. Of course, people with severe depression are prone to astonishingly virulent and inappropriate guilt and self-hatred. So what they identify as a cause of the depression is not the true cause. Also people are generally more comfortable thinking that their depressions had a specific trigger rather than thinking of them as occurring for no specific reason.
The (genuine) life events that are most often associated with depression are varied, but the distinguishing features of such events are: loss of self-determination, of empowerment, of self-confidence. More profoundly: a loss of self, of the abilities or activities that a person identifies with herself.
Stereotypically: a man loses the job that had defined him to himself and others, whether that definition was "executive" or "breadwinner"; a woman who had spent her whole life preparing for and living the role of wife, supporter, caretaker, is suddenly left alone by divorce or death. In general, any life change, often caused by events beyond one's control, which damages the structure that gave life meaning.
The ability of a person to respond to such an event will depend on many factors, including genetic predisposition, support from friends, physical health, even the weather. It can also depend on internal psychological factors which may best be explored in talk therapy: why is the person's self-esteem so bound up in the position or state that has been lost? Can she find a new source of self-esteem? Therapy can be immensely helpful here.
Obviously, not everyone to whom this sort of event happens becomes depressed, and not every person who becomes depressed has had this sort of catastrophe befall them. In fact, if a person suffers a loss and then becomes depressed, it may well be that they weathered the loss in fine style and then succumbed to a much less obvious physhological or biological trigger.
Once the depressive state has started, both physical and psychological problems will be generated in abundance. What faster way to lose a job or a spouse than to be too depressed to work or to communicate? What worse psychological state for coping with a blow to identity can there be than a chemically maintained, profound self-hatred? And what can be worse for self-esteem than watching one's appearance and household disintegrate as one loses the motivation and energy to shower, straighten up, wash dishes or laundry, or choose attractive clothes? Health deteriorates as well: some depressed people can't sleep or eat, others sleep constantly (a real help on the job!) and eat incessantly, sometimes in order to stay awake, sometimes because it's the only thing that gives a little pleasure or comfort. (Carbohydrates induce production of serotonin, so there may be an element of self-medication here); almost no one has the impulse to exercise or get fresh air and sunshine. Most if not all of these effects form feedback loops, increasing in magnitude and becoming triggers for further depression.
The question, "Is depression mostly physical or psychological," is rather beside the point. There is only one of you, not a separate physical you, and a psychological you. Depression may be triggered by either physical or psychological events. Most commonly, both seem to be involved, though it is often difficult to separate the two when one is talking about psychology and neurochemistry. However it begins, depression quickly develops into a set of physical and psychological problems which feed on each other and grow. This is why a combination of physical and psychological intervention has been shown to give the best results for many patients, regardless of any diagnosis.