The Bombers have also been stripped of draft picks for 2013 and 2014.
The Bombers will lose both their first and second round picks for 2013 and 2014, but will be given a pick in 2014 immediately after the first round.
The Bombers will be deemed to have finished ninth in 2013.
Football manager Danny Corcoran has been given a six-month suspension from AFL effective from October 1, but with two months of the ban suspended, while assistant coach Mark Thompson has been fined $30,000.
But club doctor Bruce Reid is fighting his charge, which will be heard at 10am (AEST) on Thursday.
The unprecedented penalties for bringing the game into disrepute and conduct unbecoming follow two days of talks between Essendon, their four charged officials, their legal representatives, and the AFL trying to agree penalties.
It has been 204 days since Essendon announced they had concerns over their 2012 supplements program.
AFL Commission chairman Mike Fitzpatrick expressed his distress at a saga which has dragged on for nearly seven months and overshadowed the season, while chief executive Andrew Demetriou called it a "sorry saga".
"The AFL Commission shares (AFL fans') anger, and frustration that the 2013 season has too often been dominated by headlines we'd rather not see," he said as he announced the penalties in Melbourne on Tuesday night.
"The issues involved in the Essendon Football Club's supplements program are deeply disturbing.
"The investigation undertaken over the past six months, and the actions we have taken today reflects this gravity."
Demetriou said Hird had apologised to the commission for his role in the supplements saga.
And he said that former Bombers sports scientist Stephen Dank, who played a pivotal role in implementing the suspect supplements program, had "a lot to answer for".
"This is the most significant sanction in AFL history," Demetriou said of the unprecedented penalties.
In a statement after the penalties were announced, Essendon said Hird would be welcomed back as Bombers coach after his ban was served.
"We recognise that failings occurred at our club during this period," chairman Paul Little said.
"We must and do accept accountability and apologise for them.
"We have learnt from our mistakes and made substantial reforms to our governance and people management practices to ensure the club will never be in this position again."
Little said assistant coach Simon Goodwin will coach the Bombers in Hird's absence for their last match of this season - a now-dead rubber against Richmond on Saturday night at the MCG.
Demetriou also confirmed Hird had dropped his Supreme Court action against the league, which had been launched last week after the AFL released its charge sheet against the club.
Hird did not appear at an Essendon media conference at AFL House held immediately after the AFL announced its penalties against the club.
Little said Hird had fallen on his sword to protect the club, shown significant remorse, and had requested not to be involved in the media conference.
But Little said Hird was not "ducking the media", and that he was very keen to continue his coaching with Essendon once he had served his ban.
"James Hird told the commission tonight he had taken responsibility for the shortcomings in the 2012 supplements program," Little said.
"There is no doubt in my mind James Hird agreed to accept these penalties tonight so that the club could move on ... James has put the best interests of the players, the club and as a whole, the AFL (ahead of himself)."
HOW THE ESSENDON SUPPLEMENTS SCANDAL UNFOLDED
Late 2009: David Evans appointed Essendon chairman. Ian Robson leaves Hawthorn to become Essendon's chief executive.
September 2010: James Hird appointed Essendon coach with Mark Thompson his senior assistant.
2011: Essendon finish eighth. It is clear too many Bombers lack body strength compared to the top sides. Hird promises an intense pre-season.
Late 2011: Fitness coach Dean Robinson, nicknamed 'The Weapon', joins Essendon. Sports scientist Stephen Dank subsequently follows him to the club.
2012: Essendon start the season superbly with an 8-1 record but suffer a spate of soft tissue injuries, lose eight of their last nine games, and finish 11th.
August 2012: Essendon sack Dank after cost overruns with the supplements program and Robinson receives an official warning.
February 4, 2013: Senior Essendon officials meet at Evans' home for a crisis meeting about the supplements program. AFL chief executive Andrew Demetriou rings Evans, but insists there was nothing untoward about the call.
February 5: Essendon announce they are reporting to the Australian Sports Anti-Doping Authority and the AFL about their 2012 supplements program. The same day, Robinson is suspended.
February 7: The Australian Crime Commission releases a landmark report into organised crime and Australian sport.
February 11: Dank says Hird and other senior Essendon officials were aware of the details of the supplements program.
February 27: Essendon announce an independent review into the governance at the club, with former Telstra boss, Ziggy Switkowski heading the investigation.
April 11: Dank says he injected Hird with the banned drug hexarelin, a claim the Essendon coach says is "horrifying".
April 16: Hird is interviewed by ASADA investigators.
May 6: The Switkowski report is released. Its damning findings include a "pharmacologically experimental environment" in 2012 at the club.
May: ASADA investigators start interviewing Essendon players.
May 23: Robson resigns and is replaced by Ray Gunston.
June 24: Essendon captain and reigning Brownlow Medallist Jobe Watson reveals he believes he took the banned drug AOD-9604, but also stresses he does not think he did anything wrong.
July 25: Demetriou's February 4 phone call to Evans is revealed. There is also speculation of a rift between Evans and Hird, plus talk of concerns at board level about how Evans is handling the crisis. After a board meeting that night, Evans says he will continue as chairman.
July 26: Robinson resigns and his lawyer says he is planning legal action against the Bombers.
July 26: The Essendon board publicly backs Evans. Before the match against Hawthorn, Evans says there is no rift with Hird. Evans has a health episode in the Essendon rooms post-match. In his post-match media conference, Hird emotionally says the investigations must end soon or there is a risk some people will be affected permanently.
July 27: Evans announces his shock resignation.
July 28: Hird's legal team accuses the AFL of repeatedly leaking information about the investigations. Paul Little takes over as Essendon chairman.
August 2: The AFL receive ASADA's 400-page interim report into the saga, but announce the investigation is ongoing.
August 4: The report is handed to the Bombers. Later that day they suffer a 79-point loss to Collingwood, their biggest defeat of the season.
August 13: The AFL charge the Bombers with bringing the game into disrepute. Hird, senior assistant Thompson, football manager Danny Corcoran and club doctor Bruce Reid are also charged with the same offence. No anti-doping charges are laid against players at this time.
August 22: Hird's lawyers issue a Supreme Court writ, which includes allegations Demetriou and his deputy Gillon McLachlan "tipped off'' Essendon that its players had taken performance enhancing drugs. The writ also seeks injunctions which prevent the AFL from allowing Demetriou to sit on any tribunal hearing the case.
August 26: The AFL, Essendon and lawyers meet at AFL House. A day of talks brings no resolution.
August 27: After a day of more talks, the AFL announce: Essendon have been banned from the finals; Hird has been suspended for 12 months; Corcoran has been banned four months and; Thompson fined $30,000. The charges against Dr Reid have been adjourned until Thursday.