great depresssion asd

7/31/2019 Great Depresssion Asd

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Department of Management Sciences

SZABIST, Islamabad

MACROECONOMICS

Project Report

Submitted to

Maam Zainab Dar

Date of Submission

Monday, May 23, 2011

Submitted By:

Syed Haseeb Ahmed 1011165

Hashim Mahmood Kh 1011147

Muhammad Faizan Khan 1011121

Aly Abbas 1011137

Ammar Pervaiz 1011139

Hafiz Usman Bashir 1011145.

Sarmad janjua 1011161

Faizan Ali Khan 1011140


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INTRODUCTION:

We are planning to analyze The Great Depression & factors that were

responsible for it. Also the facts and figures that are accountable for this drastic situation of

Pakistans present economic condition.

In this project you will find the complete analysis of The Great

depression i.e. in this regard we will touching every single detail specifically the reign of

President Hoover, his decisions toward the economy of United States of America and also the

decision after the happening of Black Tuesday, the rash of Wall street, economy of USA before

and after of the depression, conditions that supported the falling economy and also how 1 factor

supported the other which led to a collateral damage.

The reason for doing this analysis is to study the causes

and also to have the knowledge about the devastating economic conditions in the present

scenario, the core reason of doing this project is to have a grip on one of the favourite topic of

Economists i.e. 1930s Depression. This will help us not only academically but also as a

Pakistani, so that we can learn from the mistakes of others in order to avoid them in future.

Great Depression:

The term Great Depression is used to describe the global economic crisis that resulted

from the Wall Street stock market crash of October 29, 1929. During this time of minimal

investment and low levels of production, unemployment soared. Because many U.S. banks

reserves were invested in the stock market, the resulting panic forced many to close their doors,

taking their customers money with them. As a result of the collapse of the U.S. economy,

investments abroad were pulled back and the European economy was also devastated. Despite

massive government intervention in the years following the stock market crash, it was not until

the rearmament preceding World War II that the U.S. economy began to fully recover. Thissection provides articles with information on the 1929 crash of stock market, unemployment

during the Great Depression, causes and effects of the Great Depression, and overall life during

the Great Depression.


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Pakistans Economic Conditions:

Pakistans economy is in a downward spiral. The developing nature of the

financial sector has been a saving grace for the Pakistani economy. Less developed linkages

with international markets have meant that the direct impact of the financial crisis has not beenfelt by the Pakistani financial sector. However; effects of the crisis have been felt, even though

in a limited manner, by the real sectors of the economy. The effects of the global slowdown

have been transmitted through the trade balance; with a slowdown in global demand and fall in

commodity prices having varying effects, the capital account; with a significant reduction in

private inflows to Pakistan.

Pakistan, a fragile economy, has been facing both economic and political crisis which predate

the global financial crisis. Inflation, trade deficit, balance of payment, foreign exchange reserves,

circular debt, poor performance of banking sector and Karachi stock exchange political

instability have remained the key indicators of Pakistan economic crisis. Political and economic

stability complement each other. Pakistan is an interesting case since both are in crisis. The waron terror has become a hanging sword overhead the rate of suicide bombing is increasing day

by day.

GDP growth rate is a significant indicator to access the health of an economy; It becomes worse

since 2004-05 from 9.0% to 2.0%in 2008-9.Goverment of Pakistan spends approximately $ 26

billion per year based on the expected revenues of approximately $ 20 billion incurring a huge

balance of payment (BOP) crisis when the entire donor community was also going through

financial collapse. IMF aided with $ 7.6billion and with the first tranche of $ 3.1 billion Pakistan

foreign reserve rose from $ 6billion to $ 9 billion.


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Phase 1

The Great Depression:

Easier - The 'Great Depression' was a period in United States

History when business was poor and many people were out of work.

Harder - The Great Depression began in October 1929, when the stock market in the United

States dropped rapidly. Thousands of investors lost large sums of money and many were wiped

out, lost everything. The 'crash' led us into the Great Depression. The ensuing period ranked as

the longest and worst period of high unemployment and low business activity in modern times.

Banks, stores, and factories were closed and left millions of Americans jobless, homeless, and

penniless. Many people came to depend on the government or charity to provide them with

food.

The Depression became a worldwide business slump of the 1930's that affected almost all

nations. It led to a sharp decrease in world trade as each country tried to protect their own

industries and products by raising tariffs on imported goods. Some nations changed their leader

and their type of government. In Germany, poor economic conditions led to the rise to power of

the dictator Adolf Hitler. The Japanese invaded China, developing industries and mines in

Manchuria. Japan claimed this economic growth would relieve the depression. This militarism of

the Germans and Japanese eventually led to World War II (1939-1945).

In the United States, President Herbert Hoover held office when the Great Depression began.

The economy continued to slump almost every month. Franklin D. Roosevelt was elected

President in 1932. Roosevelt's 'new deal' reforms gave the government more power and helped

ease the depression. The Great Depression ended as nations increased their production of war

materials at the start of World War II. This increased production provided jobs and put large

amounts of money back into circulation.


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Causes of the Great Depression:

In 1929 the standard economic theory suggested thata calamity such as the Great Depression could not happen: the economy possessed

equilibrating mechanisms that would quickly move it toward full employment. For example, highlevels of unemployment should put downward pressure on wages, thereby encouraging firms toincrease employment. Before the Great Depression, most economists urged governments toconcentrate on maintaining a balanced budget. Since tax receipts inevitably fell during adownturn, governments often increased tax rates and reduced spending. By taking money outof the economy, such policies tended to accelerate the downturn, though the effect was likelysmall.

As the depression continued, many economists advised the federal government to increasespending, in order to provide employment. Economists also searched for theoretical

justifications for such policies. Some thought the depression was caused by overproduction:consumers did not wish to consume all that was produced. These analysts often attributed

overproduction to the increased disparity in income that developed in the 1920s, for the poorspend a greater percentage of their income than do the rich. Others worried about a drop in thenumber of profitable investment opportunities. Often, these arguments were couched inapocalyptic terms: the Great Depression was thought to be the final crisis of capitalism, a crisisthat required major institutional restructuring. Others, notably Joseph Schumpeter, pointed thefinger at technology and suggested that the Great Depression reflected the failure ofentrepreneurs to bring forth new products. He felt the depression was only temporary and arecovery would eventually occur.

The stock market crash of 1929 and the bank panics of the early 1930s were dramatic events.Many commentators emphasized the effect these had in decreasing the spending power ofthose who lost money. Some went further and blamed the Federal Reserve System for allowing

the money supply, and thus average prices, to decline.

John Maynard Keynes in 1936 put forward a theory arguing that the amount individuals desiredto save might exceed the amount they wanted to invest. In such an event, they wouldnecessarily consume less than was produced (since, if we ignore foreign trade, total incomemust be either consumed or saved, while total output is the sum of consumption goods andinvestment goods). Keynes was skeptical of the strength of equilibrating mechanisms andshocked many economists who clung to a faith in the ability of the market system to governitself. Yet within a decade the profession had largely embraced his approach, in large partbecause it allowed them to analyze deficient consumption and investment demand withoutreference to a crisis of capitalism. Moreover, Keynes argued that, because a portion of incomewas used for taxes and output included government services, governments might be able to

correct a situation of deficient demand by spending more than they tax.

In the early postwar period, Keynesian theory dominated economic thinking. Economistsadvised governments to spend more than they taxed during recessions and tax more thanspend during expansions. Although governments were not always diligent in following thisprescription, the limited severity of early postwar business cycles was seen as a vindication ofKeynesian theory. Yet little attention was paid to the question of how well it could explain theGreat Depression.


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In 1963, Milton Friedman and Anna Schwartz proposed a different view of the depression. Theyargued that, contrary to Keynesian theory, the deflationary actions of the Federal Reserve wereprimarily at fault. In the ensuing decades, Keynesians and "monetarists" argued for thesupremacy of their favored theory. The result was a recognition that both explanations hadlimitations. Keynesians struggled to comprehend why either consumption or investment demandwould have fallen so precipitously as to trigger the depression (though saturation in the housing

and automobile markets, among others, may have been important). Monetarists struggled toexplain how smallish decreases in the money supply could trigger such a massive downturn,especially since the price level fell as fast as the supply of money, and thus real (inflation-adjusted) aggregate demand need not have fallen.

In the 1980s and 1990s, some economists argued that the actions of the Federal Reserve hadcaused banks to decrease their willingness to loan money, leading to a severe decrease inconsumption and, especially, investment. Others argued that the Federal Reserve and centralbanks in other countries were constrained by the gold standard, under which the value of aparticular currency is fixed to the price of gold.

Some economists today speak of a consensus that holds the Federal Reserve, the gold

standard, or both, largely responsible for the Great Depression. Others suggest that acombination of several theoretical approaches is needed to understand this calamity.

Most economists have analyzed the depression from a macroeconomic perspective. Thisperspective, spawned by the depression and by Keynes's theories, focuses on the interaction ofaggregate economic variables, including consumption, investment, and the money supply. Onlyfairly recently have some macroeconomists begun to consider how other factors, such astechnological innovation, would influence the level of economic activity.

Beginning initially in the 1930s, however, some students of the Great Depression haveexamined the unusually high level of process innovation in the 1920s and the lack of productinnovation in the decade after 1925. The introduction of new production processes requires

investment but may well cause firms to let some of their workforce go; by reducing prices, newprocesses may also reduce the amount consumers spend. The introduction of new productsalmost always requires investment and more employees; they also often increase thepropensity of individuals to consume. The time path of technological innovation may thusexplain much of the observed movements in consumption, investment, and employment duringthe interwar period. There may also be important interactions with the monetary variablesdiscussed above: in particular, firms are especially dependent on bank finance in the earlystages of developing a new product.

Effects of the Great Depression: The psychological, cultural, and politicalrepercussions of the Great Depression were felt around the world, but it had a significantly

different impact in different countries. In particular, it is widely agreed that the rise of the Nazi

Party in Germany was associated with the economic turmoil of the 1930s. No similar threat

emerged in the United States. While President Franklin Roosevelt did introduce a variety of new


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programs, he was initially elected on a traditional platform that pledged to balance the budget.

Why did the depression cause less political change in the United States than elsewhere? A

much longer experience with democracy may have been important. In addition, a faith in the

"American dream," whereby anyone who worked hard could succeed, was apparently retained

and limited the agitation for political change.

Effects on individuals:

Much of the unemployment experience of the depression can be

accounted for by workers who moved in and out of periods of employment and unemployment

that lasted for weeks or months. These individuals suffered financially, to be sure, but they were

generally able to save, borrow, or beg enough to avoid the severest hardships. Their intermittent

periods of employment helped to stave off a psychological sense of failure. Yet there were also

numerous workers who were unemployed for years at a time. Among this group were those withthe least skills or the poorest attitudes. Others found that having been unemployed for a long

period of time made them less attractive to employers. Long-term unemployment appears to

have been concentrated among people in their late teens and early twenties and those older

than fifty-five. For many that came of age during the depression, World War II would provide

their first experience of full-time employment.

With unemployment rates exceeding 25 percent, it was obvious that most of the unemployed

were not responsible for their plight. Yet the ideal that success came to those who worked hard

remained in place, and thus those who were unemployed generally felt a severe sense of

failure. The incidence of mental health problems rose, as did problems of family violence. For

both psychological and economic reasons, decisions to marry and to have children were

delayed. Although the United States provided more relief to the unemployed than many other

countries (including Canada), coverage was still spotty. In particular, recent immigrants to the

United States were often denied relief. Severe malnutrition afflicted many, and the palpable fear

of it, many more.

Effects by gender and race:

Federal, state, and local governments, as well as many private

firms, introduced explicit policies in the 1930s to favor men over women for jobs. Married

women were often the first to be laid off. At a time of widespread unemployment, it was felt that

jobs should be allocated only to male "breadwinners." Nevertheless, unemployment rates

among women were lower than for men during the 1930s, in large part because the labor


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market was highly segmented by gender, and the service sector jobs in which women

predominated were less affected by the depression. The female labor force participation rate

the proportion of women seeking or possessing paid workhad been rising for decades; the

1930s saw only a slight increase; thus, the depression acted to slow this societal change (which

would greatly accelerate during World War II, and then again in the postwar period).

Many surveys found unemployment rates among blacks to be 30 to 50 percent higher than

among whites. Discrimination was undoubtedly one factor: examples abound of black workers

being laid off to make room for white workers. Yet another important factor was the

preponderance of black workers in industries (such as automobiles) that experienced the

greatest reductions in employment. And the migration of blacks to northern industrial centers

during the 1920s may have left them especially prone to seniority-based layoffs.

Cultural effects:

One might expect the Great Depression to have induced great skepticism

about the economic system and the cultural attitudes favoring hard work and consumption

associated with it. As noted, the ideal of hard work was reinforced during the depression, and

those who lived through it would place great value in work after the war. Those who

experienced the depression were disposed to thrift, but they were also driven to value their

consumption opportunities. Recall that through the 1930s it was commonly thought that one

cause of the depression was that people did not wish to consume enough: an obvious response

was to value consumption more.

International Effects:It was long argued that the Great Depression began in the United States

and spread to the rest of the world. Many countries, including Canada and Germany,

experienced similar levels of economic hardship. In the case of Europe, it was recognized that

World War I and the treaties ending it (which required large reparation payments from those

countries that started and lost the war) had created weaknesses in the European economy,especially in its financial system. Thus, despite the fact that trade and capital flows were much

smaller than today, the American downturn could trigger downturns throughout Europe. As

economists have come to emphasize the role the international gold standard played in, at least,

exacerbating the depression, the argument that the depression started in the United States has

become less central.


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With respect to the rest of the world, there can be little doubt that the downturn in economic

activity in North America and Europe had a serious impact. Many Third World countries were

heavily dependent on exports and suffered economic contractions as these markets dried up. At

the same time, they were hit by a decrease in foreign investment flows, especially from the

United States, which was a reflection of the monetary contraction in the United States. Many

Third World countries, especially in Latin America, responded by introducing high tariffs and

striving to become self-sufficient. This may have helped them recover from the depression, but

probably served to seriously slow economic growth in the postwar period.

The New Deal:

The nonmilitary spending of the federal government accounted for 1.5 percent ofGDP in 1929 but 7.5 percent in 1939. Not only did the government take on new responsibilities,

providing temporary relief and temporary public works employment, but it established an

ongoing federal presence in social security (both pensions and unemployment insurance),

welfare, financial regulation and deposit insurance, and a host of other areas. The size of the

federal government would grow even more in the postwar period. Whether the size of

government today is larger than it would have been without the depression is an open question.

Some scholars argue for a "ratchet effect," whereby government expenditures increase during

crises, but do not return to the original level thereafter. Others argue that the increase in

government brought on by the depression would have eventually happened anyhow.

In the case of unemployment insurance, at least, the United States might today have a more

extensive system if not for the depression. Both Congress and the Supreme Court were more

oriented toward states' rights in the 1930s than in the early postwar period. The social security

system thus gave substantial influence to states. Some have argued that this has encouraged a

"race to the bottom," whereby states try to attract employers with lower unemployment

insurance levies. The United States spends only a fraction of what countries such as Canada

spend per capita on unemployment insurance.

Some economists have suggested that public works programs exacerbated the unemployment

experience of the depression. They argue that many of those on relief would have otherwise

worked elsewhere. However, there were more workers seeking employment than there were job


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openings; thus, even if those on relief did find work elsewhere, they would likely be taking the

jobs of other people.

The introduction of securities regulation in the 1930s has arguably done much to improve the

efficiency, fairness, and thus stability of American stock markets. Enhanced bank supervision,

and especially the introduction of deposit insurance from 1934, ended the scourge of bank

panics: most depositors no longer had an incentive to rush to their bank at the first rumor of

trouble. But deposit insurance was not an unmixed blessing; in the wake of the failure of

hundreds of small savings and loan institutions decades later, many noted that deposit

insurance allowed banks to engage in overly risky activities without being penalized by

depositors. The Roosevelt administration also attempted to stem the decline in wages and

prices by establishing "industry codes," whereby firms and unions in an industry agreed to

maintain set prices and wages. Firms seized the opportunity to collude and agreed in manycases to restrict output in order to inflate prices; this particular element of the New Deal likely

served to slow the recovery. Similar attempts to enhance agricultural prices were more

successful, at least in the goal of raising farm incomes (but thus increased the cost of food to

others).


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Phase 2

Pakistans Economic Turmoil:Pakistan, a fragile economy, has been facing both economic and political crisis which predate

the global financial crisis. Inflation, trade deficit, balance of payment, foreign exchange reserves,

circular debt, poor performance of banking sector and Karachi stock exchange political

instability have remained the key indicators of Pakistan economic crisis. Political and economic

stability complement each other. Pakistan is an interesting case since both are in crisis. The war

on terror has become a hanging sword overhead the rate of suicide bombing is increasing day

by day.

GDP growth rate is a significant indicator to access the health of an economy; It becomes worse

since 2004-05 from 9.0% to 2.0%in 2008-9.Goverment of Pakistan spends approximately $ 26

billion per year based on the expected revenues of approximately $ 20 billion incurring a huge

balance of payment (BOP) crisis when the entire donor community was also going through

financial collapse. IMF aided with $ 7.6billion and with the first tranche of $ 3.1 billion Pakistan

foreign reserve rose from $ 6billion to $ 9 billion.

The price of oil fell to $77 a barrel, almost

one-half of the level it had reached couple of months ago. This put a strain on the spending

plans of a number of countries in the Middle East. Some of these countries had large

investments planned in Pakistan. In the light of these developments the question arises as towhat is the likely impact on Pakistans financial grounds? How should Pakistans policy makers

respond to the developments in America, Europe and the Middle East as they begin to address

the problems the country is already confronted with? The writer will attempt to answer these

questions.

Pakistan recent period of economic growth was based on a combination with political instability,

led to a rapid in inflation, a spike in the trade and current account deficits, and a devaluation of

the Pakistani rupee. Although global fuel and food prices are on the decline, the U.S financial

crisis has precipitated a possibly extended global recession. For Pakistan, a global recession

will likely reduce demand for its exports, inward FDI flows and overseas remittent. Official

Pakistan estimates for inward foreign direct investment in 2009 reportedly show a decline ofover 32% when compared ran into problems in 2008. Real GDP growth, which had been

averaging above 7% per year since fiscal year 2000/2001, declined to 5.8% in fiscal year


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2007/2008 and is expected to decline to2.5% in fiscal year 2008/2009.

Economic business sector impact:

Economic activity is the life blood of a nation. For acountry to survive it is important that its economy is sound and successful and that business

activity flourishes, but the global credit crisis and liquidity problems of many global corporations

have already led to net capital outflows from rising markets, uncertain new investment projects.

With fast depleting international reserves there is growing fear that the country may be forced

into failure to pay on its foreign obligations. It was because of the fear that on October 6,

standard and poors and Moodys, two of the largest rating agencies, downgraded Pakistani

bonds. This has created a terror and investors have begun to fear weathers P akistan will be

able to pay them back.

Impact on textile industry:Pakistan textile industry is facing an uncertain environment. Following few factors like increase

in input cost of minimum wage by 50 percent, increasing interest rates, on-guaranteed energy

supplies, lack of R and D and reduction in cotton production, put a negative impact on the

industrys competitiveness internationally, because of the entire situations the companies are

downsizing. Production units are being shut down and around 5000000 of the workers lost their


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External Financing:

The global crisis has restricted Pakistans ability to tap international

debt capital markets to raise funds. An increasing cost of borrowing internationally, coupled with

deterioration in the countrys credit rating has ruled out issuance of government prepares a

financing mechanism. Pakistans presence in the international capital markets in2008-09 waslimited to the repayment of Eurobond amounting to US$ 500 million made in February 2009 with

no new issuance at the backdrop of financial crisis engulfing the global markets.

Banking sector:

According to Fitch ratings, the Pakistani banking system has, over the last decade, gradually

evolved from a weak state-owned to a slightly improved and active private sector motivated

system. But as of end 2008, data from the banking sector confirms a slowdown. As of October

2008, total deposits fell from RS 3.77 trillion in September to RS 3.67 trillion. Provisions for

losses over the same period went up from RS 173 billion in September to Rs178.9 billion in

October.

Market analyst Muhammad Suhail told the Los Angeles times. The global crisis has really fuel

to the fire. There was a time window earlier this year to address all this, and we missed it. The

drying up of credit internationally has hit Pakistan hard with the banking system suffering a

severe liquidity problem. Overnight call rates rises so much and its ranging from 32 to 40

percent.

Circular debt:

On 26 January 2009, Raja Pervez Ashraf, Minister for water and power, told the

senate that the federal government will settle half of the RS 400 billion circular debt by the end

of January.

Circular debt arises when the Government of Pakistan owes and is unable to pay billions of

rupees to oil marketing companies (OMC) a to independent power producers (IPPs).

Stock market:

The Karachi stock market exchange (KSE) is Pakistans largest and the runniest exchange. It

was the Best performing stock market of the world for the year 2002.

Due to the global financial crisis stock market also disturbs very much. As of the last day of

December 2008, Karachi stock exchange had a total of653 companies listed with anaccumulated market capitalization of RS 1.85trillion ($23 billion). On 26 December 2007,

Karachi stock exchange, as represented by the KSE-100 index closed at 14814 points, its

highest close ever, with a market capitalization of RS 4.57 trillion ($58 billion). As of 23January

2009, KSE-100 index stood at 4929 points with a market capitalization of RS 1.58 trillion ($20


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billion), a loss of over 65 percent from its highest point ever.

Inflation:

Rising food and fuel prices have been a major source of inflationary pressure in South

Asian countries especially Pakistan. In Pakistan, food prices mad a bigger impact on inflationthan fuel, and wheat prices more than doubled, due to poor domestic production and export

restrictions. The combined effects of lower food and fuel prices along with demand management

are reducing inflationary pressure in most South Asian countries but conditions have not been

that favorable in case of Pakistan.

In the year 2009 core inflation rose to 18% from the 14.7% 2008. In year 2009 inflation

accelerated at rapid speed mainly because of food prices which increased as a result of high

prices of widely consumable items such wheat, wheat flour , sugar and meat etc., owing to their

to their supple shortage.


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Conculusion:

In our opinion The Great depression and the financial crisis of Pakistan are based on two

different scenarios. Some key points are discussed below.

The Great depression was resulted because of demotivation of consumers.

We recorded a downfall in the prices, while in the economic crisis of Pakistan, we saw a

rapid increase (almost 250%) from 2007-2011.

We noticed a sharp increase in the inflation rate of both times.

Unemployment rate was increasing in both situations but we cant compare them

because in The Great Depression we saw a rapid increase of 607% which is the highest

rate in the history of world. Even in Pakistan we are not facing such a high number.

We noticed a sharp downfall in the industrial production of The Great depression. This

downfall was because of peoples demotivation towards purchase, while in Pakistan the

downfalls in different industries are because of Government policies and energy crises.

People are willing to purchase but goods are available on high cost because of higher

production cost.

The Great Depression caused a decrease in wholesale prices while in Pakistan we saw

an increase in prices, because people are willing to purchase.

We noticed a stock market crash in both situation but the stock market crash of The

Great Depression was worst then KSE crash. It took years to recover the stock market

on the time of The Great Depression while our stock market recovered within a year.

We saw a decrease in agriculture production while in the time of The Great Depressionbut we noticed a sharp increase in agriculture production in Pakistan after crisis because

of good government policies.

great depresssion asd

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