The Great Depression

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however, this circular flow can falter. People
start hoarding money when times become tough; but times become tougher when
everyone starts hoarding money. This breakdown results in a recession.

To get the circular flow of money started again, Keynes suggested that
the central bank, the Federal Reserve System, should expand the money supply.
This would put more money in people's hands (through the multiplier effect),
inspire consumer confidence, and compel them to start spending again.

A depression, Keynes believed, is an especially severe recession in
which people hoard money no matter how much the central bank tries to expand
the money supply. In that case, he suggested that government should do what the
people were not: start spending money. He called this "priming the pump" of the
economy. I think that most economists believe that only massive U.S. defense
spending in preparation for World War II cured the Great Depression.

After the success of Keyne's economic ...

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1930.

But much more important, the economy was clearly turning downward even
before Hoover took office in 1929. Entire sectors of the economy were depressed
throughout the decade, such as: agriculture, energy and mining. Even the two
industries with the most spectacular growth - construction and automobile
manufacturing - were contracting in the year before the stock market crash of
1929. About 600 banks a year were failing. Half the American people lived at or
below the minimum subsistence level. By the time the stock market crashed, there
was a excessive amount of goods on the market, and inventories were three times
their normal size. The fact that all this occurred even ...

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