“What did Lord Keynes suggest to end the

depression?”
In the great depression of the 1930s, GDP fell, unemployment rose. In response
to this disastrous economic situation, mainstream economists were at a loss as
how to respond. Such a lengthy period of disequilibrium didn’t sit well with
Classical theory which expected markets to operate smoothly and efficiently.

One policy the National government did approve was the cutting of
unemployment benefits. Alas this is precisely the worst response the Government
could have taken. By reducing benefits they further reduced consumer spending
and AD. This made areas of high unemployment even more impoverished. When
people saved rather than spent their money it just made the recession worse.

It was John Maynard Keynes who noted that people’s psychology usually caused
them to save more and spend less. Paradox of Thrift-Saving money reduces
spending, output and therefore increases the level of unemployment in an
economy; worsening the recession. However with that Keynes also described how
savings, in a time of depression, cannot continue to accumulate. Savings actually
dry up reduced to a trickle rather than a flow. When funds are needed for
investment to stimulate the economy, there is no savings accumulation available.

Keynes was one of the most enthusiastic supporters of increasing government

spending, even if it meant increasing the levels of borrowing. Keynes pondered
the problem with the Classical theory’s way of market workings and published a
revolutionary solution in his The General Theory of Employment,
Interest, and Money (1936). Keynes’s General Theory revolutionized the way
economists think about economics, in particular because it introduced the notion
of aggregate demand as the sum of consumption, investment, and government
spending AD= C+I+G+(X-M).

He said by deliberately undertaking government investment to stimulate the

economy, full employment could be maintained. As by absorbing capital goods
and spending whenever private enterprise is unable to expand, government can
insure a high level of economic movement. Therefore, governments should
incorporate well thought out spending programs into their permanent plans.

With his strategies Keynes visited Washington in 1934 and observed President
Franklin Roosevelt's New Deal methods to combat depression. This practical
demonstration of Keynes' thesis became a defense for such policies. Measures
based on Keynes views such as; the federal government took over responsibility
for the elderly population with the creation of Social Security and gave the
involuntarily unemployed unemployment compensation and others measures in
addition to these increased the national income by fifty percent and made a large
dent in unemployment rolls.