The Keynesian Theory

Keynesian Theory

The Great Depression can be greatly understood by the Keynesian Theory. It is actually crucial to understanding the Great Depression.

To begin, when the Great Depression hit worldwide, it fell on economists to explain it and devise a cure. Most economists were convinced that something as large and intractable as the Great Depression must have complicated causes. Keynes came up with an explanation of economic slumps that was surprisingly simple. In fact, when he shared his theory and proposed solution with Franklin Roosevelt, the President is said to have dismissed them with the words: "Too easy."

Keynes explanations of slumps ran something like this: in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a circular flow of money in the economy, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But suppose something happens to shake consumer confidence in the economy.

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