<P> In his book The General Theory of Employment, Interest and Money (1936), British economist John Maynard Keynes introduced concepts that were intended to help explain the Great Depression . He argued that there are reasons why the self - correcting mechanisms that many economists claimed should work during a downturn might not work . </P> <P> One argument for a non-interventionist policy during a recession was that if consumption fell due to savings, the savings would cause the rate of interest to fall . According to the classical economists, lower interest rates would lead to increased investment spending and demand would remain constant . However, Keynes argues that there are good reasons why investment does not necessarily increase in response to a fall in the interest rate . Businesses make investments based on expectations of profit . Therefore, if a fall in consumption appears to be long - term, businesses analyzing trends will lower expectations of future sales . Therefore, the last thing they are interested in doing is investing in increasing future production, even if lower interest rates make capital inexpensive . In that case, the economy can be thrown into a general slump due to a decline in consumption . According to Keynes, this self - reinforcing dynamic is what occurred to an extreme degree during the Depression, where bankruptcies were common and investment, which requires a degree of optimism, was very unlikely to occur . This view is often characterized by economists as being in opposition to Say's Law . </P> <P> The idea that reduced capital investment was a cause of the depression is a central theme in secular stagnation theory . </P> <P> Keynes argued that if the national government spent more money to help the economy to recover the money normally spent by consumers and business firms, then unemployment rates would fall . The solution was for the Federal Reserve System to "create new money for the national government to borrow and spend" and to cut taxes rather than raising them, in order for consumers to spend more, and other beneficial factors . Hoover chose to do the opposite of what Keynes thought to be the solution and allowed the federal government to raise taxes exceedingly to reduce the budget shortage brought upon by the depression . Keynes proclaimed that more workers could be employed by decreasing interest rates, encouraging firms to borrow more money and make more products . Employment would prevent the government from having to spend any more money by increasing the amount at which consumers would spend . Keynes' theory was then confirmed by the length of the Great Depression within the United States and the constant unemployment rate . Employment rates began to rise in preparation for World War II by increasing government spending . "In light of these developments, the Keynesian explanation of the Great Depression was increasingly accepted by economists, historians, and politicians". </P>

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