The great depression of the 1930s demonstrated that, at least in the short run, the market system does not automatically lead to full employment. In The General Theory of Employment, Interest and Money (1936), John Maynard Keynes argued that market forces could produce an equilibrium with high unemployment of indefinite duration. For example, if people are worried about the possibility of losing their jobs in the near future they will probably start saving money and consume less, which will lead to a fall in demand, and consequently in production and employment. In such circumstances, producers will clearly not be interested in making new investments. So people's savings will remain unused, and the economy will settle into a new equilibrium at a lower level of activity - with fewer goods being produced, fewer people employed, and reduced rates of income and investment. Classical economic theory stated that in the long run, excess savings would cause interest rates to fall and investment to increase again. Keynes disagreed, arguing that market economies are essentially unstable and without a self-correcting mechanism, except perhaps in the long run - but as he famously put it, “in the long run, we are all dead!”
So Keynes recommended governmental intervention in the economy, to counter the business cycle. During an inflationary boom governments could decrease their spending or increase taxation. During a recession, on the contrary, they could increase their expenditure, or decrease taxation, or increase the money supply and reduce interest rates, so as to stimulate the economy and increase output, investment, consumption and employment. Keynes insisted that even a small amount of additional government spending or an increase in private investment causes output to expand by an amount greater than itself, because of the multiplier effect: the new money is repeatedly re-spent, except for the proportion that people choose to save.