During the era of the Great Depression, many politicians turned to the theories being developed by the economist John Maynard Keynes. According to Keynes, to reduce unemployment, the government should print more money and create programs that would employ the unemployed. By doing this, unemployment would drop and money would make it into the hands of those affected by the economic downturn.
Of course, the data never proved Keynes right.
On the other side of this argument at that time was Friedrich von Hayek, who promoted the idea of allowing the free market to fix the biggest problem of the age. As Hayek argued, resources would flow to where they are deemed most needed and eventually everything will turn around. If the government tries to centrally plan a recovery, as Keynes suggested, the result would be inflation and more unemployment.
Hayek was eventually proven correct, but many still don’t agree with his analysis of why the central planners failed in the 1930’s — and still continue to fail today.
First, the form of economic recovery that was envisioned by Keynes involved the Federal Reserve to pump newly printed currency into the market. This infusion of currency was designed to ease consumers back to their previous spending habits. However, as Hayek predicted, it led to inflation as more and more currency was printed which devalued the dollar. Keynesians still use the creation of new currency to fix the problems of an economic recession — and are looking to implement this very method again today.
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