During economic depression in 1930s people couldn't consume because they earned less money, and due to rising unemployment even smaller amounts of goods were purchased.
The main difference between Hayek and Keynes worth mentioning at the beginning is that they had a completely different vision to what type of systems in economy could save the capitalist system in US at the end of XIX century in time of economic depression. They both had good starting ideas but which one would be more sustainable and keep the economy going and get rid of unemployment and at the same time make the production process circulating.
"The most effective way of making everybody serve the single system of ends towards which the social plan is directed is to make everybody believe in those ends." F.A. Hayek
Hayek saw a vision of a large and active state taking a huge part in the economy planning of business and running schools and hospitals as well as high public spending, he introduced a new vision and meaning of money, he saw it to be determined by supply and demand. The price of money is the interest rate, and the value of money itself was an absolute central for economical prosperity and growth. For Haykes money was an active factor in the economy.
In his book, The Road to Serfdom, Hayek also says that "the attempt to direct all economic activity according to a single plan would raise innumerable questions to which the answer could be provided only by a moral rule, but to which existing morals have no answer and where there exists no agreed view on what ought to be done. People will have either no definite views or conflicting views on such questions, because in the free society in which we lived there has been no occasion to think about them and still less to form common opinions about them."
Going from philosophical and more general point of view into more precise subject, money, Keynes, on the other hand, believed that lack of money supply could choke of economic development during its rapid development , and so keeping devaluation money was important, to make sure there was enough money to keep up with the increase of supply of goods in the real economy in US. He suggested the state would not only print more money but also create more jobs of less meaning (employing people on Government programs earning small money) like digging holes etc to help the unemployment and keep the circulation of the money going as they could then spend it. Also at the same time make more financial benefits for these with lower paid jobs to be able to afford the goods they produce and keep not only the sells stimulated but the production level going (and in this way demand keep up the level of demand for goods).
This effect has been called a Positive multiplier- as if you take an unemployed people and give them wages even from social benefits, then they have some money to spend and the economy stays safe. On the other hand, if a person gets fired he or she will have no money for spending and these involved in the production process will suffer because there will be lower demand for goods and the circulation of the economy will be effected and this process is known as a Negative Multiplier.
Logically thinking, no income creates no savings, the country gets poorer, goes into recession and the economy falls. Keynes response to this was that the Government should print more money, as I already mentioned but also make it non-transferable to gold or silver, because if we increase the supply of money which would lead to SPENDING BOOM... Yes this solution did boost the economy temporally but will not sustain it for long and eventually, it would lead to a big devaluation of the currency, government's bailout and even hyperinflation.
That was exactly what became a massive issue in Britain and USA in 1970s , Keynesian theory failed as predicted and the bills were coming in form of gigantic inflation.
The University of Winchester Journalism Course
History and Context of Journalism, part IV
References:
1. Hayek and Keynes- theories on economy during economical depression in US in 1930s
2. F.A. Hayek, the Road to Serfdom
3. http://journalism.winchester.ac.uk/?page=102
