@Tamerlane Your description of Keynesian Economics doesn't really get to the heart of why increasing the supply of money could solve a deflationary crisis.
The reason for a deflationary spiral, where the prices continue to decrease, is because of a lack of aggregate demand. There aren't as many spenders in the economy as there are savers. When everyone is savers, and no one is spending, prices continue to plummet.
Then how does increasing the supply of money solve the problem? You can increase the supply of money in the economy by, for example, recapitalizing banks by giving them large no interest loans or giving tax cuts to the rich. We have evidence that neither of those ways of increasing the money supply results in either an increase in the velocity of money or an increase in aggregate demand in any appreciable amount. In a deflationary economy, banks don't take risks, because the longer they sit on money, the more valuable it becomes. The rich person may buy an extra yacht, or they may not. Since they're rich, they may sit on the extra money just like the banks.
That's why thinking about it in terms of the money supply is the wrong approach. The question to really ask is why is there a drop in aggregate demand? Why aren't there more spenders/why is everyone saving? In a classic deflationary crisis, there is massive unemployment. People are out work, they don't have money to spend, so they stop buying. Because they stop buying, prices are cut, more people end up losing their jobs, and the spiral continues downward.
Keynes's key insight was that the government could step in and be the buyer of last resort. If there is a lack of aggregate demand, the government can step in and spend money buying stuff. Not only that, but if the reason why people aren't spending is because they're out of a job, the government can give them one. That has the added effect of adding more spenders back into the market, and has multiplicative effects on increasing aggregate demand.
Increasing the money supply, by itself, in insufficient to defeat a deflationary spiral. That's because
distribution matters. Increasing the amount of money in the hands of people most likely to spend it is how Keynesian stimulus works. If people have enough money in their hands, they change from being savers (because they don't have enough money on hand) to being spenders, which is what you need people to do to increase aggregate demand.
Basically, you have to just give money to poor people. That is Keynesian economics greatest prescription, and ultimately the reason why it has been opposed by conservative politicians since the 1930s.
