What is Wrong with Saving Money?

If someone saves a portion of his income rather than spend it all, the money saved ("under the mattress") does not become part of anyone else's income, and is withheld from the rest of the economy. If everyone were to start saving suddenly, businesses may start failing and will have to shrink. Eventually, the total savings of the population, instead of rising, could even start to fall because people losing income or jobs would have to stop saving as they tried to get by on less and less.

This so-called paradox of thrift is the basis for the government intervention that acolytes of Keynes (or recent converts to his way) advocate in times of crisis. When demand for goods and services falls sharply and the confidence of consumers and businessmen suddenly declines, government should offset the drop in economic activity by increasing public investment.

But why does aggregate demand suddenly fall, and how does this propensity to save come upon everyone all at once, so that each person's individually irreproachable act of saving collectively becomes such a danger?

And how would government officials know how to restore people's "animal spirits" if nobody knows why they withered in the first place?

As to the first question, the Keynesian diagnosis (if that is the right word) is that unmanaged capitalist economies are inherently unstable, probably because consumers and businessmen must always make decisions under changing conditions and with uncertain expectations of the future.

And as to the second, there is every reason to be skeptical. Despite the self-proclaimed success of the authorities in staving off economic disaster, in the matter of getting people to spend, or banks to lend, even the massive emergency policies appear not to be working. Could it be that these measures are not working because they go against the people's desire to save, however inconvenient it may be for the authorities? As Adam Smith warned in The Theory of Moral Sentiments,

[The man of system] seems to imagine that he can arrange the
different members of a great society with as much ease as the
hand arranges the different pieces upon a chess-board. He does
not consider that the pieces upon the chess-board have no other
principle of motion besides that which the hand impresses upon
them; but that, in the great chess-board of human society, every
single piece has a principle of motion of its own, altogether
different from that which the legislature might chuse to impress
upon it. If those two principles coincide and act in the same
direction, the game of human society will go on easily and
harmoniously, and is very likely to be happy and successful. If
they are opposite or different, the game will go on miserably,
and the society must be at all times in the highest degree of
disorder.