In the three years following the great stock market crash of 1929, the money supply in the United States declined by a staggering one-third. This meant that it was now impossible to continue to sell as many goods and hire as many people at the old price levels, including the old wage levels.
If prices and wage rates had also declined immediately by one-third, then of course the reduced money supply could still have bought as much as before, and the same real output and employment could have continued. There would have been the same amount of real things produced, just with smaller numbers on their price tags, so that paychecks with smaller numbers on them could have bought just as much as before. In reality, however, a complex national economy can never adjust that fast or that perfectly, so there was a massive decline in total sales, with corresponding declines in production and employment.
Thus began the Great Depression of the 1930s, during which, as many as one-fourth of all workers were unemployed and American corporations as a whole operated at a loss for two years in a row. General. Motors stock, which peaked at 72 3/4 in 1929, hit bottom at 7 5/8 in 1932. U. S. Steel stock went from 261 3/4 to 21 1/4 and General Electric fell from 396 1/4 to 70 1/4. For the entire decade of the 1930s, unemployment averaged more than 18 percent. It was the greatest economic catastrophe in the history of the United States. The fears, policies and institutions it generated were still evident more than half a century later.
What this enormous and deadly reaction to a declining money supply illustrates is that there are economic principles which apply to the national economy as a whole, as well as to particular industries, markets, and occupations. However, in