The Deepening Depression
BY THE MIDDLE OF 1931, the decline in income had continued for approximately two years. It was destined to continue for another two years before the decline was arrested. This chapter analyzes some of the events in the later stages of the decline with emphasis on its international aspects. In light of the extended duration of the decline, however, it is useful to deviate temporarily from the general plan of this inquiry and examine some events that did not take place.
Most economic models contain equilibrating factors that will eventually bring the economy back to an equilibrium in which all factors, including labor, are fully employed. While these models acknowledge the possibility that the economy may not be in such an equilibrium, even for extended periods of time, they insist that economy would eventually return to such a position. We cannot hope to learn from the experience of the Depression whether the economy is of this sort or not. For even if none of these equilibrating forces were in evidence, they might have appeared at a later date if the decline in income had continued. Nevertheless, it is of great interest that none of these equilibrating forces were apparent in the early 1930s.
The demonstration that equilibrating forces did not immediately come into play can start at no better place than wages. According to classical theory, a disequilibrium in the labor market, like a disequilibrium in any market, should be corrected by a change in the price. The cure for unemployment was lower wages. But, as most economists realized by the 1930s, cutting wages was only effective by this reasoning if they could be made to fall relative to prices. And there was no