Friedman and Schwartz argue that the great depression was caused by a collapse of the money supply due to the negligence of the Fed that turned what should have been a garden-variety recession that started in late 1929.
Lee Ohanian argues that there was a steep industrial decline in the USA in 1929 began before monetary contractions or banking panics in 1930 and 1933. The figure below shows manufacturing industry hours worked between January 1929 and September 1930, and measures of the money stock from Friedman and Schwartz corresponding to M1 and M2. Manufacturing industry hours decline substantially and abruptly in late 1929 while money supply fall only about 4% and 1%, respectively.
This sharp decline in the manufacturing sector (a decline of nearly 30% by the fall of 1930 )began before monetary contraction or banking panics – the conventional culprits:
- There are no significant banking panics in 1929 and 1930. The banking panics in the great depression were mostly in 1933 and in 1934.
- Manufacturing hours worked had already fallen by 30% against trend by the time of the first banking panics in 1931, and these first banking panics had minor macroeconomic effects.
The data in the above figure shows that a factor other than monetary contractions or bank runs were central to the onset of the Great Depression.
Nominal wages declined by little during the early stages of the Depression. in September 1931 nominal wage rates were 92 per cent of their level two years earlier. Since a significant price deflation had occurred during these two years, real wages rose by 10 per cent during the same period, while gross domestic product fell by 27 per cent.
With a substantial depression in employment mostly in the manufacturing sector, any explanation of the onset of the great depression in the United States must start with an explanation of why the labour market failed to clear in that sector, why manufacturing decline was so immediately severe before significant monetary contraction and banking panics, why the Depression was so asymmetric across sectors, and provide a theory for why industrial sector wages were persistently well above their market-clearing level.
Just to make it harder for you,nominal wages in the agricultural sector will fell by 40% over the same period in which wages in the manufacturing sector did not fall to all. As Ohanian notes:
The Depression was the first time in the history of the US that wages did not fall during a period of significant deflation.”
Any explanation based on wage rigidity or sluggish wage adjustment or employee resistance to wage cuts must explain why this resistance was so effective in the manufacturing sector but so ineffective in the agricultural sector. Ohanian concluded that:
…the Depression is the consequence of government programs and policies, including those of Hoover, that increased labour’s ability to raise wages above their competitive levels.
Utopia, you are standing in it! 
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