I used to be able to just drag it smaller but now it won't do that.|||I would recommend to clear your browser history, cache, cookies, etc and try again.
I tried to adjust the size of a large image in a Google Document with success in using IE9 and Chrome by selecting the image and grabbing one of the four corners and adjust accordingly.
Sorry, not a great answer, but it doesn't sound like an issue with Google Docs, more with your browser choice and/or too much junk (clear the history, etc.)
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