Nope. It wasn't all downhill.

So, I was sayin...

AMBSL goes back to 1918. M1SL only goes back to 1959. In the Historical Statistics, M1 goes back to 1915, and you could get a really long-term view of MULT using that. Maybe it wasn't *all* downhill...

Here ya go:

The ratio reaches a peak in 1929, drops ever so slightly in 1930, then falls to a bottom in 1934. A momentary peak (1937) is followed by another bottom in 1940. The up-hill leg of that "V" peaks in 1943, with minor drops in 1944 and '45. Then, a relaxed climb to the 1959 peak, and a gradual decline to 1985. Then the two bumps that always catch my eye, and deep decline.

The Google Docs spreadsheet, after you click once on the graph, will pop up little windows to help you gather information such as in the paragraph above. You don't get that, of course, with the image I captured for posting.

First reactions:

The sharp drop and double-dip associated with the Great Depression comes as no surprise. The relatively high, relatively stable numbers that occur during the "golden age" (1947-1973) also come as no surprise.

I am surprised by the coincidence that the FRED data starts in 1959, and that the local peak also occurs in 1959. You wouldn't know, by looking at the FRED data, that the M1 multiplier had been trending upward for almost 20 years before 1959. I am surprised and I want to point it out, because I see no reason to ignore data as FRED ignores M1 before 1959. And I don't think people should be satisfied with that, great as FRED is.

What else? Oh! This is a big deal: Immediately prior to the Great Depression, the Mult ratio was trending upward at a good clip. In stark contrast, the ratio was trending down immediately before the current Depression. And it had been trending down for half a century. Why the difference?

I think it has to do with financial innovation. That's just a guess, a first reaction, but I can imagine that in the 1920s, M1 money was the financial innovation of the day. The debt that is always associated with financial innovation was, in the years before the Great Depression, associated with M1 money. Therefore an increase in debt was associated with an increase in M1 money. Today we have MZM and other, even more debt-like "near money" innovations that increase with debt, while M1 money falls by the wayside.

In our time, M1 is no longer an innovation. It is not thought of as debt, but as the money of normal use. At least, that's how I still think of it. (Thus I use M1 as the denominator of my Debt-per-Dollar graphs.) Debt in our time has had to find more innovative outlets, and has found them. Thus in our time M1 has declined while base money perhaps had to expand to support other, more debt-like forms of money.

Methodology:
Simple ratios: M1 money (in billions) divided by Base money (in billions).
Annual data.

Sources:
1. Base money: FRED AMBSL, 1918-2010
2. M1 money: Historical Statistics thru 1970, 1915-1970
3. M1 money: FRED M1SL, 1959-2010

Google Docs spreadsheet. Allow a moment for the graph to appear.