Real government purchasing was moving in the same direction as the GDP and the business cycle. The government had cut spending because of the falling production and the rise of unemployment. The massive bulge in spending during 1940 and 1941 was the result of the United States military buildup following Germany's defeat of France.
The stock of money measured grew steadily during the 1920s, but following its peak in 1929 it had fallen until 1933. The decline of spending from 1929 through 1933 was obviously linked with the falling stock of money. The equation that is used to spot the source of the decline in the money stock is M = [(1+cd)/(cd+rd)] B. Where M is the stock of money, cd is the currency-deposit ratio, rd is the reserve-deposit ratio, and B is the financial base. The expression [(1+cd)/(cd+rd)] is the money multiplier. .
In figure 1.10 the monetary base gradually increased during the late 1920s and early 1930s, while the money multiplier was on a sharp decline from 1929 through 1933. The money multiplier dropped approximately 50 percent and the monetary base climbed 17 percent. So overall the stock of money had declined 33 percent. The reserve-deposit ratio and the currency-deposit ratio steadily increased during the 1920s and early 1930s which caused the stock of money to decrease significantly. .
From 1938 - 1941 the stock of money increased quickly, but the recovery was weak until 1940 - 1941. This action turned out to be important because it meant that monetary policy had a weak effect on output.
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