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"The first era runs from 1870 to 1939. Our gold-standard ancestors lived in an age where aggregate credit was closely tied to aggregate money. In this era, money and credit were volatile but, over the long run, they maintained a roughly stable relationship with each other and with the size of the economy measured by GDP"
"The only exception to this rule was the Great Depression period; in the 1930s, money and credit aggregates collapsed relative to GDP. This stable relationship between money and credit broke down after the Great Depression and WW2, as a new secular trend took hold that carried on until today’s crisis. But prior to 1930, broad money and loans had been stable at about 50%–60% of GDP for decades, and bank assets stood at about 80%–90% of GDP."
"In this second era, money and credit began a long postwar recovery, trending up rapidly and eventually surpassing their pre-1940 levels compared to GDP by the 1970s. This could be seen as a secular recovery by the financial system from the massive destruction suffered in the 1930s. But the process did not end there. In addition, credit itself then started to decouple from broad money and grew rapidly, via a combination of increased leverage and augmented funding via nonmonetary liabilities of banks. In recent decades, we have been living in a different world, where financial innovation and regulatory ease have permitted the credit system to increasingly delink from monetary aggregates, resulting in an unprecedented expansion in the role of credit in the macroeconomy. By 2007, the typical level of broad money had risen to about 70% of GDP, but bank loans exceeded 100% and bank assets were over 200%"
