Lessons from the Historical Use of Reserve Requirements in the United States to Promote Bank Liquidity
by Mark Carlsona
Efforts in the United States to promote bank liquidity
through reserve requirements, a minimum ratio of liquid assets
relative to liabilities, extend as far back as 1837. Despite such
requirements, banking panics and suspensions of deposit convertibility
continued to occur. Eventually, policymakers created
a central bank to ensure bank liquidity. This paper
reviews the historical debates about reserve requirements, supplemented
by empirical evidence, to provide insights relevant
today about using reserve requirements to regulate liquidity.
The insights are related to convincing institutions to use the
reserve during stress events and the ways reserve requirements
for banks affect interactions with other financial firms before
and during a panic.
JEL Codes: G21, N21, E58, B00.
Full article (PDF, 34 pages, 456 kb)
a Board of Governors of the Federal Reserve System