Thursday, April 16, 2009

two qualifications to deposit creation (3)

Then the whole process would have ended right there , with no multiple expansion of deposits. or if , less absurdly , banks were always to keep 5 per cent excess reserves , on top of the 20 per cent legal requirement.
back in the 1930s excess reserves-i.e.,reserves over and above legally required reserves--were substantial,because bankers were then leery of loan opportunities and even of relatively safe government bills that were paying only 1\8 of 1 per cent interest.Had the Fed then given the banking system $1,000 of new reserves,perhaps half might have gone into excess reserves.Today excess reserves are less important,as most banks find attractive uses in the Federal Funds market even for one-day funds.
In depressed times,the level of excess reserves depends more on the attitudes of banks toward the interest rates they can earn than on their fears that withdrawals will catch them unawares.

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